Final Results

Evolution Group PLC 19 March 2008 The Evolution Group Plc (the "Evolution Group", the "Group", the "Company") Preliminary results for the year ended 31 December 2007 Evolution Group, the listed investment bank and private client investment management group, today announces its preliminary results for the year ended 31 December 2007. Financial and Operational Highlights •Record total Group income(1) of £93.3m, up 10% compared with 2006 of £84.8m. •Adjusted profit before tax(2) of £22.8m, down 10% from 2006 of £25.2m. Statutory profit before tax of £3.8m (2006: £16.7m). •Continued balance sheet strength with net assets at £155.3m (2006: £154.0m) of which cash balance was £122.7m (2006: £88.6m). •Increase in final dividend of 25% to 1.25p (2006: 1.0p) following an interim dividend paid in October 2007 of 0.67p (2006: 0.50p), giving a total dividend for the year of 1.92p, increased by 28% from prior year (2006:1.5p). Williams de Broe(3) •Williams de Broe total income(1) increased by 58% to £32.6m (2006: £20.6m). •Assets under management increased by 27% from £2.2 billion at 31 December 2006 to £2.8 billion. •New Edinburgh office expected to significantly grow assets under management and be earnings enhancing from 2009 onwards. Evolution Securities(4) •Re-balancing of Evolution Securities' business model continued as evidenced by 34% increase in secondary income to £35.8m (2006: £26.7m), representing 66% of total income (2006: 45%). •Participated in deals raising £2.9 billion (2006: £1.7 billion). •Trading volumes increased by 50% to 1.8m (2006: 1.2m). •Continues to hold No.1 position by market share for agency and total business on the AIM market of the LSE (2006: No.1). Evolution Securities China(5) •Evolution Securities China total income increased by 41% to £5.8m (2006: 4.1m). Commenting on the results and outlook, Martin Gray, Chairman of Evolution Group said: "I am pleased to report continued growth in total income from £84.8m to £93.3m, an increase of 10%. This continues the trend of headline income growth in line with our plans over the past seven years. Williams de Broe, in particular, had a very strong year, growing funds under management by 27%, and is comfortably on track to achieve our target of £3.0 billion assets under management by April 2008. Our businesses have continued to trade profitably in 2008 and are developing in line with our plans. We believe the Group, with a strong balance sheet and increasing levels of recurring income, is well placed to ride out the current volatility in financial markets, and to take advantage of the opportunities which may arise from this volatility." Summary of Key Information 31 December 31 December 2007 2006 (Restated)(6) £'000 £'000 Total income (before fee and commission expenses) 93,274 84,793 Adjusted operating profit(2) 19,970 21,317 Operating profit 884 12,765 Adjusted profit before tax(2) 22,842 25,240 Profit before tax 3,757 16,688 Adjusted earnings(2) 18,376 16,436 Profit for the year 3,202 6,846 Adjusted basic EPS(2) 8.65p 7.42p Basic EPS 1.42p 3.06p -Ends- Notes (1) Represents total income before fee and commission expenses. (2) Adjusted operating profit, adjusted profit before tax (formerly clean profit before tax), adjusted earnings (formerly clean earnings) are defined in the Financial Review section below and adjusted basic EPS is defined in Note 4. (3) The results of Williams de Broe are defined as those arising from Williams de Broe Limited ("WdB"), Williams de Broe Management Company Limited and from WDB Capital Limited, including the consolidated results of the WDB Capital UK Equity Fund. (4) The results of Evolution Securities are defined as those arising from Evolution Securities Limited ("ESL") and its subsidiary Evolution Securities (US) Inc.("ESUS"). (5) The results of Evolution Securities China are defined as those arising from Evolution Securities China Limited ("ESCL") and its subsidiary Evolution Watterson Securities Limited ("EWSL"). (6) See Note 3 for details of restatements. For further information, please contact: The Evolution Group Plc 020 7071 4300 Alex Snow, Chief Executive Officer Tony Lee, Company Secretary Bell Pottinger Corporate and Financial 020 7861 3232 Charles Cook Mike Davis Notes to Editors: The Evolution Group Plc is the holding company of Evolution Securities Limited, Williams de Broe Limited and Evolution Securities China Limited. Founded in April 2001 and originally listed on AIM, the Evolution Group joined the Official List in 2003 and now has a market capitalisation of over £240 million. Evolution Securities Limited is a leading investment bank focused on mid-cap UK public companies. It provides a full range of investment banking services including equity research, institutional sales and trading, market making and corporate finance advice. Evolution Securities Limited has over 70 retained corporate clients. It is authorised and regulated by the Financial Services Authority. Williams de Broe Limited is a leading private client investment manager, with offices in Bath, Birmingham, Bournemouth, Exeter, Guildford and London. Williams de Broe is authorised and regulated by the Financial Services Authority. Evolution Securities China Limited is a specialist Chinese investment banking business with offices in London, Hong Kong and Shanghai. It offers UK based institutional clients research and trading in listed Chinese stocks and provides Chinese companies access to the markets in London and Hong Kong. Evolution Securities China Limited is authorised and regulated by the Financial Services Authority. CHAIRMAN'S STATEMENT I am pleased to report continued growth in total income (before fee and commission expenses) for the Evolution Group Plc (the "Group" or the "Company") from £84.8m to £93.3m, an increase of 10%. This continues the trend of headline income growth over the past seven years. While our businesses are not immune to the current market volatility arising from the international credit crisis, our performance in 2007 met expectations and it supports the strategy to move the business to a better balanced revenue model. I can report that the Group has performed commendably in all three of its businesses against the backdrop of significant volatility in the UK equity markets and weaker IPO markets across all sectors, especially AIM. Evolution Securities continued to make a significant contribution to the Group, achieving total income (before fee and commission expenses) of £54.6m (2006: £60.2m). Achieving a better balance between primary and secondary market activities has been a priority for this business. This was achieved during 2007 despite the disruptions caused to the primary issuance sector in the second half of the year. Williams de Broe, the private client investment management business, completed the year with a record quarter for total income and profitability. Assets under management increased by 27% to £2.8 billion from £2.2 billion at the end of 2006. Williams de Broe is well on track to achieve its target of £3.0 billion funds under management by April 2008. The growth in assets under management, together with the full year impact of the W Deb MVL Plc business acquired in 2006, contributed to an overall increase in total income (before fee and commission expenses) from £20.6m in 2006 to £32.6m in 2007. Evolution Securities China completed an excellent year in 2007 with total income increasing by 41% to £5.8m compared with £4.1m for 2006. The business was strengthened both by the full year's results for Evolution Watterson Securities Limited in Hong Kong, where income (before fee and commission expenses) increased by 133% to £1.4m (2006: £0.6m), and by improved secondary trading out of London, which increased by 71% to £1.2m (2006: £0.7m). Balance sheet strength and cash balances Current market conditions support our strategy of maintaining a strong balance sheet. At the year-end, the Group had net assets of £155.3m (2006: £154.0m) and, of this, the Group's cash balances were £122.7m (2006: £88.6m). Maintaining a strong and liquid balance sheet is core Group policy. It provides strength in times of market uncertainty and supports our ability to grasp opportunities should they present themselves. Cash balances are maintained through the effective management of working capital in trading portfolio assets and net trade receivables. Exceptional costs Results have been impacted by the continued presence of exceptional costs of £7.6m (2006: £12.5m) related to the acquisition, restructuring and integration of W Deb MVL Plc. Board development On 1 October, Peter Gibbs was appointed as a non-executive director and has made a valuable contribution to the Board, with his significant senior experience in the asset management business at both executive and non-executive director level. This appointment has maintained our strategy of strengthening the Board. We intend to continue that strategy. On 25 October, Graeme Dell (Finance Director) resigned from the Group. The Board would like to thank Graeme for his significant contribution to the Group over the past six years. We wish him all the very best for the future. In the period since his resignation the role of Finance Director has remained vacant and its responsibilities have been absorbed within Finance, with a reporting line to the Group CEO. We expect to announce the appointment of a new Finance Director in the near future. Dividend The Board recommends the payment of a final dividend of 1.25p per share (2006: 1.0p). This follows the interim dividend payment of 0.67p per share announced in September and paid in October (2006: 0.5p). This increase in the overall dividend is in line with our progressive dividend policy and our continued confidence in the Group's operating businesses. Share buyback The Board wishes to maintain the capability to continue this programme during the remainder of 2008 and will be seeking approval from shareholders at this year's Annual General Meeting. The Group Employees We are a service business and can only prosper through the efforts of highly skilled executives and teams of highly professional and committed staff. During the year we strengthened our businesses with the recruitment of very high quality individuals throughout the Group. We will continue to strengthen our business in this way in the future. The way that our staff have integrated the businesses we have acquired, managed the growth we have achieved, managed the significant changes we have made to our business model whilst dealing with volatile market conditions, has been highly impressive. I thank them all for their skill and professionalism. Outlook Our businesses have continued to develop and are trading profitably in 2008 whilst also developing in line with our plans. We are continuing to experience strong growth in our private client investment management business, Williams de Broe, both in terms of the growth in assets under management and total income generated. The re-balancing of Evolution Securities' revenue mix has been achieved in 2007 and will continue, with good progress being made in our secondary market franchise, whilst our primary business has been subdued in line with market conditions. Evolution Securities China is gaining the critical mass to benefit from the substantial opportunities presented in this market. We believe the Group, with a strong balance sheet and increasing levels of recurring income, is well placed to ride out the current volatility in financial markets and to take advantage of the opportunities which may arise out of this volatility. Martin Gray Chairman 19 March 2008 Chief Executive's Report I am pleased to report that the Group has performed well during the year. We have achieved a great number of the strategic objectives that were set out in this report last year. Once again, the Group has achieved record income (before fee and commission expenses) in 2007 of £93.3m, up 10% from the level achieved in 2006 of £84.8m. There is also a better balance of these revenues between institutional investment banking at 65% (2006: 76%) and private client investment management at 35% (2006: 24%). Income breakdown The detailed income analysis by segment and by operating company is shown below. 2007 2006 (Restated)(4) £'000 % £'000 % Institutional investment banking Evolution Securities(1) 54,649 59 60,153 71 Evolution Securities China(2) 5,800 6 4,077 5 -------- -------- Sub-total 60,449 64,230 Private client investment management Williams de Broe(3) 32,606 35 20,621 24 Other Other income 219 - (58) - -------- ----- -------- ---- 93,274 100 84,793 100 Commissions paid away (2,068) (1,788) -------- -------- Total income 91,206 83,005 -------- -------- Note (1) The results of Evolution Securities are defined as those arising from Evolution Securities Limited ("ESL") and its subsidiary Evolution Securities (US) Inc.("ESUS"). (2) The results of Evolution Securities China are defined as those arising from Evolution Securities China Limited ("ESCL") and its subsidiary Evolution Watterson Securities Limited ("EWSL"). (3) The results of Williams de Broe are defined as those arising from Williams de Broe Limited ("WdB"), Williams de Broe Management Company Limited and from WDB Capital Limited, including the consolidated results of the WDB Capital UK Equity Fund. (4) See Note 3 on Other Restatements for details. Institutional Investment Banking Evolution Securities Evolution Securities has an integrated approach to investment banking and is acknowledged as one of the leading and most active investment banks in the UK for smaller and mid-sized public companies. We provide equity research, fixed income sales and research, institutional sales and trading, market making, corporate finance and corporate broking advice. Within Evolution Securities, the core strategic objective remains to maintain a well-balanced business, with revenues from our activities in the secondary capital fundraising marketplace complementing the more volatile income from our primary market transactions. In 2007, this strategy worked well for us. Despite the well-publicised fall in AIM Initial Public Offerings ("IPOs") and significant market volatility in the second half of the year, we achieved significant market share growth in our secondary franchise. In terms of sales and trading, Evolution Securities continued to maintain significant market shares in both agency business and total transactional share across all UK indices. During the year Evolution Securities traded profitability, with adjusted operating profit (as defined in the Financial Review) of £13.0m (2006: £20.1m). Total income before fee and commission expenses was £54.6m (2006: £60.2m), with secondary sales and trading income increasing by 34% to £35.8m (2006: £26.7m). Secondary sales and trading now account for 66% of Evolution Securities total income (2006: 45%). Secondary market activities Research Strength in equity research lies at the heart of a strong secondary market business. Our research teams are highly experienced, with in-depth knowledge and a formidable reputation across a broad range of UK sectors and industries. During 2007 we re-focused our research offering even further towards the large cap sector and our 25 (2006: 24) analysts covered over 210 (2006: 270) small, mid and large cap stocks. Each analyst is encouraged to think creatively, producing ideas and commentary that stand up to interrogation. The result is a continuous flow of sought-after reporting including: • First take - morning meeting notes with initial views on breaking news and company announcements; • Company and sector research reports - in depth analysis on sectors, companies, their business and prospects; • Monthly estimates book - a summary of all our current forecasts together with topical commentaries. Fixed Income Evolution Securities offers institutional clients a unique service in international bond trading, including government and corporate issues, from AAA to high yield and emerging market debt. Our ability to price a wide variety of credits throughout international markets and execute efficiently to the best advantage of the customer are key features of our bond service. Our research offering comprises in-depth analysis of the Sterling credit market as well as government and inflation indexed bond markets. Our in-house Eurosterling Spread Monitor covers about 500 of the more liquid investment grade Eurosterling bonds, giving a good picture of sector as well as individual bond moves. This is of use both as a guide to market moves and to spot trading opportunities. We produce daily reports with trade recommendations, on gilts and index linked bonds, investment grade credits and preference shares as well as providing a daily summary of our Sterling Spread Monitor. We believe that we offer a service not obtainable elsewhere in the investment community, and we will continue to build on our existing platform to offer institutional customers the service which best suits their bond market needs. The fixed income division increased its income by 125% in 2007 to £3.6m (2006: £1.6m) and is well placed to capitalise on current market conditions. Institutional Sales & Sales Trading Evolution Securities' UK Equities sales team has strong franchises across the UK listed markets from AIM to FTSE100 and is a significant participant in the mid-cap and small-cap markets, in both primary and secondary issues. Our fundraising record is well respected throughout the industry, and our depth of expertise and wide range of international contacts enables the department to provide services to a broad range of UK, European and USA based investors. Evolution Securities supports the electronic routing of orders from clients to our sales traders via FIX. Connections are already in place to most major trading hubs allowing clients to benefit from increased levels of automation and efficiency in the trading process. Performance from these teams in 2007 has been strong with total sales commission income increasing by 16% to £16.4m (2006: £14.1m) despite the difficult market conditions. Equity Market Making With 17 market makers covering over 900 stocks, Evolution Securities has one of the largest market making operations in the City of London. The team makes markets in stocks from a variety of sectors ranging from AIM and Small Cap right through to the FTSE 100. In an increasingly online environment it is not merely a question of accessing the Retail Service Provider ("RSP") to support trading via the request for a quote model. The quality of the RSP is important and Evolution Securities has consistently been among the leaders in terms of its breadth of stock coverage, execution size, flexible settlement and ability to support this trading via the telephone in a timely fashion. Our RSP execution engine provides our client base with immediacy of execution and a guarantee of dealing at London Stock Exchange ("LSE") prices or improving these further for a standard settlement trade. As one of the leading and fastest growing RSPs in the UK we have an approach and commitment to best results that fully reflects our pursuit of superior levels of service for our clients. We transact via both traditional voice based method and increasingly through the RSP market providing direct access to the retail clients of other member firms. In 2007 our total RSP volume was 316,000 trades, a 46% increase on the prior year (2006: 217,000), representing 17% of our total business (2006: 18%). In 2007, Evolution Securities reduced the number of stocks in which we make markets to a total of 996 stocks (2006: 1,214) including the entire FTSE250 and FTSE100 and we are now the 2nd largest market maker of UK equities. 2007 has seen a greater focus on the efficient use of capital away from some of the smaller capitalised, less liquid stocks to larger capitalised companies. This matches the greater research and sales coverage in these stocks. Primary market activities Evolution Securities participated in transactions raising in excess of £2.9 billion during 2007 (2006: £1.7 billion). Our overall fundraising activities from IPOs and fundraisings from existing listed clients raised £437m (2006: £659m). This was achieved through 41 transactions (2006: 42 transactions) of which five were IPOs (2006: twelve). The primary activities of the business are principally conducted within the corporate finance and corporate broking areas. 2007 was an exceptionally tough year for corporate finance activity, especially the final quarter of the year, during which we were still able to complete three IPOs and three secondary fundraisings, raising £116m for our clients. Corporate Finance Evolution Securities has 24 highly experienced corporate finance executives, based in London and Leeds, arranged into teams with a predominantly sector based focus, in line with the research structure. This business has an extensive track record in IPOs, secondary fundraisings and public and private merger and acquisition activity. We act for corporate clients across both the Full List and AIM in a number of sectors. Throughout 2007 we continued to improve our internal controls via committees dealing with new business, commitment, underwriting and pricing. We believe our procedures remain at the leading edge of those within our peer group. Corporate Broking We offer advice on market facing issues through our Corporate Broking team. This can either be a separate service or can be included as part of our overall Corporate Finance service. The department draws on the significant resources of Evolution Securities within the regulatory framework to ensure that we act as our client's best advocate in the market. We advise our corporate clients at all stages of their development, becoming involved in the flotation process and developing our relationship with them post-IPO on both a day-to-day and transactional basis. Providing a market facing service for our corporate clients is very important to us. Knowing what the market thinks of a stock helps us position our clients' story in the market. Evolution Securities China Evolution Securities China is a specialist, fully integrated investment banking and securities operation based in the UK and the People's Republic of China ("PRC"). It holds regulated status in both countries. This business completed its fourth year of operation during the summer of 2007. This marks a significant stage in the development of the business and comes as the financial results for the year once again improved. Headline income grew to £5.8m (2006: £4.1m), an increase of 41%. Our aim is to meet the growing demand from professional investors for attractive investment opportunities in China at acceptable levels of risk. We also serve companies operating in China seeking to raise capital in the international equity markets. To meet these aims we provide a comprehensive range of investment banking services designed to identify, structure and execute diverse and innovative market transactions for both corporate and institutional clients. Private Client Investment Management Our private client investment management business, Williams de Broe continued the momentum started during 2007, and I believe, continues to increase its value to the Evolution Group. Total income (before fee and commission expenses) increased by 58% to £32.6m in 2007 (2006: £20.6m), in part reflecting the full year impact arising from the business acquired from W Deb MVL Plc when compared to the 7 months in 2006. Assets under management ("AUM") Growth in AUM remains a core focus within Williams de Broe. On this measurement, 2007 was a period of continued strong organic growth together with the recruitment of new investment management teams. At 31 December 2007, total assets under management were £2.8 billion, an increase of 27% from the £2.2 billion at the 2006 year end. We have seen continued strong growth in AUM into our discretionary portfolio management services and also into our other fund based products and services, including WdB Assetmaster and the specialist Enterprise Investment Schemes ("EIS") and Inheritance Tax ("IHT") products. There are still considerable opportunities for our AUM to grow further in 2008 and we are on target to achieve our aim of £3.0 billion by April 2008. Intermediary distribution Central to the strategy in this business has been the extension of the philosophy of a specialist intermediary sales team focusing by geographic location, which in 2007, together with our investment managers, won and introduced new funds under management totalling £471m (2006: £245m) an increase of 92%. We have continued to grow our sales capability, in scale and in terms of product offering, which has continued to produce significantly higher AUM sales in each of the last three years. Products With a heritage dating back to 1869, Williams de Broe is one of the UK's leading firms of investment managers and has successfully established a business that has been built on the following core values: • Personal service - we have a personal service driven culture and our ethos is to maintain investment managers dedicated to our individual client's needs; • Bespoke by nature - we tailor our services to fulfil our individual client's specific investment objectives and risk criteria; • Sound investment process - we maintain a significant resource in our investment process and have a strong focus to achieve investment excellence; and • True independence - we select best of breed investments, which are appropriate for our clients, without conflicts of interest. We also develop close relationships with our professional intermediary partners. We were delighted that in the three years to 31 December 2007 the WdB Assetmaster range of multi-manager funds was awarded the highest ranking by Lipper Hindsight for Total Return and Consistent Return and also achieved an S&P 'A' ranking in all four funds: Cautious, Balanced, Growth and International Growth. In addition, during the year we launched two new fund products: a UK equity hedge fund (the WDB Capital UK Equity Fund) with an absolute return strategy and a long only UK alpha fund. Finally, there has been considerable interest in the specialist EIS and IHT tax efficient portfolio services that were launched at the end of 2005 providing products which have a national reach. WDB Capital The Group has invested £10m seed capital into the WDB Capital UK Equity Fund, managed by WDB Capital Limited, a wholly owned subsidiary of the Group. The results from the fund since launch in September 2007 to 31 December 2007 have been encouraging with a return on investment of 4.4% compared to a fall in the FTSE All share index of 0.7% over the same period. There has continued to be strong performance from this fund in 2008 with good inflows into it from third party investors. Infrastructure, culture and employees 2007 continued to create significant challenges for our infrastructure, through the increased market volatility, significant volume increases and on-going organic growth and re-balancing across our businesses. It is due in no small part to the continued professionalism of our people that the Group has weathered such conditions while continuing to create record income levels and significant underlying profitability. I would like to express my continuing thanks to all our employees who continue to work hard through the current difficult market conditions. Outlook The end of 2007 was characterised by significant volatility in UK equities, with weaker IPO markets across all sectors but especially AIM. This volatility appears set to continue for the foreseeable future. This makes it increasingly difficult to accurately forecast revenues and profits, but we will take any necessary steps to adjust our costs and, as previously outlined, the Group has re-balanced its revenue mix towards recurring fee income. Evolution Securities continues to demonstrate its primary placing power and secondary market strengths, and is trading profitably in all areas, whilst maintaining its market shares. Williams de Broe has continued the trend of organic growth with strong inflows of new funds, which will continue in 2008 and we look forward to commencing our private client activities in Edinburgh. We are experiencing extraordinary events in financial markets at present. It is unclear whether there is a banking crisis or indeed a central banking crisis. What is clear is that the price of risk and liquidity is rising rapidly as markets de-leverage. We have seen sellers of distressed assets become distressed sellers of assets - we find this process engaging and have positioned the Group with approximately half of its market capitalisation in cash. Our track record over seven years has been to acquire financial assets at reasonable prices to create shareholder value. We believe the Group is extremely well positioned at this time. Alex Snow Chief Executive Officer 19 March 2008 FINANCIAL REVIEW Adjusted operating profit Statutory operating profit declined in 2007 to £0.9m (2006: £12.8m). This was due in part to the continued presence of exceptional costs of £7.6m (2006: £12.5m) related to the acquisition, restructuring and integration of W Deb MVL Plc and the absence of any negative goodwill arising during the year (2006: £12.1m), but also to the decline in primary revenues from the prior year. The Board continues to believe a truer reflection of the performance of the Group's operating businesses is afforded by the measure of 'Adjusted operating profit' that excludes items that are one-off or non-recurring (including items that fall to be treated as exceptional), are not part of the on-going business profitability or, in the case of the cost of share options granted to employees and amortisation of intangible assets which we view in the same manner as goodwill, represent non-cash items. This measure is therefore used as the principal performance criteria against which the vesting of stock awards is determined. In addition, the Board reviews performance against the measure 'Adjusted profit before tax', which represents adjusted operating profit plus net interest; and also the measure 'Adjusted earnings', which represents Adjusted profit before tax less tax expense (excluding exceptional tax expense). The analyst community also follows these measures as benchmarks for the Group's on-going performance. The following table reconciles these measures and demonstrates a reduction in adjusted operating profit by 6% to £20.0m in 2007 (2006: £21.3m) which is principally due to continued pressure on corporate finance fee income, particularly within the final quarter when market conditions deteriorated. The adjusted profit before tax for 2007 is £22.8m (2006: £25.2m) and adjusted earnings are £18.4m (2006: £16.4m). 2007 2006 Restated)(3) £'000 £'000 £'000 £'000 ------ ------ ------- ------- Operating profit 884 12,765 Items not included within adjusted operating profit: Profit on disposal of available-for-sale investments (299) (5) Profit on part sale of subsidiary - (1,087) ------ ------ ------- ------- Adjustment for provisions and profits on investments (299) (1,092) Amortisation of intangibles 497 213 Share of post tax results of associates (29) (1) Income statement charge for share options granted to employees(1) 11,289 7,823 ------ ------ ------- ------- Non-cash items 11,757 8,035 Exceptional and non-recurring items Loss arising on disposal of available-for-sale investments - 437 Negative goodwill arising on acquisition - (12,094) Exceptional operating expenses 7,628 12,488 Impairment of intangibles - 778 ------ ------ ------- ------- Adjustment for items that are one off or non-recurring 7,628 1,609 Adjusted operating profit 19,970 21,317 Net interest income 2,873 3,923 ------ ------ ------- ------- Adjusted profit before tax 22,843 25,240 Tax expense(2) (4,467) (8,804) ------ ------- Adjusted earnings for the year 18,376 16,436 ------ ------- Earnings attributable to minority interest 233 111 Adjusted earnings attributable to equity holders of The Evolution Group Plc 18,143 16,325 ------ ------- 18,376 16,436 ------ ------- Adjusted earnings per share 8.65p 7.42p Adjusted diluted earnings per share 7.28p 6.85p (1) Represents the income statement charge for the fair value of options granted to employees. The Group continues to purchase shares through the Trust to satisfy obligations in respect of share options and call rights granted to employees. (2) Excludes the tax effect of exceptional items. (3) See Note 3 for details of restatements. Exceptional and non-recurring items During 2007 the Group has incurred significant further costs arising from the purchase of W Deb MVL Plc in 2006. These arose from the restructuring and integration of the businesses acquired and from addressing various control related weaknesses and issues inherited within the businesses. A summary of all exceptional (excluding tax) and non-recurring items for 2007, together with those of 2006 is provided below: Exceptional and non-recurring items 2007 2006 (Restated) £'000 £'000 ---------- ---------- Goodwill arising on acquisition Negative goodwill arising on acquisition - 12,094 Available-for-sale investments Loss arising on disposal of available-for-sale investments - (437) Operating expenses Retention and loyalty bonuses on acquisition of W Deb MVL Plc (2,824) (6,179) Costs to close down business (1,923) (3,449) Other operating expenses (2,881) (2,860) Impairment of intangibles - (778) ---------- ---------- (7,628) (13,266) ---------- ---------- ---------- ---------- Total exceptional and non-recurring items (7,628) (1,609) ---------- ---------- Costs to close down the business include redundancy and provisions to terminate the systems and leases following closure of the acquired businesses. Other operating expenses include those expenses incurred for wages and salaries, premises and systems which as a result of the integration of W Deb MVL Plc are not expected to recur. In addition, they include a net amount of £1,216k relating to the settlement and rectification of errors and control related issues arising prior to the final integration of the W Deb MVL Plc businesses acquired. Segmental reporting Our primary business segments are Institutional investment banking, Private client investment management and Other activities. Institutional investment banking 2007 2006 (Restated) £'000 £'000 ---------- --------- Income (before fee and commission expenses) 60,449 64,126 Fee and commission expenses (1,212) (1,259) ---------- --------- Total income 59,237 62,867 Operating expenses (56,607) (51,022) Profit on disposal of available-for-sale investments 68 5 ---------- --------- Operating profit 2,698 11,850 Profit on disposal of available-for-sale investments (68) (5) Amortisation of intangibles 297 133 Exceptional operating expenses 814 2,443 Income statement charge for share options granted to employees 9,891 6,440 ---------- --------- Adjusted operating profit 13,632 20,861 ========== ========= In line with the analysis presented in the Chief Executive Officer's Report above, the Institutional investment banking segment is further divided into Evolution Securities (consisting of ESL, ESUS) and Evolution Securities China (consisting of ESCL and EWSL). The breakout of revenues and costs for these categories is detailed below. Evolution Securities Within the investment banking business of Evolution Securities the overall level of income has declined between 2006 and 2007. As a result, and as disclosed below, adjusted operating profit has fallen from £20.1m in 2006 to £13.0m in 2007. 2007 2006 (Restated) £'000 £'000 --------- ---------- Income (before fee and commission expenses) 54,649 60,153 Fee and commission expenses (1,150) (1,177) --------- ---------- Total income 53,499 58,976 Operating expenses (51,356) (47,763) Profit on disposal of available-for-sale investments 68 5 --------- ---------- Operating profit 2,211 11,218 Profit on disposal of available-for-sale investments (68) (5) Amortisation of intangibles 196 82 Exceptional operating expenses 814 2,443 Income statement charge for share options granted to employees 9,855 6,391 --------- ---------- Adjusted operating profit 13,008 20,129 ========= ========== Evolution Securities' income analysis Evolution Securities' total income (before fee and commission expenses) has clearly been impacted in 2007 from a weaker primary performance with total primary income (before fee and commission expenses) in 2007 lower at £18.6m (2006: £33.1m) which was offset to some extent by a stronger secondary income contribution. Sales commissions have grown following the increased market shares and volumes in larger capitalisation stocks. Secondary income was up by 34% to £35.8m (2006: £26.7m), which has therefore had a greater impact on the balance between primary and secondary income. 2007 2006 --------- --------- Corporate finance 34% 55% Sales commissions 37% 24% Trading 29% 21% Evolution Securities' cost analysis With the total income declining in 2007 the cost/income(1) ratio for the Evolution Securities business has increased to 74% (2006: 66%). Costs have increased due principally to the increased scale of the operation following the acquisition of W Deb MVL Plc in 2006. Part of this cost increase occurred when we continued to operate two separate platforms in 2007 following the acquisition. Staff costs this year continue to make up a similar proportion of the total cost base as in 2006. The other costs have remained stable and relate principally to premises, direct transactions, systems and market data. 2007 2006 --------- --------- Staff costs - Non performance related 24% 25% Staff costs - Performance related 17% 18% Other costs 38% 38% Income statement charge for share options granted to employees and exceptional staff costs 21% 19% (1) Excludes the impact of the cost of options and exceptional items. Evolution Securities China This business has continued to be profitable during 2007 and achieved an adjusted operating profit of £0.6m in 2007 compared to £0.8m in 2006, with income (before fee and commission expenses) increasing by 41% to £5.8m (2006: £4.1m). 2007 2006 (Restated) £'000 £'000 ---------- ---------- Income (before fee and commission expenses) 5,800 4,077 Fee and commission expenses (62) (82) ---------- ---------- Total income 5,738 3,995 Operating expenses (5,251) (3,259) ---------- ---------- Operating profit 487 736 Amortisation of intangibles 101 51 Income statement charge for share options granted to employees 36 49 ---------- ---------- Adjusted operating profit 624 836 ========== ========== Evolution Securities China income analysis Evolution Securities China's total income (before fee and commission expenses) has grown in all areas. The driver of this growth has been corporate finance income, principally reflecting the interest from Chinese companies for London listings, and due to strong fee income earned in Hong Kong. This business is still at an early stage of development but we continue to believe growth opportunities remain. 2007 2006 --------- ---------- Corporate finance 78% 83% Sales commissions 11% 10% Trading 11% 7% Evolution Securities China cost analysis Evolution Securities China's total cost(1) base increased by over 60% as the business continued to change during the year. This cost increase occurred mainly as a result of the hiring of staff in London and Shanghai coupled with further investment in its offices and technology platform. The level of performance related staff costs decreased in line with operating profit as bonuses are calculated based on a percentage of profits. 2007 2006 --------- ---------- Staff costs - Non performance related 44% 47% Staff costs - Performance related 13% 21% Other costs 42% 31% Income statement charge for share options granted to employees 1% 1% (1) Excludes the impact of the cost of options. Private client investment management Looking next at Williams de Broe (including the results of the WDB Capital UK Equity Fund), the Group's private client investment management business, 2007 has seen a continuation of the progress of the last four years with an increase of 232% in adjusted operating profit from £1.9m in 2006 to £6.3m in 2007. Its overall costs have increased in part due to the increase in the scale of the business and the extended period that it has taken to integrate the business transferred from W Deb MVL Plc. 2007 2006 (Restated) £'000 £'000 ---------- ----------- Income (before fee and commission expenses) 32,606 20,621 Fee and commission expenses (856) (529) ---------- ----------- Total income 31,750 20,092 Operating expenses (27,804) (19,568) ---------- ----------- Operating profit 3,946 524 Amortisation of intangibles 158 39 Exceptional operating expenses 1,572 910 Income statement charge for share options granted to employees 653 453 ---------- ----------- Adjusted operating profit 6,329 1,926 ---------- ----------- Private client investment management income analysis Williams de Broe's mix of income has shown a shift towards more reliable management fee income and away from sales commissions. Income has benefited from the full year impact of the business acquired from W Deb MVL Plc compared to the 7 months in 2006. As the overall level of assets under management increases, recurring management fees are becoming a more significant source of stable income for the Group. Sales commissions also have a good degree of dependability as a result of the vast majority of funds being managed on a discretionary basis. 2007 2006 --------- --------- Sales commissions 47% 54% Management fees 51% 45% Trading income 2% - Other income - 1% Private client fund management cost analysis The overall cost/income(1) ratio for Williams de Broe Limited has declined significantly to 78% (2006: 93%). This has been in large part due to the significant income growth but also to a well defined cost base. The cost structure within Williams de Broe Limited is highly predictable and well managed. As stated in the prior year, the increased scale of the business has resulted in significantly enhanced levels of profitability and it is expected to continue to demonstrate this in the future. 2007 2006 --------- --------- Staff costs - Non performance related 27% 31% Staff costs - Performance related 24% 20% Other costs 47% 42% Income statement charge for share options granted to employees and exceptional staff costs 2% 7% (1) Excludes the impact of the cost of options and exceptional items. Other activities The Group's other activities consist of the central support costs not recovered from the operating businesses, the profits on, and provisions against, available-for- sale investments and the remaining costs to close down the W Deb MVL Plc entities (acquired in 2006) during 2007. 2007 2006 (Restated)(1) £'000 £'000 ----------- ---------- Total income 219 (58) Operating expenses (6,239) (306) Profit / (loss) on available-for-sale investments 231 (437) Profit on part sale of subsidiary - 1,087 Share of post tax results of associates 29 1 ----------- ---------- Operating (loss) / profit (5,760) 287 (Profit) / loss on available for sale investments (231) 437 Profit on part sale of subsidiary - (1,087) Share of post tax results of associates (29) (1) Impairment of intangibles - 778 Amortisation of intangibles 42 41 Negative goodwill arising on acquisition - (12,094) Exceptional operating expenses 5,242 9,135 Income statement charge for share options granted to employees 745 930 ----------- ---------- Adjusted operating profit / (loss) 9 (1,574) =========== ========== (1)See Note 3 for details of restatements. Investment portfolio As previously reported, the Group has continued to exit from its legacy investment portfolio. The Group seeks to extract value from this portfolio and recorded a profit on sale of available-for-sale investments of £0.3m in 2007 (2006 loss: £0.4m). The fair value of the Group's remaining portfolio of available-for-sale investments is £0.7m (2006: £1.9m). Shares purchased by the Employee Trust The Trust purchased 6,998,506 shares during the year (2006: 3,159,465) for total consideration of £9.7m (2006: £4.9m) through the Group's share incentive trust to meet awards made to staff. The Company has and will continue this process in 2008. Balance sheet strength and cashflow The Group remains focused on maintaining a strong balance sheet. At the year-end the Group had net assets of £155.3m (2006: £154.0m) including cash of £122.7m (2006: £88.6m). During 2007 there were increased working capital requirements compared with the previous year, with net trade receivables and net trading portfolio assets, in Evolution Securities Limited being higher on average than 2006. Working capital has been monitored carefully during the year and was actively managed at the end of the year in line with Group policy and in response to the more volatile markets. Largely as a result of the management of working capital there is an overall net inflow of cash from operating activities of £47.2m (2006: decrease £4.9m). When taken together with the £13.1m (2006: £20.2m) outflow from own share purchases and dividends paid, there is a resultant overall increase in cash for 2007 of £34.3m (2006: decrease of £49.4m). Dividend The Board is proposing a final dividend per share for 2007 of 1.25p per share (2006: 1.00p). This dividend is payable on 2 June 2008 to shareholders on the register on 2 May 2008. This follows the interim dividend paid in October 2007 of 0.67p per share (2006: 0.50p). Alex Snow 19 March 2008 CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2007 2006 (Restated) £'000 £'000 Fee and commission income 75,810 71,395 Fee and commission expenses (2,068) (1,788) -------- ---------- Net fee and commission income 73,742 69,607 Trading income 17,237 13,146 Other income 227 252 -------- ---------- Total income 91,206 83,005 Profit / (loss) on disposal of available-for-sale investments 299 (432) Profit on part sale of subsidiary - 1,087 Share of post tax results of associate 29 1 Negative goodwill arising on acquisition - 12,094 -------------------------------------------------------------------------------- Operating expenses (83,022) (70,502) Exceptional operating expenses (7,628) (12,488) -------------------------------------------------------------------------------- Total operating expenses (90,650) (82,990) -------- ---------- Operating profit 884 12,765 Interest income 3,194 4,097 Interest expense (321) (174) -------- ---------- Profit before tax 3,757 16,688 -------------------------------------------------------------------------------- Tax expense (4,467) (8,803) Exceptional tax credit / (expense) 3,912 (1,039) -------------------------------------------------------------------------------- Total tax expense (555) (9,842) -------- ---------- Profit for the year 3,202 6,846 -------- ---------- Profit attributable to minority interest 233 111 Profit attributable to equity holders of The Evolution Group Plc 2,969 6,735 -------- ---------- 3,202 6,846 -------- ---------- Basic earnings per ordinary share 1.42p 3.06p Diluted earnings per share 1.19p 2.83p Dividend per share - Interim (paid) 0.67p 0.50p - Final (proposed) 1.25p 1.00p Dividend (£'000) - Interim (paid) 1,408 1,107 - Final (proposed) 2,626 2,094 CONSOLIDATED BALANCE SHEET As at 31 December 2007 2006 (Restated) £'000 £'000 ASSETS Non-current assets Goodwill 10,002 9,956 Other intangible assets 2,636 2,745 Property, plant and equipment 3,617 4,337 Deferred tax assets 9,300 10,973 Investment in associate - 109 Trade and other receivables 34 35 ------------ ------------ Total non-current assets 25,589 28,155 ------------ ------------ Current assets Trade and other receivables 92,299 132,992 Available-for-sale investments 680 1,926 Trading portfolio assets 19,171 27,716 Cash and cash equivalents 122,743 88,565 ------------ ------------ Total current assets 234,893 251,199 ------------ ------------ Total assets 260,482 279,354 ------------ ------------ LIABILITIES Current liabilities Trade and other payables 96,082 107,269 Trading portfolio liabilities 6,744 14,728 Current tax liabilities 1,519 2,579 ------------ ------------ Total current liabilities 104,345 124,576 ------------ ------------ Non-current liabilities Deferred tax liabilities 340 459 Provisions for liabilities 525 333 ------------ ------------ Total non-current liabilities 865 792 ------------ ------------ Total liabilities 105,210 125,368 ------------ ------------ EQUITY Capital and reserves attributable to equity shareholders Share capital 2,232 2,214 Share premium 28,795 28,445 Capital redemption reserve 373 373 Merger reserve 51,230 51,230 Fair value and other reserves (1,687) (1,491) Retained earnings 72,389 72,061 ------------ ------------ Shareholders' equity excluding minority interest 153,332 152,832 Minority interest in equity 1,940 1,154 ------------ ------------ Total equity 155,272 153,986 ------------ ------------ ------------ ------------ Total equity and liabilities 260,482 279,354 ------------ ------------ CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2007 2006 (Restated) £'000 £'000 £'000 £'000 Cash flow from operating activities Cash generated from / (absorbed by) operations 44,746 (4,229) Interest received 3,596 3,695 Interest paid (322) (174) Tax paid (851) (4,241) ------- ------- ------- ------- Net cash generated from / (absorbed by) operating activities 47,169 (4,949) Cash flows from investing activities Net proceeds from sale of available-for-sale investments 1,385 525 Purchase of available-for-sale investments - (94) Acquisition of subsidiary, net of cash acquired - (21,684) Fees in relation to acquisition of subsidiaries (11) (1,820) Purchase of property, plant and equipment (983) (2,232) Purchase of intangible assets (864) (733) Dividends received - 17 ------- ------- ------- ------- Net cash absorbed by investing activities (473) (26,021) Cash flows from financing activities Issues of ordinary share capital 151 436 Issue of ordinary share capital to minorities - 1,318 Issue of investment shares to third parties in the WDB UK Equity Capital fund 550 - Dividends paid to the Company's shareholders (3,496) (2,888) Purchase of shares held by the Trust (9,557) (17,277) ------- ------- ------- ------- Net cash absorbed by financing activities (12,352) (18,411) ------- ------- Net increase / (decrease) in cash and cash equivalents 34,344 (49,381) Cash and cash equivalents at beginning of year 88,565 137,973 Exchange losses (166) (27) ------- ------- Cash and cash equivalents at end of 122,743 88,565 year ------- ------- CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 December 2007 2006 (Restated) £'000 £'000 Profit for the financial year 3,202 6,846 Available-for-sale investments: Fair value changes taken to equity during the year 139 (151) Exchange differences (36) (120) Deferred tax on share options taken to equity (990) (1,188) ---------- ---------- Net losses not recognised in income statement (887) (1,459) ---------- ---------- Total recognised income for the year 2,315 5,387 ---------- ---------- Attributable to: Minority interest 233 111 Equity shareholders of the Parent 2,082 5,276 ---------- ---------- 2,315 5,387 ---------- ---------- 1. BASIS OF PREPARATION In preparing the financial information in this statement the Group has applied policies which are in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union at 31 December 2007 and those parts of the Companies Act 1985 applicable to companies reporting under IFRS. Details of the Group's accounting policies can be found in the Group's 2006 Annual Report. The financial information in this statement does not constitute the Group's statutory accounts for the year ended 31 December 2007 within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for 2007 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The Group will be circulating the full annual report and accounts to shareholders and copies will be available from the Registered Office of the Company, 9th Floor, 100 Wood Street, London EC2V 7AN from the date of despatch to shareholders for one month. 2. RESTATEMENTS ARISING FROM THE ACQUISITION OF W DEB MVL PLC In accordance with IFRS 3, 'Business Combinations', the provisional allocation of the purchase consideration to the assets acquired from W Deb MVL Plc has been reviewed based on additional information up to 3 June 2007. Listed below are the individual adjustments arising following this review. These adjustments have not changed since they were first disclosed in the Interim Report and Accounts. Following a review of the fair value of assets and liabilities arising on the acquisition of W Deb MVL Plc, further trading assets have been identified which on disposal are to be shared 50:50 with the vendor. This review has resulted in prior year trading portfolio assets increasing by £1,696,000 and other creditors increasing by £848,000, reflecting the amount to be paid away to the vendor, in the 31 December 2006 balance sheet. The offset to this is an increase in negative goodwill of £848,000. The fair value of the remaining portfolio of assets has been reduced by £327,000, in the 31 December 2006 balance sheet, reflecting the final valuation adjustment to the assets acquired. The offset to this is a reduction in negative goodwill of £327,000. In addition other receivables and other payables within the balance sheet at 31 December 2006 have each been reduced by £306,000, reflecting the reversal of accrued professional fees, indemnified by the vendor, which are no longer payable. Finally, the fair value of other payables at acquisition has been reduced by £226,000, in the 31 December 2006 balance sheet, reflecting the over accrual for professional fees at the acquisition date. The offset to this is an increase in negative goodwill of £226,000. The net effect of the above is an increase in negative goodwill arising on acquisition of £747,000 in the 31 December 2006 income statement. 3. OTHER RESTATEMENTS As referred to in the Interim Report and Accounts, the Income Statement for the year ended 31 December 2006 has also been restated to reflect the following adjustments: • Recognition of additional trading income arising on the revaluation of trading assets in the year. This adjustment has resulted in an increase in trading income of £104,000 with a corresponding increase in trading portfolio assets within the balance sheet. • Re-classification of interest on client assets more appropriately as fee and commission income rather than other income. This adjustment has resulted in the other income figure for the year to 31 December 2006 decreasing by £1,101,000 with fee and commission income increasing by an equivalent amount. • Re-classification of taxation credits on exceptional operating expenses as exceptional tax expense rather than tax expense. This adjustment has resulted in the ordinary tax expense figure for the year to 31 December 2006 increasing by £3,746,000 with the exceptional tax expense amount decreasing by an equivalent amount. • Correction to deferred tax expense on employee options which had been overstated. This adjustment has resulted in a decrease in tax expense of £2,161,000 in the income statement for the year ended 31 December 2006 with an offsetting decrease in retained earnings. There is no impact on net assets arising from this adjustment. As a result of the other restatements above, the profit for the prior year within the income statement has increased by £2,265,000 for the year ended 31 December 2006. 4. EARNINGS PER ORDINARY SHARE The calculation of the basic earnings per ordinary share is based on the profit on ordinary activities after tax excluding minority interest and on the weighted average number of ordinary shares in issue during the year. The calculation of the diluted earnings per share is based on the basic earnings per share adjusted to allow for the issue of shares on the assumed conversion of all dilutive options. As per Notes 2 and 3, Earnings per share for 2006 have been restated to reflect the adjustments to the profit figure for the prior year. These result in basic and diluted EPS figures increasing from 1.69p and 1.56p respectively to 3.06p and 2.83p for the year ended 31 December 2006. Statutory Year ended 31 December 2007 Year ended 31 December 2006(Restated) ----------------------------------------------------------------------- Profit Weighted Earnings Profit Weighted Earnings £'000 average no. per £'000 average no. per share(p) share(p) Basic 2,969 209,745,385 1.42 6,735 220,130,070 3.06 Dilutive effect of share awards - 39,446,913 - - 18,262,950 - ------- ----------- ------ ----- ----------- ----- Diluted 2,969 249,192,298 1.19 6,735 238,393,020 2.83 ------- ----------- ------ ----- ----------- ----- Adjusted Year ended 31 December 2007 Year ended 31 December 2006(Restated) ------------------------------------------------------------------- Profit Weighted Earnings Profit Weighted Earnings £'000 average no. per £'000 average no. per share(p) share(p) Basic 2,969 209,745,385 1.42 6,735 220,130,070 3.06 Profit on investments (299) - (0.14) (1,092) - (0.49) Exceptional and non-recurring items(1) 7,628 - 3.64 1,609 - 0.73 Exceptional tax (credit)/expense (3,912) - (1.87) 1,039 - 0.47 Non-cash items 11,757 - 5.60 8,034 - 3.65 ------- ----------- ---- ------ ----------- ----- Adjusted basic 18,143 209,745,385 8.65 16,325 220,130,070 7.42 Dilutive effect of share awards - 39,446,913 - - 18,262,950 - ------- ------------ ---- ------ ----------- ----- Adjusted diluted 18,143 249,192,298 7.28 16,325 238,393,020 6.85 ------- ------------ ---- ------ ----------- ----- (1)See analysis of Exceptional and non-recurring items within the Financial Review section above. 5. DIVIDENDS 2007 2006 £'000 £'000 Prior year final paid: 1.00p (2006 0.80p) per 1p share 2,094 1,781 Current year interim paid: 0.67p (2006: 0.50p) per 1p 1,408 1,107 share ---------- --------- 3,502 2,888 ---------- --------- In addition, the directors are proposing a final dividend in respect of the financial year ended 31 December 2007 of 1.25p (2006: 1.00p) per share, which will absorb an estimated £2,626,000 of shareholders' funds. It will be paid on 2 June 2008 to shareholders on the register of members on 2 May 2008. 6. TAX EXPENSE 2007 2006 (Restated) £'000 £'000 Current tax: UK Corporation tax on profit 4,716 8,879 Corporation tax on exceptional items (2,288) (2,122) Adjustments in respect of prior years (1,223) - Adjustments in respect of prior years- exceptional tax (1,624) - Foreign tax 408 252 ---------- --------- Current year tax charge (11) 7,009 Deferred tax: Current year movement (279) 2,833 Adjustments in respect of prior years 845 - ---------- --------- Tax on profit 555 9,842 ---------- --------- The tax assessed for the year is lower (2006: higher) than the standard rate of corporation tax in the UK (30%). The differences are explained below. Factors affecting the current tax charge for the year are explained below: 2007 2006 (Restated) £'000 £'000 Profit before tax 3,756 16,688 Profit multiplied by the standard rate of corporation tax in the UK of 30% (2006: 30%) 1,127 5,006 Effects of: Expenses not deductible for tax purposes 5,523 10,519 Schedule 23 deduction on options exercised (1,742) (10,495) Utilisation of losses (2,127) (67) Non taxable income - (247) Adjustment in respect of prior years (2,847) - (Lower) / higher tax rates on overseas earnings (141) 132 Stock options taken to equity reserves 196 2,161 --------- --------- Current tax charge (11) 7,009 --------- --------- Deferred tax (809) (328) Exceptional deferred tax - 3,161 Deferred tax adjustment in respect of prior periods 845 - Change of rate from 30% to 28% 530 - --------- --------- Current year movement 566 2,833 --------- --------- --------- --------- Total tax charge 555 9,842 --------- --------- The exceptional tax credit of £3,912,000 (2006: expense of £1,039,000) includes a prior period adjustment of £1,624,000 on the £5,413,000 consideration receivable from ING for the net assets of W Deb MVL Plc and £2,288,000 which relates to the 30% tax credit estimated to arise on the £7,628,000 of exceptional operating expenses. The prior year exceptional deferred tax charge of £3,161,000 relates to the write off of deferred tax assets on pension contributions made by the vendor of W Deb MVL Plc prior to acquisition. The 2007 adjustment in respect of prior years relates to the recognition of additional tax losses claimed for the years ended 31 December 2004 to 31 December 2006. 7. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (excluding Minority Interest) Capital Fair value Retained Total Share Share redemption Merger and other Earnings Equity capital premium reserve reserve (Restated)(Restated) 2007 2007 2007 2007 2007 2007 2007 £'000 £'000 £'000 £'000 £'000 £'000 £'000 ------ ------- ------- ------- --------- ------- -------- Balance at 1 January 2,214 28,445 373 51,230 (1,491) 72,061 152,832 Profit for the year - - - - - 2,968 2,968 Issue of ordinary share capital 18 350 - - - - 368 Current tax charge on employee options - - - - - 196 196 Purchase of Trust shares - - - - - (9,619) (9,619) Share option: value of services provided - - - - - 11,279 11,279 Revaluation of available-for-sale investments - - - - 139 - 139 Available-for-sale investments transferred to Income Statement on sale - - - - (299) - (299) Deferred tax debit on employee options - - - - - (1,000) (1,000) Exchange differences - - - - (36) - (36) Dividends paid - - - - - (3,496) (3,496) ------ ------ ---- ------ -------- ------- ------- Balance at 31 December 2,232 28,795 373 51,230 (1,687) 72,389 153,332 ------ ------ ---- ------ -------- ------- ------- 8. EXCEPTIONAL OPERATING EXPENSES 2007 2006 (Restated) £'000 £'000 Exceptional items Goodwill arising on acquisition Negative goodwill - 12,094 Operating expenses Retention and loyalty bonuses on acquisition of W Deb MVL Plc (2,824) (6,179) Costs to close down business (1,923) (3,449) Other operating expenses (2,881) (2,860) --------- --------- (7,628) (12,488) --------- --------- Total exceptional items (7,628) (394) --------- --------- Costs to close down the business include redundancy and provisions to terminate the systems and leases following closure of the acquired businesses. Other operating expenses include those expenses incurred for wages and salaries, premises and systems which as a result of the integration of the acquired business are not expected to recur. In addition, they include a net amount of £1,216k relating to the settlement and rectification of errors and control related issues arising prior to the final integration of the W Deb MVL Plc businesses acquired. 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