Last checked at 16 Apr 2009 07:00
The Mission Marketing Group plc
Preliminary results
for the period ended 31 December 2008
Enlarged Group delivering growth despite tough market conditions
16 April 2009
The Mission Marketing Group plc ("TMMG, themission®"), the UK marketing communications group, today announces its audited financial statements for the full year ended 31 December 2008.
Since admission to AIM on 13 April 2006 themission® has grown from a £5m turnover agency to a Group with annual sales of £104m in seven major agencies covering nine sectors.
The highlights below show the results for the period with comparable results for the previous year. Proforma numbers assume all the existing Group companies had been owned since 1 January 2007.
Financial highlights:
Actual turnover up 31% to £104.2m (2007: £79.5m)
Operating income up 29% to £42.7m (2007: £33.0m)
Proforma operating income up 1% to £42.7m (2007: £42.3m) outperforming the broader advertising and marketing services sector
Operating profit up 22% to £9.0m (2007: £7.4m)
Robust margin performance maintained at over 20%
Profit before tax up 37% to £7.2m (2007: £5.3m)
Diluted EPS up 20% to 16.14 pence (2007: 13.44 pence)
Good underlying operating cash flow and cash conversion
Group adjusted cash of £4.5m and Bank adjusted debt of £22.4m giving net debt of £17.9m(2007: £15.9m)
Agreed in principle a number of initiatives to reschedule the Group's liabilities
Outstanding acquisition liabilities down to £10.4m, in line with comments made at time of Interim Results.
Operational highlights:
New on-line and off-line clients include both public sector: the Scottish Government, UK Border Agency and the Royal Mint, and private sector: Breakthrough Breast Cancer, Hammonds, RNLI, Symantec, Miele, Logica, Remington, Woburn, Ricoh, Yamaha, Domino's Pizza, Tetley, Dairy Crest, the Organic Milk Co-operative, Fairview Homes and Lettings for Countrywide
Small in-fill acquisitions successfully integrated with existing agencies
Digital income up 34% (proforma 14%) and made up 14% of full year operating income (2007: 14%)
Continued focus on cost management
In a challenging market environment, trading is currently in line with the Board's expectations
Iain Ferguson, Chief Executive Officer, commented:
"In a challenging trading environment the Group has delivered a good set of results. Income growth of 29% demonstrates the benefits of the full year effect of the acquisitions made in 2007 as well as the underlying performance of the businesses. Our strategy to build a dynamic, profitable national communications group has served themission well, and this is reflected in our continued new business success with recent wins including the Royal Mint, Countrywide Lettings and Office of National Statistics.
To ensure that the Group is positioned for the future, we have realigned our focus from the rapid growth through acquisitions in previous years to a more prudent approach based on cost containment and internal development. Trading is currently in line with the Board's expectations and the Group remains well positioned in the markets in which we operate."
| Iain Ferguson, Chief Executive The Mission Marketing Group plc | 020 7395 7575 |
| Tim Alderson, Chief Financial Officer The Mission Marketing Group plc | 020 7395 7572 |
| Charles Palmer/Nicola Biles Financial Dynamics | 020 7831 3113 |
| Mark Percy/Sarah Jacobs Seymour Pierce Limited | 020 7107 8000 |
www.themission.co.uk
themission® is a national marketing communications and advertising group with 12 offices across the UK. The Group specialises in providing national and international clients with award winning marketing, advertising and business communications. Group members include April-Six, Bray Leino, Big Communications, Fuse Digital, thinkBDW, Story UK and RLA. themission® employs over 620 staff nationally and is listed on AIM (TMMG).
Chairman's Statement
2008 made for a challenging trading environment, which deteriorated particularly rapidly during the second half. Despite this themission® has had a good year, outperforming industry average revenues.
The Group realigned its focus during the year from rapid growth to market retrenchment, transferring its focus from acquisition and expansion to cost containment and internal development. Our operating income is up by 29% and, on a like-for-like basis grew slightly, despite the economic slowdown. While measures to manage costs had a clear impact, in particular during the second half, our reported operating profit increased by 22% and our lower cost base still enabled the delivery of a strong margin performance.
We continue to see evidence that, despite the pain being experienced by most client companies, our agencies are well positioned in their markets and are winning significant new assignments - a tribute to the quality of our management teams and people in each of our businesses.
I would also like to take this opportunity to recognise and record the Board's thanks to Martin Banbury, who founded themission® and who stepped down as Non-Executive Director on 24 October in order to take up the position of Executive Chairman and Chief Executive of MediaEquals. We wish him further success with this latest venture and thank him again for all he has done for the Group.
At the half-year, we invested in a new incentive programme for key managers through the creation of long-term share-based schemes which we plan will be activated as each agency emerges from its earnout period - beginning in 2009. This will ensure that management teams are aligned with shareholders' interests going forward.
In the last quarter we began to take steps to strengthen the balance sheet and have agreed in principle a number of initiatives to reschedule the Group's liabilities. This, along with a continued focus on costs will ensure that themission® is well positioned for the uncertain environment forecast for the broader economy in the year ahead.
Our strategy of building a dynamic, profitable national communications group has served themission® well and this is reflected in our continued new business success. In light of current market conditions we are adopting a prudent approach; however, the Board is confident the Group remains well positioned for the future in the markets in which it operates.
Rt. Hon. Francis Maude MP
Chairman
Chief Executive's Review
Overview and strategy
themission® has maintained its momentum despite a tough environment, delivering significant turnover and income growth. Group turnover has grown dramatically since IPO - from an annualised £5.1m in April 2006 to £104.2m by the end of 2008. This has allowed us to report a good set of results with operating profit growth of 22% at £9.0m on turnover of £104.2m up 31% and operating income of £42.7m up 29%.
A series of strategic acquisitions following IPO has allowed us rapidly to develop the Group in terms of scale, scope and reach. Today, themission® consists of seven award winning agencies, in twelve locations, employing some 628 talented staff servicing a broad range of national and international blue chip clients.
The strategy of bringing together established leading agencies, based in lower-cost locations, with expertise in a wide range of sectors, to deliver incremental services to existing and new clients continues to prove successful. The integration of acquired agencies is progressing well and the in-fill acquisitions we made during the year, strengthening the Learning and Direct Marketing operations at Bray Leino through the Rhythmm and BroadSkill businesses, have settled in as planned and have added to the scope and management strength at our largest agency. Similarly we now have a new service offering in Spark - a sales activation specialist relocated locally to Leicester alongside Big and Fuse Digital.
Our focus on developing on-line and digital services has continued, with new hires in all key locations, the further development of touch screen and other interactive technologies, e-learning product innovations at Bray Leino BroadSkill, and the continued activity in the i-blink joint venture also at Bray Leino all increasing our on-line offer in new and exciting channels.
The Group's agencies continue to enjoy success in attracting top-quality talent through our combination of strong agency brands, our national locations and the collective appeal of themission® as one of the UK's most dynamic new groups. Consistent with this we have continued to hire for key positions and have maintained our programme of succession management planning to ensure that we have strengths in the required depth to drive the future performance of the Group in its various operations.
The current year is expected to be challenging as companies in all industries and geographies face unprecedented turmoil in the markets for their goods and services. Our broad base of activities and, perhaps more than ever, our growing presence and expertise in the public sector will help us to weather the storm; however we will continue to keep a close eye on incomes, new business flow and the appropriate cost base. We have taken measures to reduce overall operating costs across the Group. The full year benefit of the measures put in place will be approximately £2m for the current year. We do not anticipate making any material acquisitions and will focus on leveraging our existing capabilities and relationships to drive growth through all opportunities we identify. We see some evidence that new initiatives in the housing market, the UK Government's intention to invest to keep the economy moving forward and the continued need for presence in digital platforms will provide agencies in themission® with opportunities to perform strongly despite the challenging market conditions.
In preparation for the beginning of the year we re-organised the Operations Board and refined its remit. The Operations Board is now made up of the CEO of each agency and its focus is increasingly on evolving the direction and strategy of themission®, defining operational priorities, and championing and enabling client, service and other collaborative initiatives involving multiple agencies. The makeup and scope of the Operations Board will continue to evolve in order to deliver optimum commercial performance from the Group going forward.
onemission™ is the Group's term for these collaborative and shared efforts and the Operations Board is charged with identifying, supporting and enabling resource which can be deployed on collective efforts to take new services to our clients. This year has seen continued success for onemission™ teams who have worked effectively together to deliver services to clients as diverse as Volkswagen, Symantec, Oliver Sweeney and the GSMA.
A quarterly recognition scheme was launched during the year to recognise the efforts of those who do most to support their colleagues around the Group. This is aimed to reward not just commercial performance, but to highlight those staff members who are leaders in thinking always on how best to leverage the wide range of services available to Group clients.
Financials
The Group consists of The Mission Marketing Group Plc, Big Communication Limited ("Big"), Fuse Digital Limited ("Fuse"), Bray Leino Limited ("Bray Leino"), The Driver is Limited ("TDI"), Bastin Day Westley Limited ("thinkBDW"), April-Six Limited ("April-Six"), PCM Limited ("PCM"), Story Limited ("Story"), RLA Group Limited ("RLA"), Rhythmm Communications Group Limited (Rhythmm) and BroadSkill Limited ('BroadSkill').
The results contain Rhythmm from 5 February 2008 and BroadSkill from 7 March 2008.
Turnover for the period was £104.2m (2007: £79.5m) up 31%, operating income was £42.7m (2007: £33.0m) up 29%, operating profit was £9.0m (2007: £7.4m) up 22% and diluted EPS was 16.14 pence (2007: 13.44 pence) up 20%.
To provide helpful information and to provide continuity to the proforma information provided in last year's Annual Report, we have provided proforma financials for the twelve months to 31 December 2007, as if the Group had existed in its current form throughout that year.
In 2008 themission® delivered proforma turnover growth to £104.2m up from £103.7m and resulting in operating income growth of 1% from £42.3m to £42.7m in a market which is estimated to have been flat. As a result of investments in growing the business during late 2007 and early 2008, proforma operating profit was down 18%. The cost cutting initiatives outlined above reflect the changes in the market environment during 2008 and the measures taken across the Group to reduce operating costs.
As announced on 16 February the Directors have taken actions to balance the repayment of certain liabilities to the forecasted cash flows, while continuing to ensure adequate working capital for growth. These actions include renegotiating the repayment profile and terms of the outstanding acquisition obligations with the relevant vendors, and renegotiating the repayment of the bank debt with the Group's bankers. Negotiations are at an advanced stage and an agreement has been made in principle.
Dividend
The Board has taken the prudent decision to conserve cash within the Group in the current climate and as a result will not be making a final dividend payment for 2008. The total dividend for the year is therefore 0.36 pence (2007: 1.1 pence). The Board intends to revert to its previous policy when circumstances permit.
Review of Operations
themission® and its strategy to build a leading UK group has delivered a strong performance in the period. Operating income is up 29% and on a proforma basis is slightly ahead 1% on prior year. This has been achieved in a market which, especially in the second half, slowed rapidly and where costs are under scrutiny across the sector.
The Group announced its intention to make no further major acquisitions during 2008. Instead it added skills or scale through the addition of staff, know-how or clients which could be implanted into our existing operations. Teams from BroadSkill and Rhythmm, specialising in Learning and in Response Marketing respectively, joined in Q1, and are now successfully integrated into Bray Leino. Spark added Activation Marketing expertise to the Leicester group complementing the existing Big Communications and Fuse Digital offerings.
Our ongoing commitment to integration, our focus on creating and developing new business lines across multiple locations and our wide geographic footprint all combine to further strengthen the enlarged group.
Business segments:
The Group's business mix is built upon, and reported under, five strategic capabilities - Branding and Advertising, Digital and On-line, Learning and Events, Media, and Public Relations. These areas operate on a standalone or combined basis according to specific client needs and the continued ability of our teams to identify, evaluate and deploy the various communications and media platforms necessary to deliver maximum value and return on our clients' investment is a key component of our agencies' offer.
Branding and Advertising remains our largest area of activity representing some 62% of operating income and income in the period is up 30%. Within this segment, themission® agencies deliver business and marketing consultancy, design and packaging, and creative and production services. This is all in addition to TV, radio, poster, and national and regional press campaigns - usually spanning both traditional off-line media and, increasingly, on-line platforms.
Performance here has been extremely encouraging and the segment's share of the Group's total income is in line with last year. Wins from RNLI, Royal Mint, Symantec, Air BP, M&M Direct, Tie Rack, Iglü, Transform Cosmetic Surgery Group, Hammonds, Calor, Fairview Homes, Unilever, Dominos Pizza, Ricoh, Kingston Technology Group, Lettings for Countrywide and Fairview Homes have been achieved in the period against national and international competition. As previously announced, after the year end, we lost part of the budget from one of the Group's major clients in the automotive sector.
We anticipate that growth in this segment will continue to be fuelled by new business and new service wins. It is likely that clients will continue to redeploy existing investments into on-line and other areas where short term returns can be most readily identified and measured. Our addition of the Spark and Rhythmm capabilities, now integrated into Big and Bray Leino respectively, means that income in response marketing and activation marketing will also help maintain this segment's share of total income.
Digital and On-line continues to deliver dramatic growth, with operating profit up by over a third at 42% and the on-line segment now accounting for 16% of the total against 13% last year, sustaining its position as the Group's second largest segment. This is still one of our fastest growing areas and includes a wide range of media, marketing and communication activities. A good example of this can be seen at Bray Leino where a new e-commerce solution has been designed and launched enabling the provision of skills development programmes to be delivered via the internet - reducing costs and down time for participants. On-line teams at Fuse Digital also helped create and publicise the Birmingham Bullring's first ever live music event - Festibull.
New business has been encouraging throughout the year with wins from Logica, Remington, Miele, Ecover, Newcross Healthcare, Royal College of Surgeons, GSMA, Tetley, Samsung, Woburn, Ardbeg Corryvreckan, Consero Homes and Crest Nicholson. Story have been appointed to the core agency roster for digital services provision to the Scottish Government and RLA have also produced 'Red Carpet News', the weekly email newsletter of the House of Lords.
Developments in touch screen and Computer Generated Images (CGI) technology continued at BDW where property companies shifted to focus spend on converting sales as a result of decreasing visitor traffic flows.
Learning and Events are specialist areas where the Group's Bray Leino agency has built a wide range of capabilities. These units service clients in, amongst others, the Luxury Goods, Fashion and Oil and Gas sectors - all significant investors in the international events business - and the Public Sector, a major investor in learning and people development. Together, Events and BroadSkill incomes are up 25% and represent 11% of the Group's total revenue streams.
Bray Leino Events has continued to evolve its business in key, high-activity sectors and has appointed a new management team to continue its growth and service development.
The Group continued to increase its penetration in the international energy sector and added Maersk Oil to its existing stable of clients. The Group has worked with Maersk to support or create events in Mexico, Brazil, Qatar, Norway and Kazakhstan; with Denmark, the US and the UK to follow in 2009. In a different industry, the team scored a major success for Yamaha at the International Motorcycle and Scooter Show.
Building on our ambition to create a world class Learning and Training Business, Bray Leino BroadSkill was created early in the year with the combination of the existing Barnstaple based Bray Leino Learning business and the Chester based training company BroadSkill. This added scale, a new suite of services and routes to market, and growth to the existing management team. Bray Leino BroadSkill's exciting mix of Inspiration, Success and Efficiency offers customers in both the private and public sectors a range of innovate solutions to support them in growing and developing their people with the rights skills and motivation.
The Group has again added to its public sector wins being appointed as an accredited supplier on the Office of Government Commerce Buying Solutions (OGCBS) framework agreement for learning and development e-learning solutions. Having already been a major contracted supplier to various parts of the public sector, now including the UK Border Agency, this award again reflects Bray Leino BroadSkill's ability to meet the most demanding Government selection criteria.
Media has again delivered good growth with operating incomes up 26%. The slowdown in the property sector was offset by a growing softness in the regional press market which helped create improved volume and margin as we bought effectively on behalf of clients of BDW, our property specialists. Media wins include Lettings for Countrywide and a win in a new sector - Must Be Sold, which is a new joint venture focused nationally on auctions of repossessed properties.
The Hastings insurance business rolled out strongly through the year and although this will not repeat through 2009, our work with Hastings continues. Bray Leino continued to innovate for Olbas where the 'family of noses' found a new home on GMTV - sponsoring local weather spots. Radio was another busy medium for RLA's 'Lets go to Work' campaign featuring the voice of Ray Winstone for Volkswagen.
Media represents 8% of operating income - consistent with its share of income last year.
Public Relations had another good year - growing income by 20% to maintain its share of the total at 5%. The business spans both private and public sector clients and continues to build on its expertise in consumer food and drink, environmental and public sector at Bray Leino and in property at BDW.
Bray Leino PR has continued its winning ways throughout the year with a combination of creative campaign delivery and strategic campaign planning as well as significant growth in influencer and advocate campaigns. New consumer wins include leading RTD alcohol brand WKD, the UK's leading organic milk supplier OMSCO and voice technology experts Bury Technologies. Public sector has also seen significant gains, with campaigns for Envirowise, Learning and Skills Council and JISC. As well as managing the roll-out of the WIRSPA Caribbean rum campaign and creating, in partnership with Bray Leino Events, a new, permanent rum experience in London's Vinopolis, the PR unit also collaborates on other major integrated clients including the Royal Mint and Wrigley. At BDW the new PR team has been busy building its client base with assignments at Fairview and Bloor Homes.
Awards and Recognition
2008 was another outstanding year for the Group with agencies receiving over 60 awards. themission® agencies enjoyed runaway successes at the regional Fresh and Rose Awards, which saw Big Communications, RLA, and Bray Leino furnished with 25 awards for work for clients including WKD, Sustrans, Lidl, Gillette, Intel, Volkswagen and Charnos.
Big Communications collected another impressive haul at this year's Cream Awards which recognise creative excellence, with three Gold, two Silver, eight Bronze and the Grand Prix for work with WKD. The awards covered a range of advertising mediums, ranging from TV to outdoor and press.
Bray Leino's work for Tribute Ale earned a runners-up position in the alcohol category at the Campaign Media Awards, narrowly beaten by Gordon's gin - which went on to become winners of the overall Media Campaign of the year. The agency's innovative work for Gillette's 'Razor Amnesty' in Superdrug picked up Gold at the ISP Awards, while the 'Duvet Days' experiential campaign for Intel and Ikea also gained a Silver and Gold award before going on to win Silver at the IMC European awards. Bray Leino also scored at the Fresh Digital Awards, picking up Freshest Use of Creativity for its Ecover viral.
It was also a great year for April-Six and Experian, with the outstandingly successful Unfair Advantage DM campaign achieving finalist status at the B2B Marketing Awards and a bronze award at the DMA Awards. April-Six enjoyed success with its work on the EMEA channel launch campaign for Symantec Endpoint Protection 11.0. reaching the finals in the CNET Awards in the Best Technology Marketing category.
RLA's Let's Go To Work campaign devised for Volkswagen Commercial Vehicles picked up a Gold award at the B2B Awards for Best Use of Advertising, and came runner-up for the Grand Prix prize. The agency also won Gold for TV Commercial on a Limited Budget and Silver for Best TV Commercial at the Cream Awards, and Bronze for TV Commercial on a Limited Budget at the Fresh Awards.
The prestigious Marketing Excellence awards in May saw Story's work for Ardbeg Beastie win the Direct Marketing category. Scottish & Southern Energy also fared very well at the DMA awards, picking up no less than two golds in the Brand Building and Consumer DM categories. The agency's work for Ardbeg Corryvreckan which combined direct mail and digital was a strong winner in 2008, earning a Gold at the Echo awards in Las Vegas and a Gold, Silver and three Bronzes at the DMA awards.
Closer to home Corryvreckan was also recognised for Best use of Illustration/Animation at the Scottish Advertising Awards and picked up Best FMCG Website/Campaign at the digital DADI awards.
In 2008 Big Communications was recognised as the Midlands Advertising Agency Of The Year in the Drum New Year Honours. While Story and Bray Leino ranked 11 and 17 respectively in The Drum magazine's Top 100 marketing services companies outside of London. These results highlight our agencies' commitment to driving growth through creative, hard working effective campaigns.
New Business
The Group enjoyed another excellent year for new business with wins in all segments and agencies, including multiple public sector appointments such as The Scottish Government, the UK Border Agency and OGC. In addition, wins on food and drink brands such as Domino's Pizza; industrials including BP; charities including RNLI, the SSPCA and Breakthrough Breast Cancer; leisure including Calor and Black's Leisure Group; IT including Ricoh and Kingston Technology; property including Fairview and Countrywide Lettings; and promotions for E&J Gallo and Flora London Marathon were added during the year.
Trading outlook
In a challenging market environment, trading is currently in line with the Board's expectations. New business momentum from second half of last year has been maintained into the first quarter and recent wins from Royal Mint, the Office of National Statistics and Countrywide Lettings are beginning to roll out their activity for 2009 and beyond.
We continue to monitor the macro-economic environment closely and are taking a cautious approach to cost management including significant reductions in the central and agency cost base. The Group remains well positioned in the markets in which it operates.
Iain Ferguson
Chief Executive Officer
Chief Financial Officer's Review
Despite the tough economic conditions, the Group has delivered Operating income growth of 29% during the period, benefiting both from the full year effect of the acquisitions made in 2007 and also proforma growth in a difficult market.
As previously outlined, the Group has shifted its focus to smaller in-fill acquisitions rather than completing any major acquisitions during the year and Rhythmm and BroadSkill have been successfully integrated into the Bray Leino Agency. The consolidation and integration into the Group systems of the acquisitions made last year has proceeded smoothly. The Group continues to maintain and develop systems supporting strong financial internal controls.
Key Performance Indicators
The Group manages its internal operational performance by monitoring various key performance indicators (''KPIs''). The KPIs are tailored to the level at which they are used and their purpose. At the Group level the KPIs are EPS growth, gearing, liquidity, amount of EBIT acquired and especially proforma growth.
At the company level the KPIs comprise profitability measures including profit growth and net/gross margin; productivity measures including gross profit, salary costs and net profit per head; cash measures including debtor days and cash conversion.
The implementation and development of these KPIs is an ongoing process with the aim of providing executive management the maximum time to make appropriate actions to maximise the profitability of their business.
| KPI | Actual | Target | Result | |
| Proforma operating income growth | 1% | > market | Met | |
| Diluted EPS growth | 20% | 20% | Met | |
| Gearing | 37% | < 50% | Met | |
| Cash conversion (excl Acquisition accruals) | 98% | 100% | To improve |
The target of two acquisitions with EBIT over £1m was discontinued as being in appropriate in the current climate.
Banking Arrangements and Liquidity
At 31 December 2008 the Group had a £22.4m (2007: £25.7m) revolving credit facility (RCF) with the Royal Bank of Scotland (RBS) and HSBC Bank plc under a club arrangement and a continuing £2.0m overdraft facility with RBS. The actual amount drawn down on the RCF as at 31 December 2008 was £20.4m (2007: £25.4m) due to the cash offset process detailed below. There is a cross guarantee structure in place with the Group's bankers by means of a fixed and floating charge over all of the assets of the Group companies in favour of the Royal Bank of Scotland and HSBC Bank plc.
The Group maintains a cash balance for working capital and growth opportunities. At 31 December 2008 this amounted to £2.5m (2007: £9.6m), however £2.0m had been used to offset the RCF to minimise interest payable so the underlying cash balance was £4.5m (2007: £9.8m). Interest cover remains over 5 times.
As detailed in the Chief Executive's Review and in note 12 to the consolidated financial statements, the Group has various outstanding acquisition obligations and bank debt repayments falling due over the next few years. The timing of these repayments coupled with the decline in the state of the market has resulted in forecasted cash flow projections falling short of requirements. In this regard, the Directors are in the process of re-negotiating the repayment profiles and terms of these obligations such that the Group has sufficient cash available for operating purposes going forward.
Treasury Policy
The Group's policy is not to use any financial instruments for speculating but to use hedging of interest rates and currencies appropriate to the level of debt and trade respectively. Approximately half of the Group's debt is hedged for three years under a cap or cap and collar arrangement which limits the maximum interest rate that can be paid, but also puts a floor on the minimum that is paid.
The Group does not have a material amount of its turnover in foreign currencies and natural hedges are used where possible, matching revenues and costs in the same currency. Where this is not possible, appropriate currency hedging is used.
The Group operates a virtual cash pooling arrangement where the cash balances of all the Group agencies are pooled to offset any overdrafts and give the maximum net balance to invest. The maximum amount of this net cash balance not needed for operational cash flow is offset against the revolving credit facility on a weekly basis to reduce net interest payable.
Balance Sheet, Net Debt and Gearing
Equity attributable to shareholders of the Group was £48.5m at 31 December 2008 (2007: £44.7m). The number of shares in issue remained constant throughout the year at 33.1m, however 1.7m were bought by The Mission Marketing Group Employee Benefit Trust (TMMG EBT) in the second half of the year. These are classified as own shares and do not vote or count for the purposes of calculating earnings per share and for this purpose the weighted average number of shares in issue is 32.3m (2007: 26.2m).
Net Debt being Bank debt less cash has increased slightly to £17.9m (2007: £15.9m) as a result of debt repayments, payment of acquisition liabilities, the share re-purchase for the LTIP scheme detailed above and the acquisition of the Rhythmm and BroadSkill teams.
Acquisition liabilities have been reduced by the payment of deferred initial consideration amounts. The deferred consideration payments at the 2007 year end were conservatively high based on the initial acquisition business plans. These were reviewed both at the half year and again at the full year based on the actual performance and the 2009 business plans. As a result of our acquisition structure, the lower forecasts result in lower additional consideration entitlement and liabilities were materially reduced to £10.4m (2007: 27.9m). All the additional consideration payments (with the exception of the pre-IPO Big and Fuse agencies, are payable in cash/loan notes and up to 50% shares at the Group's option. The total outstanding acquisition liabilities, including some deferred initial payments, and their timing are detailed in note 8.1.
Gearing, being net debt over equity, has remained relatively constant at 37% at 31 December 2008 (2007: 36%). Allowing for the TMMG EBT equity repurchase, this would have fallen to 36%.
Total Debt, being acquisition liabilities plus net debt over equity, has reduced to 58% (2007: 98%).
Taxation
The effective tax rate, after adding back the notional IFRS interest charges which are not taxable, for 2008 was 27.9% (2007: effective rate of 31.0% or a rate charged of 27.5% after the benefit of reductions from the prior period).
Cash Flows
The Group had strong operational cash flows with operating profit of £9.0m (2007: £7.4m)
converting into operating cash flow of £7.8m (2007: £8.2m) this included one-off acquisition accruals of £1.2m (which were partially offset by cash in the acquisition balance sheets) which increase the conversion to 98% (2007: 110%).
During the year payments relating to prior year acquisitions were made totalling £3.1m, consisting the repayment of £2.8m of liabilities existing at 31 December 2007 and £0.3m arising from changes to acquisition consideration during the year. Payments relating to the acquisition of Rhythmm and BroadSkill in the year net of cash acquired amounted to £0.5m. Scheduled repayments of the RCF to the banks were made of £3.1m and a further, reversible, £2.0m was paid as part of the cash/RCF offset process described above. The TMMG EBT share repurchase cost £1.4m. The net cash outflow after these movements together with tax, interest and dividend payments was £7.0m.
Employee Incentives
The employee Share Save Scheme ("SAYE") noted in last year's Report was implemented in June 2008. Over 20% of employees took up the offer under the SAYE scheme giving them options over ordinary shares at 81 pence which, if exercised, would result in the issue of up to 582,695 shares in the second half of 2011. This would represent approximately 1.8% per cent of the currently issued share capital of the Group.
In the second half of 2008 The Mission Marketing Group Employee Benefit Trust bought 1,698,094 (5.1%) of the total issued share capital of the Company.
Compliance
This review together with the operating review have been prepared in accordance with the Accounting Standards Board's 2006 Reporting Statement.
Tim Alderson
Chief Financial Officer
Consolidated Income Statement
For the year ended 31 December 2008
| Year ended 31 December 2008 | Year ended 31 December 2007 | ||
|
Note | £'000 | £'000 | |
| TURNOVER | 2 | 104,157 | 79,540 |
| Cost of sales | (61,475) | (46,493) | |
|
| |||
| OPERATING INCOME | 2 | 42,682 | 33,047 |
| Operating expenses | (33,646) | (25,614) | |
| OPERATING PROFIT | 2 | 9,036 | 7,433 |
| Share of results of equity accounted associate | (10) |
(14) | |
| Profit on sale of equity accounted associate | 12 | - | |
| Investment income | 119 | 400 | |
| Finance costs | 3 | (1,900) | (1,390) |
| IFRS interest charges | 3 | (12) | (1,146) |
|
| |||
| PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION | 4 | 7,245 | 5,283 |
| Taxation | (2,027) | (1,766) | |
|
| |||
| PROFIT FOR THE PERIOD | 5,218 | 3,517 | |
| Basic earnings per share (pence) | 6 | 16.14 | 13.44 |
| Diluted earnings per share (pence) | 6 | 16.14 | 13.44 |
Consolidated Balance Sheet
As at 31 December 2008
| As at 31 December 2008 | As at 31 December 2007 | ||
|
Note | £'000 | £'000 | |
| FIXED ASSETS | |||
| Intangible assets | 7 | 74,553 | 87,182 |
| Investments in associates | - | 10 | |
| Property, plant and equipment | 2,075 | 2,534 | |
| 76,628 | 89,726 | ||
| CURRENT ASSETS | |||
| Work in progress | 585 | 822 | |
| Trade and other receivables | 17,823 | 16,624 | |
| Cash and short term deposits | 2,526 | 9,561 | |
| 20,934 | 27,007 | ||
| CURRENT LIABILITIES | |||
| Trade and other payables | (13,610) | (14,060) | |
| Accruals | (3,172) | (2,943) | |
| Corporation tax payable | (1,442) | (1,640) | |
| Bank loans | (2,683) | (3,062) | |
| Acquisition loan notes and shares | 8.1 | (958) | (3,894) |
| Acquisition contingent payments | 8.1 | (6,368) | (122) |
| (28,223) | (25,721) | ||
| NET CURRENT (LIABILITIES)/ASSETS | (7,299) | 1,286 | |
| TOTAL ASSETS LESS CURRENT LIABILITIES | 69,329 | 91,012 | |
| NON CURRENT LIABILITIES | |||
| Bank loans | (17,696) | (22,383) | |
| Obligations under finance leases | - | (17) | |
| Acquisition loan notes and shares | 8.1 | (194) | (1,637) |
| Acquisition contingent payments | 8.1 | (2,887) | (22,229) |
| Deferred tax liabilities | (70) | (81) | |
| NET ASSETS | 48,482 | 44,665 | |
| CAPITAL AND RESERVES | |||
| Called up share capital | 9 | 3,308 | 3,308 |
| Share premium account | 36,643 | 36,643 | |
| Own shares | 10 | (1,398) | |
| Staff remuneration reserve | 800 | 445 | |
| Retained earnings | 9,129 | 4,269 | |
| TOTAL EQUITY | 48,482 | 44,665 |
Consolidated Cash Flow Statement
for the year ended 31 December 2008
| Year to 31 December 2008 | Year to 31 December 2007 | ||
|
Note | £'000 | £'000 | |
| OPERATING CASH FLOW | 11 | 7,785 | 8,160 |
| Net finance costs | (1,781) | (1,310) | |
| Tax paid | (2,236) | (1,718) | |
| Net cash inflow from operating activities | 3,768 | 5,132 | |
| INVESTING ACTIVITIES | |||
| Proceeds on disposal of property, plant and equipment | 152 | 22 | |
| Purchase of property, plant and equipment | (462) | (753) | |
| Acquisition of subsidiaries | (1,165) | (26,997) | |
| Acquisition of intellectual property rights | (61) | - | |
| Net Cash acquired with subsidiaries | 341 | 6,605 | |
| Acquisition of associate companies | - | (24) | |
| Net cash (outflow)/inflow from investing activities | (1,195) | (21,147) | |
| FINANCING ACTIVITIES | |||
| Dividends paid | (358) | (309) | |
| Repayments of amounts borrowed | (2,754) | (7,492) | |
| Movement in HP creditor and finance leases | (32) | - | |
| Receipts from long term loans | - | 19,001 | |
| Repayment of long term loans | (5,066) | (1,556) | |
| Proceeds on issue of ordinary share capital | - | 5,000 | |
| Purchase of own shares held in EBT | (1,398) | ||
| Financing and share issue costs | - | (150) | |
| Net cash inflow from financing activities | (9,608) | 14,494 | |
| (Decrease)/increase in cash and cash equivalents | (7,035) | (1,521) | |
| Cash and cash equivalents at beginning of year | 9,561 | 11,082 | |
| Cash and cash equivalents at end of year | 2,526 | 9,561 |
Consolidated Statement of Changes in Equity
Year ended 31 December 2008
| Share capital £'000 | Share premium £'000 | Own shares £'000 | Retained earnings £'000 | Staff remuneration reserve £'000 | Total £'000 | |
| Changes in equity | ||||||
| At 1 January 2007 | 2,156 | 22,517 | - | 1,061 | 128 | 25,862 |
| New shares issued | 1,152 | 14,126 | - | - | - | 15,278 |
| Credit for share option scheme | - | - | - | - | 317 | 317 |
| Profit for the period | - | - | - | 3,517 | - | 3,517 |
| Dividends | - | - | - | (309) | - | (309) |
| At 31 December 2007 | 3,308 | 36,643 | - | 4,269 | 445 | 44,665 |
| Own shares purchased by EBT | - | - | (1,398) | - | - | (1,398) |
| Credit for share option scheme | - | - | - | - | 355 | 355 |
| Profit for the period | - | - | - | 5,218 | - | 5,218 |
| Dividends | - | - | - | (358) | - | (358) |
| At 31 December 2008 | 3,308 | 36,643 | (1,398) | 9,129 | 800 | 48,482 |
Notes to the Consolidated Financial Statements
1. Accounting Policies
Basis of preparation
The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The Financial statements have also been prepared in accordance with IFRS adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation.
The financial statements have been prepared on the historical cost basis.
Going Concern
The financial statements have been prepared on a going concern basis, notwithstanding the potential impact on the Group's operations resulting from:
the re-negotiation of the repayment profile of the outstanding acquisition obligations with the relevant vendors; and
the re-negotiation of the repayment profile of the existing bank revolving credit facility
As detailed in the Chief Executive's Review and in note 12 to the consolidated financial statements, the Group has various outstanding acquisition obligations and bank debt repayments falling due over the next few years. Amounts and maturity dates of these outstanding obligations. The timing of these repayments coupled with the decline in the state of the market has resulted in forecasted cash flow projections falling short of requirements. In this regard, the Directors are in the process of re-negotiating the repayment profiles and terms of these obligations such that the Group has sufficient cash available for operating purposes going forward.
Notwithstanding the challenges facing the Group, the Directors are satisfied, given the state of negotiations which are in an advanced stage, and the options currently available to them, that the Group will continue in operational existence for the foreseeable future, being at least one year.
Basis of consolidation
The Group's financial statements consolidate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the company has the power to govern the financial and operating polices of an investee entity so as to obtain benefits from its activities.
On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Goodwill represents the excess of acquisition cost over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary at the date of acquisition. Any deficiency of the cost of acquisition below the fair value of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income statement in the period of acquisition.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Revenue and revenue recognition
Turnover is in respect of the provision for services including fees, commissions, rechargeable expenses and sales of materials performed subject to specific contract. Where recorded turnover exceeds amounts invoiced to clients, the excess is classified as accrued income.
Income is taken on fee income in the period to which it relates. Project income is recognised in the period in which the project is worked on. For projects, which fall over the accounting year end, income is recognised to reflect the partial performance of the contractual obligations in accordance with IAS18 Revenue.
Income is recognised on the following basis:
Retainer fees are apportioned over the time period to which they relate.
Project income is recognised by apportioning the fees billed or billable to the time period for which those fees were earned by relationship to the percentage of completeness of the project to which they relate.
Media commission is recognised, when the advertising has been satisfactorily aired or placed.
Unbilled costs relating to contracts for services are included at rechargeable value in accrued income.
Unbilled costs relating to contracts for products are carried forward at the lower of cost and net realisable value with no profit recognition.
Financial liabilities are released to income when the liability is extinguished.
Share-based payment transactions
In accordance with IFRS 3 certain payments made to employees in respect of earn-out arrangements are required to be treated as remuneration within the income statement. These amounts are required to be charged to the income statement.
The Group has applied the requirements of IFRS 2 Share-based Payments. IFRS 2 has been applied to all grants of equity instruments.
Equity-settled share-based payments, such as share options, are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the number of shares that will eventually vest.
Fair value is measured by use of a Black Scholes model on the grounds that there are no market related vesting conditions. The expected life used in the model has been adjusted, based on the management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Market price on any given day is obtained from external publicly available sources.
Goodwill
Goodwill arising from the purchase of subsidiary undertakings, represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable asset, liabilities and contingent liabilities of the subsidiary acquired, and is capitalised in accordance with the requirements of IFRS 3. Future anticipated payments to vendors in respect of earn-outs are based on the Directors' best estimates of these obligations. Earn-outs are dependent on the future performance of the relevant business and are reviewed annually. The deferred consideration is discounted to its fair value in accordance with IFRS 3 and IAS 39. The difference between the fair value of these liabilities and the actual amounts payable are charged to the income statement as notional finance costs over the life of the associated liability.
Goodwill is not amortised, but is reviewed annually for impairment. Goodwill impairment is assessed by comparing the carrying value of goodwill to the net present value of future cash flows derived from the underlying assets considering forecast cash flows over an initial projection period of up to three years for each cash-generating unit. After this period, growth rates equivalent to nominal GDP are generally assumed. In accordance with IFRS 3 the carrying value of goodwill will continue to be reviewed for impairment on the basis stipulated and adjusted should this be required. Impairment is recognised in the income statement and is not subsequently reversed. The individual circumstances of each future acquisition will be assessed to determine the appropriate treatment of any related goodwill.
Work in progress
Work in progress is stated at the lower of cost and net realisable value and includes the costs of direct materials and purchases, and the costs of direct labour. Net realisable value is based on estimated invoice value less further costs expected to be incurred to completion.
Deferred consideration
The terms of an acquisition may provide that the value of the purchases consideration, which may be payable in cash, shares or other security at a future date, depends on uncertain future events, such as the future performance of the acquired company. Where it is not possible to estimate the amounts payable with any degree of certainty, the amounts recognised in the financial statements represent a reasonable estimate at the balance sheet date of the amounts expected to be paid. The deferred consideration is discounted to a fair value. The difference between the fair value of the liabilities and the actual amounts payable are charged to the income statement as notional finance costs (calculated at annual rates of between 4.5% and 5.5% over the life of the associated liability. The rate used is the risk free rate applicable at the time of acquisition of the relevant entity. The Directors consider these rates to be reasonable in light of similar rates available on debt instruments.
Where it becomes appropriate to increase or decrease a previous estimate of deferred consideration, an adjustment is made to the current year IFRS interest charge, such that the cumulative interest charged to the date of change reflects the amount of interest charge that would have been expensed had the revised estimate of the deferred consideration been made at the date that the liability was first recognized. By so doing, the total interest expensed over the life of the liability is calculated as a function of the latest expectation and is not influenced by any previous estimates whether higher or lower, and fully reflects the intention of IFRS 3.
Financial instruments
Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. Issue costs are offset against the proceeds of such instruments.
Financial liability and equity
Financial liabilities and equity instruments are classified 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. The Group has only one class of share in existence.
Finance costs
Finance costs, which include interest, bank charges and the unwinding of the discount on deferred consideration, are recognised in the income statement in the year in which they are incurred.
Accounting estimates and judgements
The Group makes estimates and judgements concerning the future and the resulting estimates may, by definition, vary from the actual results. The Directors considered the critical accounting estimates and judgements used in the financial statements and concluded that the main areas of judgement are:
Revenue recognition policies in respect of contracts which straddle the year end;
Contingent deferred payments in respect of acquisitions; and
Recognition and quantification of share based payments
Valuation of intangible assets.
These estimates are based on historical experience and various other assumptions that management and the Board of Directors believe are reasonable under the circumstances and are discussed, to the extent necessary, in more detail in their respective notes.
2. Segmental Information
Business Segmentation
For management purposes the Group had seven operating subsidiaries during the period, Bray Leino Limited, Big Communications Limited, Fuse Digital Limited, Bastin Day Westley Limited, April-Six Limited, Story UK Limited and RLA Group Limited. These have been divided into five segments which form the basis of the Group's primary segmentation namely; Branding and Advertising, Media, Digital, Events and Learning, and Public Relations.
| Branding & Advertising | Media | Digital | Events & Learning | Public Relations |
Group | |
| Year to 31 December 2008 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Turnover | 39,751 | 39,404 | 9,155 | 13,323 | 2,524 | 104,157 |
| Operating income | 26,481 | 3,504 | 6,152 | 4,613 | 1,932 | 42,682 |
| Segmental operating profit | 6,962 | 1,483 | 1,724 | 627 | 167 | 10,963 |
| Unallocated corporate expenses | (1,927) | |||||
| Operating profit | 9,036 | |||||
| Share of results of equity accounted associate | (10) | |||||
| Profit on sale of equity accounted associate | 12 | |||||
| Investment income | 119 | |||||
| Finance costs | (1,900) | |||||
| IFRS interest charges | (12) | |||||
| Profit on ordinary activities before taxation | 7,245 | |||||
| Taxation | (2,027) | |||||
| Profit for period | 5,218 | |||||
| Other Information | ||||||
| Capital expenditure | 308 | 34 | 44 | 24 | 28 | 438 |
| Unallocated capital expenditure | 24 | |||||
| Total capital expenditure | 462 | |||||
| Depreciation and amortisation | 496 | 31 | 67 | 122 | 34 | 750 |
| Unallocated depreciation and amortisation | 26 | |||||
| Total depreciation and amortisation | 776 | |||||
| Balance Sheet | ||||||
| Assets | ||||||
| Segment assets | 13,659 | 3,724 | 3,615 | 1,670 | 564 | 23,232 |
| Unallocated corporate assets | 74,330 | |||||
| Consolidated total assets | 97,562 | |||||
| Liabilities | ||||||
| Segment Liabilities | 7,619 | 2,195 | 1,705 | 734 | 237 | 12,490 |
| Unallocated corporate liabilities | 36,590 | |||||
| Consolidated total liabilities | 49,080 | |||||
| Consolidated net assets | 6,040 | 1,529 | 1,910 | 936 | 327 | 48,482 |
Unallocated corporate expenses include corporate administration expenses necessary for a quoted company. It is considered impractical to split the debt interest and notional IFRS charges into segments.
The split of assets and liabilities has been estimated, but is not considered accurate as the businesses are integrated. Unallocated corporate assets and liabilities include unallocated IFRS assets and liabilities, corporate assets and liabilities, Group cash reserves, drawn debt liabilities and payments due to vendors.
| Branding & Advertising | Media | Digital | Events & Learning | Public Relations |
Group | |
| Year to 31 December 2007 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Turnover | 31,898 | 29,306 | 6,526 | 9,733 | 2,077 | 79,540 |
| Operating income | 20,376 | 2,773 | 4,583 | 3,699 | 1,616 | 33,047 |
| Segmental operating profit | 6,167 | 1,219 | 1,214 | 578 | 82 | 9260 |
| Unallocated corporate expenses | (1,827) | |||||
| Operating profit | 7,433 | |||||
| Share of results of equity accounted associate | (14) | |||||
| Investment income | 400 | |||||
| Finance costs | (1,390) | |||||
| IFRS interest charges | (1,146) | |||||
| Profit on ordinary activities before taxation | 5,283 | |||||
| Taxation | (1,766) | |||||
| Profit for period | 3,517 | |||||
| Other Information | ||||||
| Capital expenditure | 523 | 19 | 98 | 131 | 47 | 818 |
| Unallocated capital expenditure | 21 | |||||
| Total capital expenditure | 839 | |||||
| Depreciation and amortisation | 265 | 18 | 62 | 121 | 29 | 495 |
| Unallocated depreciation | 21 | |||||
| Total depreciation | 516 | |||||
| Balance Sheet | ||||||
| Assets | ||||||
| Segment assets | 23,345 | 4,058 | 3,213 | 1,334 | 189 | 32,139 |
| Unallocated corporate assets | 84,594 | |||||
| Consolidated total assets | 116,733 | |||||
| Liabilities | ||||||
| Segment Liabilities | 7,105 | 2,419 | 1,117 | 444 | 63 | 11,148 |
| Unallocated corporate liabilities | 60,920 | |||||
| Consolidated total liabilities | 72,068 | |||||
| Consolidated net assets | 16,240 | 1,639 | 2,096 | 890 | 126 | 44,665 |
3. Finance Costs and IFRS Interest Charges
| Year to 31 December 2008 | Year to 31 December 2007 | |
| £'000 | £'000 | |
| Finance costs: | ||
| Interest on bank loans and overdrafts | (1,900) | (1,280) |
| Interest on loan notes | - | (110) |
| (1,900) | (1,390) | |
| IFRS interest charges: | ||
| Finance cost of deferred consideration | (12) | (826) |
| Bank arrangement fees | - | (320) |
| (12) | (1,146) |
4. Profit on Ordinary Activities Before Tax
Profit on ordinary activities before taxation is stated after charging:-
| Year to 31 December 2008 | Year to 31 December 2007 | |
| £'000 | £'000 | |
| Depreciation of owned tangible fixed assets | 760 | 503 |
| Depreciation of tangible fixed assets held under finance leases | 13 | 13 |
| Amortisation of intangible assets | 3 | - |
| (Profit) / Loss on disposal of property, plant and equipment | (4) | (3) |
| Operating lease rentals - Land and buildings | 1,041 | 570 |
| Operating lease rentals - Plant and equipment | 284 | 280 |
| Operating lease rentals - Other assets | 73 | 216 |
| Staff costs | 24,748 | 18,631 |
| Auditors' remuneration | 238 | 255 |
| (Profit) / Loss on foreign exchange | (15) | (4) |
5. Dividends
| Year to 31 December 2008 | Year to 31 December 2007 | |
| £'000 | £'000 | |
| Amounts recognised as distributions to equity holders in the year | ||
| Full year dividend for the period ended 31 December 2006 of 1.0 pence per share | - | 215 |
| Interim dividend of 0.36 pence per share (2007: 0.36 pence ) | 119 | 94 |
| Final dividend of 0.74 pence per share for the year ended 31 December 2007 | 245 | - |
| Total dividend paid to EBT scheme | (6) | - |
| 358 | 309 |
The Board have decided to suspend the payment of the final dividend in order to conserve cash.
6. Earnings Per Share
The calculation of the basic and diluted earnings per share is based on the following data, determined in accordance with the provisions of IAS33: "Earnings per Share".
| Year to | Year to | |
| 31 December 2008 | 31 December 2007 | |
| £'000 | £'000 | |
| Earnings | ||
| Earnings for the purpose of reported earnings per share being net profit attributable to equity holders of the parent | 5,218 | 3,517 |
| Add back IFRS interest charges | 12 | 1,146 |
| Earnings for the purpose of headline earnings per share | 5,230 | 4,663 |
| Number of shares | ||
| Weighted average number of ordinary shares for the purpose of basic earnings per share | 32,319,841 | 26,163,476 |
| Dilutive effect of securities: | ||
| Share options | - | - |
| Weighted average number of ordinary shares for the purpose of diluted earnings per share | 32,319,841 | 26,163,476 |
| Reported basis: | ||
| Basic earnings per share (pence) | 16.14 | 13.44 |
| Diluted earnings per share (pence) | 16.14 | 13.44 |
| Headline basis: | ||
| Basic earnings per share (pence) | 16.18 | 17.82 |
| Diluted earnings per share (pence) | 16.18 | 17.82 |
Basic earnings per share includes shares to be issued subject only to time as if they had been issued at the beginning of the period.
The additional consideration shares included in non current liabilities have not been included in the diluted earnings per share because the conditions for their issue had not been met in the period. Options issued are included in diluted earnings per share to the extent that the market price is above the exercise price in accordance with IAS33.
7. Intangible Assets - Goodwill
| £'000 | |
| At 1 January 2007 | 37,292 |
| Recognised on acquisition of subsidiaries | 48,076 |
| Adjustment to consideration and net assets | 1,814 |
| At 31 December 2007 | 87,182 |
| Recognised on acquisition of subsidiaries (see note 8) | 2,123 |
| Adjustment to consideration and net assets | (14,810) |
| At 31 December 2008 | 74,495 |
As explained in the Accounting Policies note and in line with IFRS, goodwill has not been amortised.
The adjustments to consideration relate to changes in the estimated deferred consideration in the earn-out period under the terms of the relevant sale and purchase agreement. In addition, the adjustments to consideration include reclassifications of acquisition costs previously included in prepayments.
In accordance with the Group's accounting policies, an annual impairment test is applied to the carrying value of goodwill and other intangible assets. The review performed assesses whether the carrying value of goodwill is supported by the net present value of future cash flows derived from the underlying assets considering forecast cash flows over an initial projection period of three years for each cash-generating unit. After this period, growth rates equivalent to nominal GDP are assumed for all units. The discount rate used is the Group's estimated pre-tax weighted average cost of capital, which is 7.3%. Similarly the cash flow projections used in the calculations are pre-tax.
Goodwill is comprised of the following substantial components:
| Year to 31 December 2008 | Year to 31 December 2007 | |
| £'000 | £'000 | |
| Big Communications Ltd/Fuse Digital Ltd | 8,125 | 8,122 |
| Bray Leino Ltd | 28,363 | 30,984 |
| April-Six Ltd | 9,411 | 12,182 |
| Bastin Day Westley Ltd | 6,283 | 9,028 |
| The Driver Is Ltd | 365 | 396 |
| Story UK Limited | 8,598 | 10,075 |
| PCM Ltd | 657 | 526 |
| RLA Group Limited | 10,570 | 15,869 |
| Rhythmm Communications Group Ltd | 439 | - |
| BroadSkill Ltd | 1,684 | - |
| 74,495 | 87,182 |
8. Acquisitions
8.1 Acquisition Loan Notes and Acquisition Contingent Payments
The terms of an acquisition may provide that the value of the purchase consideration, which may be payable in cash or shares or other securities at a future date, depends on uncertain future events such as the future performance of the acquired company. The Directors estimate that the liability for payments that may be due are as follows:
| Initial Consideration Loan Notes | Additional Consideration Loan Notes | Additional Consideration Shares to be issued | Total | |
| £'000 | £'000 | £'000 | £'000 | |
| Less than one year | 958 | 3,766 | 2,602 | 7,326 |
| Between one and two years | 194 | 420 | 409 | 1,023 |
| Between two and three years | - | 1,029 | 1,029 | 2,058 |
| 1,152 | 5,215 | 4,040 | 10,407 |
8.2 Acquisition of Rhythmm Communications Group Limited ("Rhythmm")
On 5 February 2008, the Group acquired the whole issued shared capital of Rhythmm Communications Group Limited. The fair value of the consideration given for the acquisition was £455,933. An initial payment of £449,918 was satisfied by cash on completion. Costs relating to the acquisition amounted to £6,015.
Contingent consideration of £300,000 is dependent on the profitability of Rhythmm for the two years to 31 December 2009. The Group has provided for contingent consideration of zero to date.
The fair value of the net assets acquired was £17,403, resulting in goodwill of £438,530 which has been capitalised as an intangible asset.
| Book Value | Fair Value adjustments | Fair value | |
| £'000 | £'000 | £'000 | |
| Net assets acquired | |||
| Inventory | 18 | - | 18 |
| Trade and other receivables | 319 | - | 319 |
| Cash and cash equivalents | 336 | - | 336 |
| Trade and other payables | (656) | - | (656) |
| 17 | |||
| Goodwill | 439 | ||
| Total consideration | 456 | ||
| Satisfied by: | |||
| Cash | 450 | ||
| Acquisition costs | 6 | ||
| 456 | |||
The goodwill arising on the acquisition is attributable to the anticipated profitability of Rhythmm and the anticipated future operating synergies from the combination with the Group.
Management carried out a review to assess whether any intangible assets relating to brand names, customer relationships and contractual arrangements were acquired as part of the transaction. Management concluded that no value could be ascribed to these intangible assets on the basis that other intangibles and goodwill cannot be separately valued reliably, due to the nature of the intangible assets in question.
8.3 Acquisition of BroadSkill Limited ("BroadSkill")
On 7 March 2008, the Group acquired the whole issued shared capital of BroadSkill Limited. The fair value of the consideration given for the acquisition was £1,265,172. An initial payment of £350,000 was satisfied by cash on completion. Costs relating to the acquisition amounted to £60,959.
Contingent consideration of £1,200,000 is dependent on the profitability of BroadSkill for the three years to 31 December 2010. The Group has provided for contingent consideration of £950,000 to date. This has been discounted to a net present value of £854,213, with the resulting discounting charge of £95,787 to be taken thorough the income statement over the earnout period.
The fair value of the net liabilities acquired was £419,120, resulting in goodwill of £1,684,292 which has been capitalised as an intangible asset.
| Book Value | Fair Value adjustments | Fair value | |
| £'000 | £'000 | £'000 | |
| Net assets acquired | |||
| Inventory | 4 | 4 | |
| Trade and other receivables | 469 | - | 469 |
| Cash and cash equivalents | 5 | - | 5 |
| Trade and other payables | (897) | - | (897) |
| (419) | |||
| Goodwill | 1,684 | ||
| Total consideration | 1,265 | ||
| Satisfied by: | |||
| Cash | 350 | ||
| Deferred contingent consideration | 854 | ||
| Acquisition costs | 61 | ||
| 1,265 | |||
The goodwill arising on the acquisition is attributable to the anticipated profitability of BroadSkill and the anticipated future operating synergies from the combination with the Group.
Management carried out a review to assess whether any intangible assets relating to brand names, customer relationships and contractual arrangements were acquired as part of the transaction. Management concluded that no value could be ascribed to these intangible assets on the basis that other intangibles and goodwill cannot be separately valued reliably, due to the nature of the intangible assets in question.
9. Share Capital
| Year to 31 December 2008 | Year to 31 December 2007 | |
| £ | £ | |
| Authorised: | ||
| 85,000,000 ordinary shares of 10 p each (2007: 85,000,000 ordinary shares of 10p each) | 8,500,000 | 8,500,000 |
| Allotted and called up: | ||
| 33,076,828 ordinary shares of 10 p each (2007: 33,076,828 ordinary shares of 10 p each) | 3,307,683 | 3,307,683 |
Options
The Group has the following options in issue:
| At start of year | Granted | Exercised | Lapsed | At end of year | |
| TMMG Share Option Scheme | 2,449,500 | 492,829 | - | (83,333) | 2,858,996 |
| SAYE Scheme | - | 582,695 | - | - | 582,695 |
The purpose of the TMMG Share Option Scheme is to incentivise certain key employees. Exercise prices of share options outstanding under this scheme at year end range between 108.00p and 137.50p, the exercise prices being the market price of the underlying shares at the time of issue.
The SAYE Scheme is available to all employees. The exercise price of share options outstanding under this scheme is 81.00p, being 90 percent of the market price of the underlying shares at the time of issue.
10. Own Shares
| No. of shares | £'000 | |
| At 1 January 2008 | - | - |
| Acquired in the year | 1,698,094 | 1,398 |
| At 31 December 2008 | 1,698,094 | 1,398 |
Shares are held in an EBT to meet certain requirements of The Mission Marketing Group Long Term Incentive Plan.
11 Reconciliation of Operating Profit to Operating Cash Flow
| Year ended | Year ended | |
| 31 December 2008 | 31 December 2007 | |
| £'000 | £'000 | |
| Operating profit | 9,036 | 7,433 |
| Depreciation and amortisation charges | 776 | 516 |
| Gain on disposal of property, plant and equipment | (4) | (3) |
| Non cash charge for share options | 355 | 317 |
| (Increase) / Decrease in receivables | (398) | 416 |
| Decrease / (Increase) in work in progress | 109 | (25) |
| Decrease in payables | (2,089) | (494) |
| Operating cash flow | 7,785 | 8,160 |
12. Post balance sheet events
The Directors have been in negotiations with both the vendors and the bank regarding the re-scheduling of the repayment of outstanding acquisition obligations and bank debt, such as to release sufficient cash for operating purposes going forward. These negotiations are at an advanced stage, but have not yet been finalised.
13. Preliminary announcement information
The financial information set out in this preliminary announcement does not constitute the Group's statutory accounts within the meaning of section 240 of the Companies Act 1985.
Proforma Consolidated Income Statement
for the twelve months ended 31 December 2008
The financial statements for the year ended 31 December 2008 includes a full twelve month trading period. The Group acquired April-Six Limited and Bastin Day Westley Limited in March 2007, Story UK Limited in September 2007 and RLA Group Limited in December 2007.
As a result of the aforementioned factors, comparison of the results does not reflect the underlying organic growth of the Group. A comparable proforma (like-for-like) financial statement has therefore been prepared. Proforma figures for both the current year ended 31 December and the comparative period include all current trading units for the full twelve months ended 31 December. This gives a representative picture of the underlying trading performance of the Group, the comparisons representing purely organic growth.
| Year to | % | Year to | |
| 31 Dec 2008 | growth | 31 Dec 2007 | |
| Unaudited | Unaudited | ||
| £'000 | £'000 | ||
| TURNOVER | 104,157 | +0% | 103,744 |
| Cost of sales | (61,475) | +0% | (61,399) |
| OPERATING INCOME | 42,682 | +1% | 42,345 |
| Operating expenses | (33,646) | +8% | (31,297) |
| OPERATING PROFIT | 9,036 | -18% | 11,048 |
Segmentation Note
For management purposes the Group had seven operating subsidiaries during the period, Bray Leino Limited, Big Communications Limited, Fuse Digital Limited, Bastin Day Westley Limited, April-Six Limited, Story UK Limited and RLA Group Limited. These have been divided into five segments which form the basis of the Group's primary segmentation namely: Branding and Advertising, Media, Events and Learning, Public Relations and Digital. The Group's operations are all based in the UK and substantially all the Group's business is executed in the UK.
| Year to | Year to | ||
| 31 Dec 2008 | % growth | 31 Dec 2007 | |
| Unaudited | Unaudited | ||
| £'000 | £'000 | ||
| Turnover | |||
| Business segment | |||
| Branding and Advertising | 39,751 | -14% | 46,387 |
| Media | 39,404 | +3% | 38,090 |
| Events and Learning | 13,323 | +37% | 9,733 |
| Public Relations | 2,524 | +22% | 2,077 |
| Digital and On-line | 9,155 | +23% | 7,457 |
| 104,157 | +0% | 103,744 |
| Operating income | |||
| Business segment | |||
| Branding and Advertising | 26,481 | -6% | 28,274 |
| Media | 3,504 | +4% | 3,365 |
| Events and Learning | 4,613 | +25% | 3,699 |
| Public Relations | 1,932 | +20% | 1,616 |
| Digital and On-line | 6,152 | +14% | 5,391 |
| 42,682 | +1% | 42,345 |
| Operating profit | |||
| Business segment | |||
| Branding and Advertising | 6,962 | -25% | 9,294 |
| Media | 1,483 | +8% | 1,377 |
| Events and Learning | 627 | +8% | 578 |
| Public Relations | 167 | +104% | 82 |
| Digital and On-line | 1,724 | +12% | 1,544 |
| 10,963 | -15% | 12,875 | |
| Central costs | (1,927) | (1,827) | |
| 9,036 | -18% | 11,048 |