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CAGNEY Plc ('Cagney' or the 'Company')

FULL YEAR RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008

30 March 2009 

Cagney, an integrated group of marketing services firms, today announces full year results for the year ended 31 December 2008.

Highlights

•	Gross profit increased by 8% to £8.1m (2007 - £7.5m)
•	Small operating profit, in line with earlier guidance (against £547,000 loss in 2007)
•	More than £500,000 taken out of cost base going into 2009
•	Strong new business performance in all companies
•	Profitable start to 2009
•	Significant reduction in debt
•	Continued bank support
•	New management team cautiously optimistic about 2009

Commenting on the results, Chief Executive Steve Mattey said:

'When I look back at the task the new management team inherited almost a year ago, I do so with satisfaction in what we have achieved so far, but also knowing that we still have much to do.

At the time I became CEO, I felt that there were three stages which Cagney needed to go through.  The first, and most urgent, was to bring financial robustness to all business areas of the Group; the second was to re-define our business strategy and direction; and the third was to restore carefully managed growth.  

Therefore the key task during 2008 for the new management team was the first stage - to bring financial robustness to all business areas.  Among other things, this involved taking more than £500,000 out of the Group's cost base.  Whilst this had a small impact in 2008, we will reap its full reward in the coming year.

We have the continued support of our bank; we are being prudent and realistic in our forecasting; and we are carefully managing our cost base.  Ever mindful of the wider economic malaise and the impact this might have on clients and potential clients, we nevertheless expect to deliver a much more encouraging financial performance in 2009.

I hope to be in a position to deliver news of changes in the strategy and direction for Cagney as the year unfolds to match the changing needs of the communications marketplace.

I would like to thank my Board for their support in a difficult 2008 and, as always, my thanks to the staff of all the Cagney companies for their continued hard work and commitment.'

On 11 February 2009 the Board of Cagney announced that it had received a preliminary approach regarding a possible offer for the Company, whilst stressing that the approach and the resulting discussions were at an early stage.  Discussions continue, but this does not necessarily imply that an offer will be made for the Company.  A further announcement will be made as and when appropriate. 

ENDS

Enquiries:
Cagney Plc	Tel: 020 7637 4198
Steve Mattey, Chief Executive
Patrick Oram, Chief Financial Officer
Smith & Williamson (Nomad)	Tel: 0117 376 2213
Nick Reeve
WH Ireland (Broker)	Tel: 0161 832 2174
Stuart Forshaw
The Media Foundry (PR)	Tel: 020 7612 1163
Anna Foster

About Cagney Plc

Cagney Plc is an integrated group of marketing services firms. It combines four main businesses: Chick Smith Trott (advertising and design); Cubo (promotional marketing); The Media Foundry (public relations); and Tree (market research and data analysis). The Group floated on AIM in February 2006.  

www.cagneyplc.com

CEO STATEMENT

For the year ended 31 December 2008

OVERVIEW

I would not have chosen to begin my tenure as CEO of Cagney in the jaws of a global financial crisis, but I have always relished a challenge, and continue to believe that the economic conditions will bring opportunities in all business sectors.  

When I look back at the task I inherited almost a year ago, I do so with satisfaction with what we have achieved so far, but also knowing that we still have much to do.

I felt then that there were three stages which Cagney needed to go though.  The first was to create financial robustness in all business areas; the second was the re-definition of our strategy and direction for the business; and the third stage was carefully managed growth.

The key task during 2008 for the new management team was the first stage. 

The interim operating profit for 2008 of £234,000 was a welcome performance after 2007's operating loss of £547,000 but, as we said at the time, it was boosted by some one-off revenues, and masked the pressure that the Group's finances were under. The level of new business needed to produce a reasonable margin from the Group's inflated cost base would have been difficult in times of plenty, but almost impossible in a recession.  

But we did achieve an operating profit in 2008, albeit a small one of £34,000, and we achieved that despite inheriting a huge burden of central costs that could not quickly be reduced. We also grew gross profit by £0.6m over 2007, to £8.1m.  

Central operating costs in 2007 were £1.3m, which was far too high for a group of Cagney's size. Some cost cutting measures at the end of 2007 yielded a modest improvement going into 2008, but the burden of central costs that we inherited remained too high. In the first months of its tenure, the new management team cut the running rate of central costs by more than half, although notice periods meant that 2008 saw little benefit from these measures. Payments during the notice periods of senior personnel who left the Group during the year amounted to £338,000. Without these non-productive costs and other related costs the Group would have registered an operating profit approaching £500,000.  

The other main factor behind the 2007 operating loss was a significant loss at CST, the Group's above-the-line advertising agency. CST's overheads were significantly reduced towards the end of 2007, and cost control continued into 2008. CST recorded a small but encouraging profit in 2008, though the company's main achievement during the year was in converting an increase in gross profit of £138,000 against 2007 into an impressive £448,000 improvement in its operating performance.  

Whilst the operating profit for the year was small, it is nevertheless satisfying considering the circumstances, and we entered 2009 in the best possible shape to be able to capitalise on the opportunities we believe these testing times will present.  

In the first quarter of 2009 Cagney is trading profitably, and we continue to feel cautiously optimistic about new business prospects. We have a healthy pipeline and our bank is supportive of this management team's progress and vision for the future.

This all puts us in a good place to move to the second stage I mentioned earlier - re-definition of our strategy and direction for the business.

Communications companies need to respond to the changes taking place in the way consumers receive information about products and services.  Digital media and mobile telecommunications are now critical routes to market in every sector. There is an enormous proliferation of data about people and their behaviour - web usage, purchasing habits, transactional information, personal data to name but a few. Harnessing this data to understand people and reacting to it with intuitive and natural communications is the future for marketing. With this in mind, my intention is to re-align Cagney as a business delivering communications led by insight and technology.

We are an extremely creative company, and if this creativity can be channelled effectively for our clients, they will benefit greatly.  Communications will be judged on their effectiveness and impact on sales in this economy more than ever.  I welcome that.  We will be a business that at its heart will let insight and technology drive our creativity. 

The third stage for Cagney will then be to embark on a measured and considered growth plan which incorporates businesses that are consistent with this strategy.

SEGMENTAL REVIEW

The segmental analysis in the financial statements identifies three segments - (i) creative services; (ii) market research and data analysis; and (iii) public relations.  

The creative services segment comprises CST, Exedra and Cubo. At the end of the year we decided to fold Exedra, our brand consultancy, back into CST.  

CST turned a £428,000 operating loss in 2007 into an operating profit in 2008 from only a modest increase in gross profit.  The agency had a quiet first half of the year, but emerged re-energised in the second half, adding Douwe Egberts and Go3 to its client list, and winning a project from Interflora. It also consolidated its relationships with existing clients, winning four additional COI projects, and being re-appointed to National Savings & Investments following the statutory review pitch.  

Cubo, our promotional marketing business, had another very good year in 2008, recording an increase in operating profit at a healthy margin. The arrival of Cal Ledward as business development director in March 2008 contributed to a solid new business performance, with added projects from Budweiser, Martell, Busch Entertainment, and Douwe Egberts.  

The market research and data analysis segment is primarily Tree, which grew both operating profit and gross profit, despite a slightly disappointing new business year.  Tree has traditionally performed well when clients are challenged to demonstrate the effectiveness of their marketing spend, and that should stand the business in good stead at a time when companies are examining every penny of their expenditure.  

Cagney also has a minority stake in A Good Listener ('AGL'), a revolutionary software tool which condenses all web chatter on particular topics of interest to clients into digestible form.  AGL already has clients and an impressive pipeline of potential clients.

The public relations segment is The Media Foundry ('TMF'). The company significantly increased its operating profit against 2007, despite the provision for doubtful debts that we referred to in the announcement we made in December.  We are particularly pleased with the amount of new business generated.  During the year TMF won 18 new clients or projects, including Tradewind, 38th Floor, CBS International and Clusta, and there are signs that the economic conditions might lead companies to invest in communication methods such as public relations which are capable of high impact at lower cost.  

ECONOMIC OUTLOOK

No one knows how long this recession will last, or how deep it will go. We are assuming that it will last long and be very deep, and are preparing ourselves accordingly by preserving cash and cutting out waste. We will invest, but only against a robust business plan.  

SUMMARY

The Group entered 2009 running at a profit, and with a formidable and motivated management team. TMF and Cubo now have business development directors, each of whom contributed significant new business wins during 2008. The coming months will not be easy, but we could hardly be better placed to build on an encouraging start and the Board remains cautiously optimistic about 2009 despite the current financial climate.  

I would like to take this opportunity to thank my Board of Alex Hambro, Patrick Oram and Kerry Simpson for their hard work, support and commitment during 2008.

Finally, a company is only as successful as the people who work in it, so I would also like to thank all of the staff of Cagney and our companies for their continued commitment to our business.

Steve Mattey

Chief Executive Officer

30 March 2009

FINANCIAL REVIEW

For the year ended 31 December 2008

HIGHLIGHTS

For the year ended 31 December 2008 the Cagney Group generated an operating profit of £34,000 (2007 - operating loss of £547,000) on gross profit of £8.1m (2007 - 7.5m).  

Below the operating line, the Income Statement includes a loss of £85,000, net of related taxation, on the associated undertaking, AGL, which came into being at the beginning of the year. AGL is an online tool that gathers information about clients and products from the internet. The loss is slightly greater than originally planned, but development of the product has gone well and it is generating revenue and considerable interest from potential clients.  

Net interest payable of £165,000 is an improvement of £10,000 against 2007, due primarily to the reduction in the base rate. At the present base rate, and with the underlying debt declining, we would expect a more significant improvement in 2009.  

The Income Statement also includes the benefit of a £65,000 unwinding of part of the notional provision for the finance cost of deferred consideration, which compares with a £368,000 charge in 2007.  This unwinding occurred because the Directors reduced their estimates of the deferred consideration payable in respect of Tree and TMF.  

The last item in the Income Statement before the loss on ordinary activities before taxation is a provision of £3.5m for the impairment of goodwill relating to subsidiary undertakings Cubo (£2.5m), TMF (£0.5m) and CST (£0.5m). This provision has no effect on either cash or taxation, nor is it an indication of problems at those subsidiary undertakings - indeed, Cubo remains the Group's most successful company. However, Cubo had an exceptional year in 2006, resulting in a consideration payment out of all proportion with the company's current trading. The Board has therefore decided to reduce the carrying value to a more sustainable level.  

TMF and CST were both profitable in 2008, but they are in parts of the sector - public relations and broadcast advertising - which could potentially be hit by a prolonged recession, and the Board has therefore decided to take a cautious view of the carrying value of these investments.  

The loss before tax for the year was £3.7m (2007 - £3.1m), and the loss after tax for the year was £3.7m (2007 - £2.9m).  

LOSS PER SHARE

Basic and fully diluted loss per share were 1.9p (2007 - 2.6p).  

KEY PERFORMANCE INDICATORS

Group management monitors three primary KPIs - (i) operating margin; (ii) staff costs as a percentage of gross profit; and (iii) gross profit per head. Each of these KPIs can vary significantly from business to business.  

Operating margin is operating profit divided by gross profit. We would like each of our business to achieve an operating margin of at least 20%. Some achieve margins greater than this, but it can be a difficult mark to achieve in smaller companies. This margin is important as a measure of the profitability of a business, but it is also an important measure of risk. A company with a low operating margin runs the risk that an absolute decline in its revenue will wipe out its profit. Conversely, a company with a high operating margin is more likely to be able to withstand a loss of revenue and still make a profit.  

Having fixed a forecast for operating profit, we then also monitor what we call incremental operating margin. This is the percentage of any additional gross profit that flows into operating profit. This not only varies from business to business, but also varies depending on whether or not a business has surplus capacity - for example a business with a lot of surplus capacity would expect to be able to service a certain amount of additional gross profit without employing any additional staff.  

Staff costs as a percentage of gross profit is self-explanatory. It is particularly important in a service industry, as people are the main cost to the business, and therefore one of the main factors in determining operating margin. We would normally expect this measure to fall between 50% and 60%.  

Gross profit per head is a measure of productivity. The 'holy grail' in the sector is said to be gross profit of £100,000 per head, but it can be greater than this.  

Each of our businesses produces an initial profit plan - including a profit forecast and a cash flow forecast - in October for the following year. The holding company management team reviews each plan in the light of the forecast for the current year, and the KPIs above, and discusses the plans with company management. The agreed plans are then presented to the Group's senior management, usually in early November. The plans are updated in January in the light of activity since the original plan, and progress is monitored thereafter on a monthly basis, both in terms of profit and cash flow.  

Furthermore, in March each year senior management, in conjunction with the finance team, also produce a financial model of the following year for use in conjunction with its banking review and the audit. Thus we already have a financial model of 2010, which also enables senior management better to appreciate the longer-term effects of the actions planned for the current year.  

DEFERRED CONSIDERATION

Under the terms of most of the Group's acquisitions, the vendors were able to earn additional consideration if certain profit targets were achieved. TMF and Tree were eligible for deferred payments based on their 2008 profitability. Tree qualified for an additional payment based on their 2008 performance, but TMF did not meet the necessary criteria. No further deferred consideration payments will arise in the future, though the 2008 calculations are not yet final, and it is possible that the Group's estimate of its present deferred consideration obligations might change.  

CURRENT AND NON-CURRENT LIABILITIES

At the end of 2008 the Group had net current liabilities of £1.8m (down from £4.1m at the end of 2007), and total net debt of £2.3m (down from £6.6m at the end of 2007).  

Total net debt of £2.3m comprises a bank overdraft with Coutts of £0.5m; the £0.8m balance of the £1.2m term loan provided by Coutts in 2007; loan notes of £0.4m; and £0.8m of deferred consideration, all offset by £0.2m of net current trading assets.  

The major factor behind the £4.3m reduction in total net debt was a £4.6m reduction in deferred consideration provisions and liabilities. Of that £4.6m, £3m resulted from the settlement of Cubo and Tree deferred consideration by the issue of shares. Most of the balance is attributable to a reduction in the Directors' estimate of deferred consideration in respect of The Media Foundry, which fell short of the necessary performance thresholds whilst still delivering a reasonable operating profit.  

During 2007 the Group secured a £1.2m medium term loan from Coutts. The loan including interest is repayable in monthly instalments amounting to approximately £345,000 per annum, and is scheduled to be fully repaid by May 2011.  Interest is charged at 1.75% above Coutts' base rate from time to time. The loan and bank overdraft are secured by fixed and floating charges over the assets of the Group, with cross guarantees. The Group's overdraft facility was formally renewed by Coutts in March 2009.  

The overdraft and the deferred consideration are payable on demand.  

RISKS AND UNCERTAINTIES

The nature of the business is such that there is always a risk that existing clients might reduce expenditure or find alternative providers, and groups of our nature are always seeking to find a way to measure the extent of this risk.  My preference is to consider how much of the year's gross profit is genuinely secure - barring default or liquidation on the part of the client - and that is the total of gross profit already earned, plus retainer fees covered by contractual notice periods. Of the current forecast gross profit for 2009, I estimate that at the time of writing almost 50% of the year's forecast gross profit was secure on the stated basis. That is encouraging, given that we are only a quarter of the way through the year.  

STAFF NUMBERS

The average number of employees decreased from 100 to 93 during the year, reflecting the cost cutting measures taken during the year.  

PROPERTY

The Group operates out of two premises located within a few minutes walk of each other. One of the leases terminates early next year, which could present an opportunity to bring the Group even closer together and reduce its cost base.  

DIVIDENDS

The Directors do not propose a dividend, and are unlikely to do so until the Group is much closer to achieving its strategy, as described in the Business Review.  

Patrick Oram

Chief Financial Officer

30 March 2009

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2008

	Note			2008 £000	2007 £000
Revenue	1,2			11,812	11,251
Direct costs				(3,669)	(3,724)
Gross profit	2			8,143	7,527
Administrative expenses				(7,771)	(8,074)
Payments during notice periods				(338)
Operating profit/(loss)	3			34	(547)
Share of loss of associated undertaking	1			(85)	-
Interest receivable	5			12	13
Interest payable and similar charges	6			(177)	(188)
Finance cost of deferred consideration	16			65	(368)
Impairment of goodwill	9			(3,500)	(2,000)
Loss on ordinary activities before taxation	2			(3,651)	(3,090)
Tax (charge)/credit on loss on ordinary activities	7			(11)	147
Loss on ordinary activities after taxation				(3,662)	(2,943)

Loss per ordinary share:			2008	2007
Basic	8		(1.9p)	(2.6p)
Diluted	8		(1.9p)	(2.6p)

CONSOLIDATED BALANCE SHEET

As at 31 December 2008

	Note	2008 £000	2007 £000
Non-current assets
Goodwill	9	5,569	10,509
Tangible assets	10	180	249
		5,749	10,758
Current assets
Trade and other receivables	12	2,213	2,834
Deferred tax asset	15	192	138
		2,405	2,972
Current liabilities
Trade and other payables	13	(2,165)	(2,181)
Current tax liabilities		(7)	(142)
Bank overdrafts, loans and loan notes	14	(1,244)	(1,120)
Deferred consideration liabilities	16	(616)	(2,509)
Deferred consideration provisions	16	(213)	(1,127)
		(4,245)	(7,079)
Net current liabilities		(1,840)	(4,107)
Total assets less current liabilities		3,909	6,651
Non-current liabilities:
Bank loans	14	(437)	(764)
Deferred consideration provisions	16	-	(1,773)
Total net assets	2	3,472	4,114
Capital and reserves
Called up share capital	20	2,183	1,344
Share premium		8,153	5,986
Share option reserve		20	6
Merger reserve		(150)	(150)
Profit and loss account		(6,734)	(3,072)
Equity shareholders' funds		3,472	4,114

CONSOLIDATED CASH FLOW STATEMENT

For the year ended 31 December 2008

	Note	2008 £000	2007 £000
Cash flows from operating activities
Operating profit/(loss)		34	(547)
Share of loss before tax of associate		(117)	-
Charge in respect of share option scheme	19	14	6
Depreciation charge	10	121	103
Operating profit/(loss) before working capital changes		52	(438)
Reduction/(increase) in trade and other receivables		620	(710)
(Reduction)/increase in trade and other payables		(16)	676
Net cash inflow/(outflow) from operating activities		656	(472)
Investing activities
Interest received		12	13
Purchases less disposals of property, plant and equipment		(52)	(116)
Purchase of business and assets		-	(882)
Settlement of deferred consideration		(70)	(1,633)
Net cash used in investing activities		(110)	(2,618)
Taxation
UK corporation tax paid		(168)	-
Financing activities
Interest paid		(175)	(123)
Loan repayments		(296)	(606)
Proceeds on issue of shares (net of expenses)		-	1,811
Proceeds from loan financing		-	1,200
Net cash (outflow)/inflow from financing activities		(471)	2,282
Net change in cash and cash equivalents		(93)	(808)
Net cash and cash equivalents at beginning of year		(417)	391
Cash and cash equivalents at end of year		(510)	(417)
Analysed as:
Bank overdrafts	14	(510)	(417)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2008

	Called up share capital £000	Share premium account £000	Share options reserve £000	Other reserves £000	Profit and loss account £000	Total £000
Balance at 1 January 2007	831	4,191	-	(150)	(129)	4,743
Retained loss for the year	-	-	-	-	(2,943)	(2,943)
Provision for share based payment	-	-	6	-	-	6
Shares issued during the year	513	1,994	-	-	-	2,507
Costs of fundraising	-	(199)	-	-	-	(199)
At 31 December 2007	1,344	5,986	6	(150)	(3,072)	4,114
Retained loss for the year	-	-	-	-	(3,662)	(3,662)
Provision for share based payment	-	-	14	-	-	14
Shares issued during the year	839	2,167	-	-	-	3,006
At 31 December 2008	2,183	8,153	20	(150)	(6,734)	3,472

Other reserves represents the merger reserve arising from the prior year merger of Cagney Plc with Paul Simons & Partners Limited.  Merger relief under s131 of the Companies Act has been taken and the premium arising on the issue of these shares has been disregarded as required by s133 of the Companies Act 1985.

NOTES TO THE FINANCIAL STATEMENTS

1.         Accounting policies

a)    Statement of compliance

The consolidated financial statements have been prepared in accordance with IFRS and IFRIC interpretations for use in the European Union and issued by the International Accounting Standards Board.

b)    Basis of preparation

The financial statements have been prepared in sterling, the currency in which the majority of the Group's transactions are denominated, under the historical cost convention and in accordance with applicable International Financial Reporting Standards ('IFRS'). The principal accounting policies which have been consistently applied are described below.  

The Directors have satisfied themselves that the Company will in due course to be able to satisfy all its liabilities within its present banking facilities, and have therefore prepared the financial statements on the going concern basis.  

c)    Basis of consolidation

The Group financial statements consolidate the financial statements of the Company and its subsidiaries for financial periods ended 31 December 2008. Control is achieved where the Group has the power to govern the financial and operating policies of an investee so as to obtain benefits from its activities.

On acquisition the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (ie discount on acquisition) is credited to the income statement in the period of acquisition.

The results of subsidiaries acquired during the year are included in the consolidated income statement from the effective date of acquisition.    

Where necessary, adjustments are made to the financial statements of subsidiary undertakings to bring the accounting policies used in line with those used by the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

d)    Gross revenue recognition

Revenue 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 financial year end, income is recognised to reflect the partial performance of the contractual obligations in accordance with IAS 18.

Third party costs and the associated income relating to bought in costs directly rechargeable to clients are recognised in the period to which they relate.

e)    Retirement benefit costs

The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from those of the Group in an independently administered fund. The amount charged to the profit and loss account represents the contributions payable to the scheme in respect of the accounting period.

f)    Finance costs

Finance costs - including interest, bank charges and the unwinding of the discount on deferred consideration - are recognised as profit or loss in the period in which they are incurred.  

g)    Taxation

The tax charge or credit represents the sum of the current tax and deferred tax. 

The current tax charge or credit is based on taxable profit or loss for the year. Taxable profit or loss differs from profit or loss on ordinary activities before taxation as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years, and items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit or loss, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available, against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit or loss nor the accounting profit or loss. 

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

h)    Goodwill

Goodwill arising from the purchase of subsidiary undertakings represents the difference between the purchase consideration and the fair value of the identifiable assets, liabilities and contingent liabilities of a 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 is charged to the income statement as notional finance costs over the life of the associated liability. 

Goodwill impairment is assessed in accordance with IAS 36.  Impairment has taken place if the carrying amount of an asset is greater than its 'recoverable amount'. The recoverable amount of an asset is the higher of its 'fair value' (less the likely costs of disposal) and its 'value in use'. Fair value is the amount obtainable from an arm's-length transaction between a willing buyer and a willing seller. Value in use is the discounted present value of the future cash flows expected to be derived from the asset. The discount rate used is the risk-free rate of interest adjusted to reflect the risk associated with the asset. This adjusted discount rate should reflect the return that an investor would require from an investment in such an asset.  Impairment is recognised in the income statement and is not subsequently reversed.  

On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. 

i)    Associated undertakings

The Group's share of the net assets or liabilities of associated undertakings has been accounted for in the consolidated financial statements using the equity method.  

j)    Operating leases

Rental costs under operating leases are charged to the income statement in equal annual amounts over the periods of the leases.

Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term or the period to the next review. 

k)    Plant and equipment

Plant and equipment is stated at cost less accumulated depreciation and any provision for impairment. Depreciation is provided on a straight-line basis over the estimated useful economic lives of assets at between 25% and 33% per annum.  

Any gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.

l)    Cash and cash equivalents

Cash and cash equivalents comprises cash, overdrafts and cash held on short-term deposit. 

m)    Trade receivables

Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

n)    Share-based payment

The Company grants options over its shares to certain directors and employees under the Group's Enterprise Management Incentive Plan. The value of these share-based payments is measured at the date of grant using the Black-Scholes pricing model, and is expensed on a straight-line basis over the vesting period. 

2.          Segment reporting

The Group's gross profit and its loss on ordinary activities before taxation were derived from the following business segments: 

		2008 £000	2007 £000
	Gross profit
	Creative services	4,499	4,280
	Market research and data analysis	2,635	2,201
	Public relations	1,009	1,046
		8,143	7,527

		2008 £000	2007 £000
	Profit/(loss) on ordinary activities before taxation
	Creative services	453	210
	Market research and data analysis	348	348
	Public relations	104	57
	Head office	(1,056)	(1,705)
	Impairment provision	(3,500)	(2,000)
		(3,651)	(3,090)

		2008 £000	2007 £000
	Net assets
	Creative services	902	1,122
	Market research and data analysis	325	277
	Public relations	137	202
	Head office	2,108	2,513
		3,472	4,114

The Group's revenue was earned from clients based in the following geographical markets:

		UK £000	Rest of World £000	Total £000
	Year ended 31 December 2008
	Creative services	5,656	1,530	7,186
	Public relations	1,072	-	1,072
	Market research and data analysis	3,554	-	3,554
		10,282	1,530	11,812
	Year ended 31 December 2007
	Creative services	4,603	2,813	7,416
	Public relations	1,113	-	1,113
	Market research and data analysis	2,722	-	2,722
		8,438	2,813	11,251

All assets and liabilities are located within the UK with the exception of certain trade receivables which relate to the revenue noted above.  

All the above figures are shown before intra-group management charges.  

3.            Operating profit/(loss)

Operating profit/(loss) is stated after charging:

		2008 £000	2007 £000
	Staff costs (note 4)	5,285	5,728
	Directors' emoluments (note 4)	468	457
	Depreciation - owned plant and equipment (note 10)	121	103
	Operating lease rentals - land and buildings	282	285
	Operating lease rentals - plant and machinery	47	59
	Auditors' remuneration for audit services	68	63

4.            Staff costs 

The average monthly number of employees (including non-executive Directors) was:

		2008	2007
	Directors	5	5
	Creative services	46	51
	Public relations	12	16
	Market research and data analysis	28	25
	Head office	2	3
		93	100

Their total aggregate remuneration comprised:

		2008 £000	2007 £000
	Wages and salaries	4,721	5,173
	Social security costs	545	519
	Pension costs	19	36
		5,285	5,728

Directors' remuneration during the year was as follows:

		2008 £000	2007 £000
	Emoluments	454	422
	Pension contributions	14	35
		468	457

Pension contributions made during the year were in respect of two directors (2007 - three).

Amounts paid to the highest paid Director were £213,000 (2007 - £198,000).  

5.            Interest receivable 

Interest receivable comprises interest on bank deposits.  

6.            Interest payable and similar charges

		2008 £000	2007 £000
	Interest and charges on bank overdrafts and loans	99	76
	Interest on convertible loan notes	45	22
	Interest on other loans	33	90
		177	188

7.                Tax on loss on ordinary activities

		2008 £000	2007 £000
	Current tax (UK corporation tax at 28.5% (2007 - 30%)):
	Current year	(19)	22
	Prior year	(14)	(13)
	Total current tax (charge)/credit	(33)	9
	Deferred tax:
	Current year (see note 15)	26	138
	Prior year (see note 15)	(4)	-
	Total deferred tax credit	22	138
	Total tax (charge)/credit	(11)	147

  The (charge)/credit for the year can be reconciled to the loss per the income statement as follows:

		2008 £000	2007 £000
	Loss before tax	(3,651)	(3,090)
	Notional tax credit at UK corporation tax rate of 28.5% (2007 - 30%)	1,041	927
	Tax effect of:
	Impairment provision disallowed for tax purposes	(998)	(600)
	Effect of offsetting tax relief on losses of associated undertaking against such losses, rather than including it in the tax line	(24)	-
	Unwinding of finance charge on deferred consideration not taxable	19	-
	Finance charge on deferred consideration disallowed for tax purposes	-	(110)
	Other expenditure disallowed for tax purposes	(30)	(22)
	DT assets not provided	(9)	-
	Charges relating to prior year	(18)	(13)
	Profits taxed at small company rates	8	-
	Losses carried forward at lower future tax rates	-	(7)
	Losses carried back at small company rates	-	(13)
	Deferred tax provided at lower future rates	-	(2)
	Movement in provisions	-	(13)
	Tax (charge)/credit for year	(11)	147

8.             Loss per share 

The calculation of the basic and diluted loss per share is based on the following data:

		2008  £000	2007  £000
	Loss
	Loss for the purposes of basic loss per share, (net loss attributable to equity holders)	(3,662)	(2,943)
	Interest and redemption premium on convertible loan notes	n/a	34
	Adjusted loss for diluted loss per share	(3,662)	(2,909)

		2008 Number	2007 Number
	Number of shares
	Weighted average number of ordinary shares for basic loss per share	189,412,432	114,497,772
	Effect of dilutive potential ordinary shares:
	Share options	62,700	-
	Shares to be issued in respect of deferred acquisition consideration	-	89,559,339
	Convertible loan notes	n/a	2,500,000
	Weighted average number of ordinary shares for diluted loss per share	189,475,132	206,557,111

Diluted loss per share for the year ended 31 December 2007 was the same as basic loss per share, as the above instruments were anti-dilutive. Basic and diluted loss per share for the year ended 31 December 2008 appear the same when given to one decimal place, but are in fact slightly different.  

9.            Goodwill

The movement on goodwill during the year is set out below.

		£000
	At beginning of year	10,509
	Deferred consideration in respect of The Media Foundry	(1,225)
	Deferred consideration in respect of Tree	(215)
	Impairment provision in respect of Cubo	(2,500)
	Impairment provision in respect of The Media Foundry	(500)
	Impairment provision in respect of Chick Smith Trott	(500)
	At end of year	5,569

Impairment reviews have been undertaken in respect of goodwill in accordance with the policy set out in note 1(h).  The reasons for the impairment provisions are given in the Financial Review. In arriving at the impairment provision in respect of Cubo, the Directors considered discount rates of between 15% and 20%.  

Goodwill at the end of the year comprised the following substantial holdings:

		£000
	Chick Smith Trott	701
	Cubo	2,291
	The Media Foundry	251
	Tree	2,326
	Total goodwill	5,569

10.          Tangible assets

For the year ended 31 December 2008:

		Short leasehold premises £000	Plant and machinery £000	Total £000
	Cost:
	At beginning of year	203	821	1,024
	Additions	-	54	54
	Disposals	-	(62)	(62)
	At end of year	203	813	1,016
	Depreciation:
	At beginning of year	144	631	775
	Charge for year	20	101	121
	Disposals	-	(60)	(60)
	At end of year	164	672	836
	Net book value:
	At beginning of year	59	190	249
	At end of year	39	141	180

For the year ended 31 December 2007:

		Short leasehold premises £000	Plant and machinery £000	Total £000
	Cost:
	At beginning of year	203	678	881
	On acquisitions of subsidiary undertakings	-	87	87
	Additions	-	131	131
	Disposals	-	(75)	(75)
	At end of year	203	821	1,024
	Depreciation:
	At beginning of year	125	588	713
	On acquisitions of subsidiary undertakings	-	26	26
	Charge for year	19	84	103
	Disposals	-	(67)	(67)
	At end of year	144	631	775
	Net book value:
	At beginning of year	78	90	168
	At end of year	59	190	249

11.             Subsidiaries 

		Country of incorporation	Principal activity	Holding
	Chick Smith Trott Limited	UK	Advertising	100%
	Cubo Brand Communications Limited	UK	Promotional Marketing	100%
	The Media Foundry International Limited	UK	Public Relations	100%
	Paul Simons and Partners Limited	UK	Dormant	100%
	Tree (London) Limited	UK	Research and Data Analysis	100%
	Exedra Consultancy Limited*	UK	Brand Consultancy	100%

*Exedra, formerly Brand Aid Consultancy Limited, is 100% owned by Chick Smith Trott.  

12.            Trade and other receivables

		2008 £000	2007 £000
	Amounts receivable from provision of services	1,708	2,198
	Prepayments and accrued income	319	444
	Other debtors	186	192
		2,213	2,834

The Directors consider that the carrying value of trade and other receivables approximates their fair market value.  

13.          Trade and other payables

		2008 £000	2007 £000
	Trade creditors	679	650
	Other taxation and social security	397	369
	Accruals and deferred income	892	1,023
	Other creditors	197	139
		2,165	2,181

14.             Bank overdrafts, loans and loan notes

		2008 £000	2007 £000
	Bank overdrafts	510	417
	Bank loans	758	1,044
	Convertible loan notes	177	200
	Loan notes issued in settlement of deferred consideration	236	223
		1,681	1,884
	Analysed as:
	Current liabilities	1,244	1,120
	Non-current liabilities	437	764
		1,681	1,884

During 2007 the Group secured a £1.2m medium term loan from Coutts. The loan is repayable in monthly instalments over 4 years and interest is charged at 1.75% above Coutts' base rate from time to time. The loan and bank overdraft are secured by fixed and floating charges over the assets of the Group, with cross guarantees. The Group's overdraft facility was renewed by Coutts in March 2009.  

15.          Deferred tax

The movement on the deferred tax asset during the year was as follows;

		Losses carried forward £000	Other timing differences £000	Total £000
	At beginning of year	138	-	138
	Credit in respect of current year	-	26	26
	Charge in respect of prior year	(4)	-	(4)
	Deferred tax credit in respect of an associated undertaking	32	-	32
	At end of year	166	26	192

At the year end the Group and Company had unprovided deferred tax assets of £95,000 (2007 - £96,000) relating to losses carried forward.  

16.         Deferred consideration liabilities and provisions

The Directors' best estimate of the fair value of future earn-out obligations is set out below:

	Liabilities	Shares £000	Cash £000	Total £000
	At beginning of year	2,509	-	2,509
	Crystallised during year	497	686	1,183
	Settled during year	(3,006)	(70)	(3,076)
	At end of year	-	616	616

	Provisions	Shares £000	Cash £000	Total £000
	At beginning of year:
	Short term	451	676	1,127
	Long term	977	796	1,773
	At beginning of year	1,428	1,472	2,900
	Reduction in provision	(931)	(573)	(1,504)
	Crystallised during year	(497)	(686)	(1,183)
	At end of year	-	213	213

The deferred consideration liability is payable on demand, and the provision, when crystallised, will become payable on demand before the end of the year. 40% of the closing provision is capable of being settled in the form of shares, at the Company's sole discretion.  

The Directors consider that the provisions approximate to their fair value. The obligations have been discounted using a rate of 4.65%, and the total obligation expected to be paid before discounting is £216,000. The loss on ordinary activities before taxation for the year benefited from an unwinding of the finance charge provision in the amount of £65,000 (2007 - charge of £368,000).

17.          Pensions

The Group operates a defined contribution pension scheme. The pension cost charge for the year represents contributions payable by the Company to the scheme and amounted to £19,000 (2007 - £36,000).  

18.          Operating lease commitments

At the end of the year the Group had annual commitments under operating leases as set out below:

		Plant and machinery		Land and buildings
		2008 £000	2007 £000	2008 £000	2007 £000
	Expiring between one and five years	39	15	120	119
	Expiring after more than five years	-	-	166	166
		39	15	286	285

19.          Share based payments

During the year options were granted under the Cagney Plc 2008 Enterprise Management Incentive Plan. The number of options granted in the year and their exercise price in pence per share was as follows:

		Number	Exercise price in pence per share
	Outstanding at beginning of year	3,232,800
	Expired during the year	(1,850,000)
	Granted during the year (less any surrendered)	2,917,200	1.380
	Granted during the year (less any surrendered)	500,000	1.130
	Outstanding at end of year	4,800,000
	Exercisable at end of year	250,000	2.750

No options were exercised during the year. The options outstanding at 31 December 2008 had a weighted average remaining minimum life of 336 days. The value of the options is measured by the use of the Black-Scholes valuation model, assuming volatility of 50%, an expected life of 1-3 years based on the contractual life of the options, and a risk free rate of 4.65%. Expected volatility is based on historic volatility of the Group's share price and from review of similar AIM listed companies.

The Group recognised a charge of £14,000 (2007 - £6,000) in relation to share-based payment transactions in the year.

20.          Share capital

The Company's authorised share capital is £4m, comprising 400m ordinary shares of 1 penny each.

	Called-up, allotted and fully-paid	Number of 1p  ordinary  shares	Nominal  value £000
	At beginning of year	134,394,338	1,344
	Issued in part settlement of deferred consideration for Tree	27,914,110	279
	Issued in part settlement of deferred consideration for Cubo	55,988,484	560
	At end of year	218,296,932	2,183

21.          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. Other transactions with related parties are detailed below. 

During the year £13,334 of convertible loan notes were repaid to Alex Hambro, chairman and non-executive director of Cagney Plc. At 31 December 2008 £86,666 of these convertible loan notes remained outstanding, which is payable on demand. Interest is payable on these notes at a rate of 2% above the base rate of the Bank of England.  

22.          Financial instruments

The Group's financial instruments principally comprise borrowings, cash at bank and various items such as trade debtors and creditors that arise directly from operations. The main purpose of these financial instruments is to raise money for the Group's operations.

The Group's policy is to ensure that adequate cash is available and the Group does not trade in financial instruments and has not entered into any derivative transactions.

All of the material activities of the Group take place in the United Kingdom and consequently there is minimal exchange risk. As at 31 December 2008 the Group had no material foreign currency exposures.

The main risks arising from the Group's financial instruments are interest rate risk and liquidity risk.

The Directors monitor the cash flows of the Group to ensure that there is sufficient liquidity to meet foreseeable needs. The operations of the Group generate cash and the planned growth activities are cash generative.

The Group has taken advantage of the exemption in respect of the disclosure of short-term debtors and creditors.    

The fair value of the Group's financial assets and liabilities is not considered to be materially different from their book values.  

23.          Post balance sheet events

There are no post balance sheet events.  

ENDFR SEUFWWSUSEDD