Vitec Group plc
Annual Report 2006

Plain-text annual report

annual report 2006 The Year In Review01Directors’ ReportChairman’s & Chief Executive’s Statement02Business Review04Divisional ReportsImaging & Staging Systems06Broadcast Systems08Broadcast Services10Financial Review12Key Performance Indicators and Other Measures15Board of Directors17Remuneration Report21Corporate Social Responsibility Report28Corporate Governance32Independent Auditors’ Report39Consolidated Accounts 2006Consolidated Income Statement40Consolidated Statement of Recognised Income and Expense41Consolidated Balance Sheet42Consolidated Cash Flow Statement43Notes to the Consolidated Accounts44Company Accounts 2006Company Balance Sheet87Reconciliation of Movements in Shareholders’ Funds88Notes to the Company Accounts89Five Year Financial Summary97Shareholder Information and Financial Calendar98Group DirectoryInside Back CoverContentsFront cover pictures:Robbie Williams starts his Closer Encounter tour in Dublin with one of Brilliant Stages’ largest touring sets – Photo courtesy of Kevin Edwards.Vinten products being used ‘on location’ in Tibet - Photo courtesy of Martin Gremmelspacher.Back cover pictures:IFF supplied their top lift hoist, rail and control systems to Lumiq Studios School in Turin, Italy.Bexel rent video broadcast equipment to many major sporting events – seen here at the State Farm US Figure Skating Championships.The Year in Review01The Vitec GroupThe Vitec Group made very good progress in 2006, with strong revenue and profitgrowth. We have launched exciting new products into growing markets and areseeing the benefits of our consolidated operational structure.2007 will not see any benefit from major events for our broadcast businesses.However, given the increasing importance of Vitec's photographic and liveentertainment businesses, combined with the contribution from acquisitions madein 2006 and further operational improvements within Broadcast Systems, the Boardlooks forward to further growth in 2007.• Revenue growth of 15% in constant currency, of which 12% was organic• Profit before tax* of £24.1 million, an increase of 35% in constant currency,31% as reported• Basic earnings per share* of 35.3p, up 36%• Cash generated from operations of £28.7 million• Imaging & Staging division sales up 24%• Two further significant acquisitions: Autoscript prompters and Tomcat Globalstaging systems, both performing to plan• Total dividend recommended of 16.5p per share, up 6%* from continuing operations and before significant items (see Note 5 to the Consolidated Accounts on page 52).**For 2002 and 2003, before exceptional items, goodwill amortisation and impairment. For 2004, 2005 and 2006 before significant items (see Note 5).2002 and 2003 figures include results for Alu which was sold in 2003.Accounts for 2006, 2005 and comparable figures for 2004 were prepared in accordance with IFRS as adopted for use in the EU. Accounts for 2003 and 2002were prepared in accordance with UK GAAP accounting policies.0203040506020304050602030405060203040506Revenue £m182.2192.8185.4194.9222.3Net debt £m11.910.411.35.418.9Operating profit** £m24.717.817.820.025.2Adjusted basicearnings pershare** pence34.123.922.226.035.302Annual Report 2006The directors present their report and the audited accounts ofthe Group for the year ended 31 December 2006.Chairman's & Chief Executive'sStatementWe are delighted to report another year of strong progress forThe Vitec Group in revenue, profits and earnings per share dueto underlying growth in our markets and continued operationalimprovements. Our efforts to find attractive acquisitions werealso successful, with four businesses joining the Group during2006.Results2006 revenue grew 14%, to £222.3 million (2005: £194.9million) of which around 11% was organic, reflecting Vitec'sstrong positions in markets that are growing well and thecontinued emphasis placed on new product development.Constant currency organic growth was higher, at 12%, as thelower US Dollar reduced reported figures. While the first halfsaw particularly good progress, partly due to the rentalcontracts for the Winter Olympics, it was pleasing that thesecond half also showed significant growth over what hadbeen a very good second half in 2005. Imaging & Staging (previously Photographic) grew 24%, ofwhich 18% was organic, with constant currency organicgrowth even stronger at 19%. This was driven by a buoyantmarket for accessories for professional photographers andcinematographers, with sales of lighting stands and bags alsoperforming well. We saw continued benefits from thesignificant and ongoing growth in sales of digital SLR camerasto the keen amateur segment, which generates sales of ouraccessory products. Our distribution arm, Bogen Imaging,which sells both Group and other premium third partyproducts, had a good year and was augmented in June bybringing our Japanese distribution in-house. The StagingSystems business continued to expand and in Novemberacquired Tomcat Global, bringing significant scale andinternational reach to this part of the Company.Broadcast Systems saw revenues increase at each businessunit. The ongoing investment by broadcasters in HighDefinition TV is proving of benefit to us. Following anexcellent finish to 2005, overall sales growth in 2006 was10%, of which 8% was organic (10% in constant currency),with particularly good results in Camera Dynamics. Petrol,acquired in January, performed very well during the year. Atthe end of October we acquired Autoscript, whose advancedteleprompting products we had already been distributing toseveral countries.Broadcast Services, operating principally in the USA, sawrevenue growth in US Dollars of some 1%, but flat revenue ontranslation to pounds Sterling. This division benefited from asuccessful set of contracts for the Winter Olympics and FIFAWorld Cup.With the further increase in revenue and continued progresson operational improvement, Group profit before tax andsignificant items* increased 31% to £24.1 million (2005:£18.4 million). In constant currency terms profit before taxand significant items* grew 35% and, excluding acquisitions,the reported growth was 28% in pounds Sterling and 32% inconstant currency. The reported tax rate for the Group fell again by 2% to 40%and as a result basic earnings per share before significantitems* rose to 35.3p (2005: 26.0p), an improvement of 36%.After significant items* profit before tax was up 32% to £22.6million (2005: £17.1 million) and earnings per share rose to32.6p (2005: 22.9p before discontinued operations).Cash generated from operations of £28.7 million (2005:£29.8 million) remains strong. While working capital controlremains good, 2006 saw increased expenditure onacquisitions and on capital projects, including the expansionof Camera Dynamics' Costa Rican facility.Strategy update and future developmentThe Group's strategy is summarised in the phrase 'Consolidate– Leverage – Grow'. After an initial phase, during whichmultiple locations and smaller business units wereconsolidated into a divisional structure to give economies ofscale, the focus shifted to leveraging our skills and exploitingour routes to market in pursuit of growth. While continuousimprovement activities are ongoing, the emphasis is ongenerating growth through ongoing research and development.We continue to review a number of potential acquisitionopportunities, some of which are material and would hopethat, as in the recent past, a number would complete in thecoming year.We believe the consolidation of our individual brands intostronger businesses provides a sound platform for futuregrowth - each of them has the scale to develop innovativeproducts and services and to deliver them effectivelyworldwide.We aim to grow ever closer to our end customer, providingthem with better tools and services to do their jobs, while atthe same time looking for complementary areas into which theGroup can expand and utilise its industry-leading expertise.Research, development & engineeringAn ongoing part of our success is due to continuousinnovation by Vitec's staff, developing both new products andnew services.Within Imaging & Staging and Broadcast Systems the Groupspends approximately 4.5% of revenue on new productdevelopment, £8.7 million in 2006 (2005: £7.8 million).Vitec's businesses are known for the quality and reliability oftheir products and there is an exciting pipeline of new ideas forthe future. During the year our businesses won a number ofawards for innovation, a sign that the Group's products remainvery relevant to our customers and a testament to the strengthDirectors' Report*Significant items are those items of financial performance that the directorsconsider should be separately disclosed to assist in the understanding of theunderlying trading and financial performance achieved by the Group and inmaking projections of future results. These items are quantified and explainedin the Financial Review and in Note 5.03The Vitec Groupof our R&D capability. Around 25% of sales in 2006 (2005:19%) were derived from products launched in the last threeyears.Within Broadcast Services, continued innovation of its videoand audio services is as important. 2006 saw the launch ofthe 'LTR' programme in the US. Bexel has traditionally offeredrentals – this Long Term Rental programme offers ourcustomers the advantages of a lease from a bank, but with thebenefits of additional service options from Bexel.AcquisitionsDuring the year we made four acquisitions: Petrol broadcastcamera bags in January; Bogen Imaging Japan, a photographicdistribution business, trading from June; Autoscript promptingsystems in October; and in November Tomcat Global, theleading manufacturer of aluminium truss and staging systems,perhaps best known for their projects for the Rolling Stonesand U2 tours. These businesses are all complementary to theexisting activities of the Group and increase the range ofexciting products we can sell to our customers, often throughin-house distribution. We also acquired a minority stake inMedia Numerics Ltd, which has launched a revolutionarydigital audio network for use at live events.Post balance sheet eventsThere have been no significant post balance sheet events.2006 dividendWith improved results and positive trends in our markets theBoard is proposing a final dividend of 10.1p per share,resulting in a full year total of 16.5p (2005: 15.5p), anincrease of 6.5%. Subject to approval by shareholders, thefinal dividend will be paid on 31 May 2007 to shareholderson the register on 4 May 2007.Using adjusted earnings per share before significant items*the dividend is covered 2.1 times (2005: 1.7 times), whilstafter significant items* it is covered 2.0 times (2005: 1.5times). Board changesAs previously announced, Sir David Bell will step down fromthe Board following the Annual General Meeting in May 2007.David joined the Board as a non-executive director in 1997and has provided us with ten years of excellent service andwise counsel, helping us navigate the Group through a periodof considerable change. We are delighted that Maria Richter joined the Board as anon-executive director on 28 February 2007. Maria'sbackground is in corporate finance in the US and she hassignificant experience with deals involving companies, both inthe US and South America, which complements the skills ofthe Board and will be of use as the Group expands.Our thanksThe continued success of Vitec is due primarily to thededication and skill of all of our colleagues throughout theworld – the Group is now seeing the fruits of the efforts theyhave expended over the past years, for which we thank them.Outlook for 20072007 will not see any benefit from major events for ourbroadcast businesses. However, given the increasingimportance of Vitec's photographic and live entertainmentbusinesses, combined with the contribution from theacquisitions made in 2006 and further operationalimprovements within Broadcast Systems, the Board looksforward to further growth in 2007.Gareth Rhys WilliamsChief ExecutiveMichael HarperChairman 04Annual Report 2006Business ReviewOverviewVitec is an international Group, principally serving customers in the worldwide media sector withproducts and services designed to facilitate the production of video programmes or still images. Vitec isbased on strong, well known, premium brands that professionals rely on. Vitec is organised in threedivisions: Imaging & Staging, Broadcast Systems and Broadcast Services.Imaging & Staging - Products for the photographic, video and live event marketsBroadcast Systems – Products and systems primarily for broadcast applicationsBroadcast Services – Rental and technical support services, mainly for the broadcast marketActivitiesDesign and manufacture of high quality equipmentprincipally for photography, video, cinematography andlive events professionals. Distribution of in-houseand third party photographic accessories.ProductsPhotographic and video camera tripods and heads.Lighting stands, grips and accessories. Lighting and scenerysuspension equipment. Camera bags. Live entertainment andexhibition lighting suspension structures and staging systems.Third party products distributed include flash units, lightmeters and filters.Locations: France, Germany, Hong Kong, Israel, Italy, Japan, Mexico, Slovakia, UK, USAActivitiesDesign and manufacture of high quality equipmentused principally by broadcast and live entertainmentprofessionals. Focused on studio and outside broadcastand film production markets with applications in the airtraffic control and government markets.ProductsManual and remotely controlled camera support pedestals,tripods and heads. Camera and equipment bags. Studio andportable lighting. Scenery hoists and pantographs.Prompting products and services. Microprocessor-controlledbatteries and chargers for video cameras. Multi-locational wiredand wireless intercom systems.Locations: China, Costa Rica, France, Germany, Israel, Japan, The Netherlands, Singapore, UK, USAActivitiesRental services and selected sales of camera,video, wireless communication and audio equipment,including engineering support for the film and TVprogramme production markets.ProductsRental of broadcast video equipment. Rental of audioequipment. Rental of high definition TV production support.Provision of support for major event broadcasting andwebcasting. Sales of communications,audio equipmentand used video equipment.Location: USADirectors' Report continuedThe Vitec Group05Strategy: 'Consolidate - Leverage - Grow'Vitec's strategy is to grow ever closer to its end customer, providing them with better tools and services to dotheir job, while at the same time looking for complementary areas into which the Group can expand and utiliseits industry-leading expertise. After an initial phase which yielded economies of scale, during which multiplelocations and smaller business units were consolidated into a divisional structure, the focus has shifted toleveraging our skills to develop new products and exploit our routes to market. This phase of the strategy isdelivering meaningful growth.06Annual Report 2006OverviewThe Imaging & Staging division operates in two main markets:manufacturing and distributing products for the professionaland keen amateur photographer and videographer, such ascamera supports and bags, and manufacturing lighting andstaging systems for the live entertainment market. Lightingsupports ('grip') are manufactured for both these markets andfor cinematographers. It is organised in three units: ImagingAccessories, Imaging Distribution and Staging Systems.StrategyThe division's operations are highly interrelated – strengths inphotographic accessories and in their distribution are mutuallysupportive. A focus on constant innovation in productdevelopment as well as the control of their distribution in thekey markets of the world, which allows us to work more closelywith the end-customer, is proving to be a winningcombination. Innovation is as important in Staging Systems,where the businesses erecting the stage or lighting systemsare looking for ever lighter, easier to use and more elegantsolutions to make their event look as good as possible.2006 performance2006 was another successful year for this division withrevenue of £94.6 million (2005: £76.2 million) up 24.1%,and operating profit before significant items* rising to £16.6million (2005: £13.6 million), up 22.1%. Constant currencysales and profit growth were £19.1 million and £3.5 millionrespectively. As in 2005, each part of the business sawrevenue growth.Imaging Accessories continued to benefit from the continueduptake of digital SLR cameras by keen amateurphotographers, who also buy the Group's accessory products.2006 also saw a resurgence of sales of lighting stands toprofessional photographers. The range of camera supports andbags sold under the National Geographic brand (under licence from the National Geographic Society) has been wellaccepted, as has the new Crosspole lighting suspensionsystem, the new 501 HD video head and the new 190 seriesprofessional tripod. Continuous improvement activities duringthe year included the relocation of lighting stand manufacture,part of which was outsourced to China with the rest beingconsolidated into the existing site at Feltre in Italy.Imaging Distribution also had a good year – those customerswho buy camera supports and bags that are manufactured bythe Group also buy other professional products that wedistribute to the retailer through Bogen Imaging, our in-housedistributor. Bogen is one of the largest photographic and videoaccessory distributors operating internationally and hasstrengthened its position through the creation of BogenImaging KK, which is based in Tokyo.Litec and IFF, brought together in 2005, focus on the marketfor lighting trusses and control systems. That area greworganically but the biggest step forward was the acquisition ofTomcat Global, the worldwide leader in temporary staging forlive events, to create a new unit, Staging Systems. We believethe combination of Litec's standard trusses and Tomcat'scustom designs and reputation for innovation will be verypositive.As a result of this acquisition, reflecting the increasedimportance of live events in this division and that we now sellto a wider customer base than purely "photographers", we haverenamed the division 'Imaging & Staging'.Imaging & Staging (formerly Photographic) DivisionProducts for the photographic, video and live event marketsDirectors' Report continued20062005Revenue£94.6m£76.2mOperating profit*£16.6m£13.6mOperating margin*17.5%17.8%*Before significant items. Significant items are amortisation of intangible assets of £0.5 million (2005: £0.2 million)and profit on sale of property of £nil (2005: £0.3 million).TV Broadcast/Videography Magazine'sVidy Top Innovation Award andVideomaker Editors Most InnovativeProduct of the Year award forManfrotto's 560B Fluid Monopod,aproduct distributed by Bogen ImagingTechnical ImagePress Association'sAward for BestInnovative Design forKata bagsDigital Photographermagazine BestTripod of 2006 forManfrotto's MagFiber 190MF4 TripodDigital PhotoGold Award forManfrotto's 055MF4and 458BGitzo receivedthe DiGi AnnualAward for Best TripodBrand in 2006The Vitec Group07Rolling Stones A Bigger Bang tour - Photo courtesy of Mark FisherTomcat Global Corporationwas acquired in November 2006. Tomcat Global comprises Tomcat and Brilliant Stages. Tomcatsupplies both premium standard and custom aluminium truss systems, principally for the entertainment and exhibitionindustries. Brilliant Stages is a leading supplier of custom effects and accessories for staged events. Tomcat and Brilliant Stageshave undertaken projects for a wide variety of live events for customers such as the Rolling Stones, Pink Floyd, Robbie Williamsand U2.08Annual Report 2006Broadcast Systems DivisionProducts and systems primarily for broadcast applicationsOverviewThe Broadcast Systems division provides equipmentprincipally for professionals engaged in producing live eventsor video content, frequently for subsequent broadcast. Thebusiness units, Camera Dynamics, Communications andMobile Power, sell their products worldwide, either direct tothe end-customer or through a network of professional dealers.The division's brands are frequently the acknowledged leadersin their fields.StrategyThe broadcast market has changed considerably in recentyears with a dramatic decline post-9/11. In the productionarea the market has recently been invigorated by the move tomake programmes in 'High Definition' (HD). This involves theupgrading of cameras and the associated ancillary equipment,much of which is provided by Vitec Group companies. We haveresponded to the changed needs of the marketplace bymanaging the brands in groupings of similar businesses,enabling us to achieve economies of scale in manufacturingand distribution and to develop exciting new product ranges.2006 performance2006 saw a further significant improvement in the underlyingresult for this division, with revenue of £100.5 million (2005:£91.5 million), up 9.8% and operating profit beforesignificant items* rising to £6.9 million (2005: £5.2 million),up 32.7%. After a very strong first half, all business unitsshowed a year-on-year increase in revenue.Volumes in Camera Dynamics continued strongly as webenefited from our customers' increased expenditure onproduction equipment. Revenue growth was particularly goodin the US, Middle East and Russia and we have seen furthersignificant interest in our robotic camera control products,particularly following the launch of the new Fusion system.During the year the acquisition and integration of the Petrolbag business was completed and in November we weredelighted to acquire Autoscript, the leading manufacturer andprovider of prompting systems and services, which are sold tocustomers Vitec knows well. Like our existing businesses,Autoscript has a history of product innovation and won severalawards during the year. During 2006 we expanded theassembly facility in Costa Rica to include the machining ofkey components; we believe this will both reduce costs andease the introduction of new products.In Communications, the market remained the toughest areafor this division. Clear-Com is the brand of choice for many ofthe outside broadcast vans being built for the BeijingOlympics and Clear-Com systems were used successfully atthe Asian Games, seen by many as a test for Beijing. Duringthe year considerable effort was spent updating the productrange to comply with new EU lead-free regulations, whichhave also generated issues for many of our electronicssuppliers. With this now done, many new products will belaunched in early 2007 which will provide for increasednetworking, user flexibility and ergonomics. The margins inthis unit were unsatisfactory in 2006 and we expect them toimprove in 2007; some local management has been changedand we will benefit from the outsourcing of some productionto the Far East.The Mobile Power business had a good year, one of recordsales (in US Dollars, where the business is based). The ElipZsystem, consisting of camera battery, on-board light,innovative grip and charger, has been well received. It takesthe Company's products into a new segment, that of thesmaller, handheld cameras often used by the professionalnews gatherers who have long been used to the quality andservice Anton/Bauer provides.Directors' Report continued20062005Revenue£100.5m£91.5mOperating profit*£6.9m£5.2mOperating margin*6.9%5.7%*Before significant items. Significant items are restructuring costs of £1.5 million (2005: £0.9 million), amortisation of intangible assets of £0.1 million (2005: £nil) and profit on sale of property of £0.4 million (2005: £nil).TV Technology's SuperiorTechnology Star Award and the4 EVER Group Award forproduct innovation forAnton/Bauer's ElipZBroadcastEngineering's PickHit Award forAutoscript'sGoPrompt 15Best of IBC Editors' Awards – TVBEurope, TV Technology'sSuperior Technology Star Award, Broadcast Engineering'sPick Hit Award and Vidy Top Innovation Award forAutoscript's +Voice-Plus+TV Technology'sEurope Star Awardfor Autoscript andVinten's iScriptThe Vitec Group09ALC Broadcast Limited,which is the holding company for the Autoscript prompting businesses, was acquired in October 2006.Autoscript is one of the leading providers of prompting hardware and software to the broadcast industry, with subsidiaries in theUK and USA. Vitec acts as distributor for Autoscript in Germany and Italy. Vinten and Autoscript recently co-developed aninnovative prompting system (iScript) which gained one of a number of industry awards recently received by Autoscript.10Annual Report 2006OverviewThe Broadcast Services division provides rental equipment andtechnical support for demanding outside broadcast events,mostly in the USA, from a network of ten depots. Bexel peoplehave a reputation for solving the most complex problems thatarise when these events are broadcast. The division also actsas an integrator for sophisticated audio equipment and resellsused equipment into the aftermarket.StrategyCustomers choose ASG and Bexel because of their reputationfor designing creative solutions, providing service excellenceand their nationwide footprint. With the most relevantequipment and the best technical back-up, Bexel will continueto target contracts from customers looking for more thansimple equipment hire.2006 performanceRevenue in 2006 of £27.2 million (2005: £27.2 million) wasboosted by successful contracts for the Winter Olympics andFIFA World Cup in the first half. In constant currency revenuewas up 1.1%, but was unchanged when translated intopounds Sterling. Operating profit before significant items* at£1.7 million (2005: £1.2 million) was up 41.7% due to theWinter Olympics contract, better equipment utilisation andcontinued good cost control.With HD technology becoming widely accepted, the capitalspending on new equipment which resulted in the successfulWinter Olympics contracts has also led to significant customercommitments for the summer games in Beijing. In turn thiswill enable Bexel to explore other contracts using similarequipment that would not otherwise have been viable.With the core US market relatively flat, the emphasis has beenon finding innovative new service niches to exploit. In thesecond half we were delighted to announce that a jointmarketing effort to promote longer term contracts has beenlaunched in conjunction with the commercial arm of aCleveland-based bank, National City Commercial CreditCorporation (NC4). They normally arrange financing leases fortheir broadcast clients; the 'LTR' programme of long termrental will prove useful for those clients who are looking formore flexible arrangements to acquire assets that needupgrading or other technical services during the life of thelease. NC4 will provide the lease, with Bexel providing theservice and a route to market for the equipment at the end ofthe lease. The first of these deals has been entered into in2007 and we look forward to finding more.During the year it was determined that the Irvine facility wasno longer viable and it was relocated to the growing rentalmarket in Las Vegas in mid-year. That office has justsupported the very successful NBA All-Star games.2006 2005Revenue£27.2m£27.2mOperating profit*£1.7m£1.2mOperating margin*6.3%4.4%*Before significant items. Significant items are £nil (2005: £nil).Broadcast Services DivisionRental and technical support services, mainly for the broadcast marketDirectors' Report continuedNew Fiber Service VehicleSupports major live events and fiber construction projects (stadiums, OB trucks, live events).OSCARS Awards ShowFiber infrastructure for worldwide distribution of all TV signals; audio, video and editing equipmentfor "Red Carpet" coverage.NBC Today ShowPortable control room, cameras, audio, video and signal conversion products for all of NBC News OlympicGames coverage.Breeders' Cup RacingBBS One edit truck with EVS-AVID server tapeless edit workflow; HD super slo-mo cameras; specialty lenses; generalaudio and video support packages.NBA All-Star GameHD Flypack for 3D camera trials; BBS One edit truck with EVS-Avid server tapeless edit workflow;other audio and video support.Hell's Kitchen III Reality ShowOn-site control room and audio, with over 85 cameras in use, 24 hours a day forsix weeks.FIFA World Cup EVS server systems; telephoto and wide angle lenses; audio and video infrastructure supportequipment.NFL Super BowlBBS One edit truck; Fiber Optic infrastructure; HD specialty lenses; VTR's and monitors; audioand video processing equipment.12345678The Vitec Group1112345678Financial ReviewRevenueincreased by £27.4 million to £222.3 million, or14.1% in the year. Of this, £23.3 million (12.1%) was like-for-like, £2.1 million (1.2%) was due to adverse foreign exchangeand £6.2 million (3.2%) due to acquisitions (including £1.2million due to the Kata acquisition part way through 2005).Revenue growth was particularly strong in the UK and the restof Europe.Operating profit The table below sets out an analysis of thecauses of movements in operating profit before significantitems* between 2005 and 2006 and helps to explain theunderlying changes in the business during the year. Thevariances are based on management's best estimates and arenot a statutory presentation. Operating profit before significant items*2005-06 Variance Analysis (£m)Operating profit before significant items* was £25.2 million,£5.2 million or 26.0% greater than 2005. The Group'soperating profit* margin increased from 10.3% to 11.3%.Despite hedging its foreign exchange transaction exposure, theGroup suffered from the weaker US Dollar in the second half ofthe year. Before adverse foreign currency effects of £0.7million, the increase in profit was £5.9 million or 29.8%.Restructuring costs of £1.5 million (2005: £0.9 million) areincluded in significant items*. This is the last part of thepreviously announced restructuring plans within the BroadcastSystems division. No further costs will be charged and thecumulative total cost is £4.5 million, within the £4.0-5.0million originally forecast. There was an operating profit on thesale of a building of £0.4 million (2005: £0.3 million).Amortisation of acquired intangibles increased to £0.6million (2005: £0.2 million) due to the recent acquisitionsand has been included in significant items*.Net financial expensebefore significant items* totalled £1.1million (2005: £1.6 million) and reduced principally becauseof an increase in the IAS 19 pension credit to £0.5 million(2005: £0.2 million). Finance expenses included insignificant items* consisted of a £0.2 million gain (2005:£0.2 million loss) due to currency movements on loans notaccounted for as net investment hedges and £nil (2005:£0.3 million loss) arising from a reduction in the value offoreign exchange options due to foreign exchange marketvolatility.* Significant items comprise restructuring costs, goodwill impairment andnegative goodwill, amortisation of acquired intangibles, profit on sale ofproperty and fair value adjustments relating to volatile financial instruments.TaxationThe effective taxation rate on operating profit afternet finance expense but before significant items* was 40%(2005: 42%). The reduction in the tax rate is due principallyto progress made in rationalising the Group's legal structure.The Group's tax charge is relatively high because thesignificant majority of its profits arise in overseas high taxjurisdictions. We are targeting a rate of 38% in 2007.Acquisitionstotalled £15.8 million (2005: £4.6 million). TheGroup completed four acquisitions in 2006: Petrol, amanufacturer of high-end broadcast camera bags; ALCBroadcast Ltd (Autoscript), a leading provider of promptinghardware and software to the broadcast industry; TomcatGlobal Corporation, a leading US manufacturer of aluminiumtrusses for live events; and Bogen Imaging KK, which acquiredthe businesses of Imaging's two Japanese distributors.(1)Including acquisition expenses and net cash acquired.In addition, in May a minority stake was acquired in MediaNumerics Ltd, a company that has developed a digital networkproduct targeted at the live entertainment industry. Theplanned investment is £1.0 million, with £0.7 millioninvested in 2006.Cash flow and net debtNet debt increased to £18.9 million (2005: £5.4 million)mainly because of the two acquisitions we made towards theend of the year.12Annual Report 2006Directors' Report continued252015105020022003200420052006£ millionBusinessDivisionAcq date2006 acquisitionsPetrolBroadcast16/01/061.81.83.606SystemsBogenImaging & 01/06/060.9-0.9-Imaging KKStagingALCBroadcast31/10/065.02.07.007-09Broadcast LtdSystemsTomcatImaging &07/11/067.13.610.707-08Global CorpStagingEarnout payments for previous acquisitionsKataImaging &31/05/051.0n/an/a05-07(re 2005)StagingTotal acquisition cost in 200615.8n/an/aEarnoutperiodMaxpotentialcon-sideration£mMaxpotentialearnout£mAcq(1)con-sideration£mNet DebtFree Cash Flow(2)(2)Free cash flow is the cash generated from operations less interest, tax andcapital expenditure on property, plant & equipment and capitalised IT costs.35302520151052005Profit*2006Profit*Vol/MixPrice/CostOp. ExpsAcqsFX TranslFX Transact£20.0m£9.9m£2.2m(£6.7m)£0.5m(£0.2m)(£0.5m)£25.2mDespite higher profits, free cash flow reduced to £10.5 million(2005: £17.3 million) as a result of higher capital expenditure,increased working capital and higher tax payments.Cash generated from operations was £28.7 million (2005:£29.8 million). Capital expenditure and financial investmentstotalled £13.9 million (2005: £11.7 million), of which £4.1million (2005: £5.4 million) related to rental assets, partlyfinanced by the proceeds from rental asset disposals of £1.4million (2005: £1.2 million).Whilst working capital increased, as a percentage of revenue(before acquisitions) it was 22.0% (2005: 23.1%) at the yearend and averaged 23.1% in 2006 (2005: 25.9%). Inventoryincreased by £9.8 million to £41.1 million, reflecting higherrevenue, the new acquisitions and deliberately increasedinventory levels in Imaging and Camera Dynamics in order toreduce delivery lead times. As a result, inventory days increasedto 116 (2005: 99 days). Trade receivables were only slightlyhigher than 2005 at £31.2 million (2005: £30.5 million),despite higher revenue, which lowered debtor days to 51 (2005:57 days).Tax paid in 2006 of £5.5 million was significantly greater than2005 (£1.6 million). 2005 benefited from Italian tax creditsarising from the sale of the Alu business in 2003, as well as a£0.7 million UK tax rebate, whereas 2006 payments returnedto more normal levels.TreasuryFinancing, currency hedging and tax planning aremanaged centrally. Hedging activities are designed to protectprofits, not to speculate. Substantial changes to the financialstructure of the Group or treasury practice are referred to theBoard.The Group operates strict controls over all treasury transactionsinvolving dual signatures and appropriate authorisation limits. As in previous years, a portion of the transactions of subsidiaries inforeign currencies is hedged 12 months forward, as set out below.Some cover was also taken out for the first quarter of 2008.The Group does not hedge its foreign currency profits. Aproportion of the Group's foreign currency net assets are hedgedusing normal Group borrowings and forward contracts.Financing activitiesThe Group's principal financing facility is afive year £100 million committed multicurrency revolving loanagreement involving five banks, expiring on 24 January 2010.At the end of December, £26.3 million (2005: £17.2 million)of the facility was utilised.The average cost of borrowing for the year was 5.4% (2005:4.6%) reflecting the worldwide upward trend in interest rates.Net interest cost (consisting of net interest payable andcommitment fees) was £1.4 million (2005: £1.3 million). Netinterest cover (using operating profit before significant items*)remained high at 18 times (2005: 15 times). UK pensionsAt the end of 2003 the Group closed both of its UKdefined benefit schemes to new members. Since 2004 a Grouppersonal pension plan has been made available for newemployees with Standard Life. In November 2005 the definedbenefit schemes were merged. As at 31 December 2006 thenumber of active members in the merged scheme had reducedby 7% to 192 (2005: 206). Total scheme members are 662(2005: 662).A triennial actuarial valuation was undertaken as at 5 April2004. On the basis of the assumptions adopted, the value ofthe schemes' assets (£28.3 million) was equal to 94% of thevalue placed on the benefits that had accrued to members,allowing for expected future increases in salaries. As a result ofthe valuation, employers' and employees' contributions wereincreased. In November 2005 the Group contributed £2.1million to fund the deficit highlighted by the 2004 triennialvaluation and, also, to facilitate the merger of the two schemes.Following the funding actions set out above, the Group's UKdefined benefit pension liabilities under IAS 19 (amended) as at31 December 2006 were estimated by the Group's actuaries tobe £43.5 million (2005: £42.0 million) and the deficit £1.0million (2005: £3.1 million). The deficit has reduced principallybecause of an increase in the corporate bond interest rate usedto calculate the present value of future liabilities, partially offsetby an increase in liabilities arising from an assumption of greaterlongevity for scheme members. The principal assumptions usedfor recent valuations are set out below.Principal risks and uncertaintiesUS marketForty eight per cent of the Group's 2006 revenuewas from the Americas, principally the USA. This percentagehas reduced in recent years, mainly due to the weakness ofthe US Dollar, but the Group remains very susceptible to anymajor deterioration in demand for its products and servicesfrom US customers. It is difficult to mitigate this risk but theThe Vitec Group13Inflation rate3.0%2.8%2.8%Expected rate of increase in:Salaries5.0%4.8%4.8%Pensions and deferred pensions3.0%2.8%2.8%Discount rate5.2%4.8%5.3%Long term rates of returnEquities7.8%7.8%7.9%Bonds4.7%4.3%4.8%Property6.2%6.3%6.8%LongevityPensioners currently aged 6586/89(4)84/87(4)84/87(4)Non-pensioners currently aged 4588/91(4)86/89(4)86/89(4)(4)Male/female.200420052006Currency millionsUS Dollars sold for EurosForward contracts$9.61.23$22.91.22Options(3)$23.61.25$17.71.24US Dollars sold for SterlingForward contracts$17.31.85$15.51.78(3) Includes cylinder options, where the mid-point of range is taken.AverageRateDecember2005AverageRateDecember2006Group is seeking to reduce its dependence on the US byactively widening its sales and distribution activities,particularly into Asia.Foreign exchangeThe great majority of the Group's profits isearned in overseas currencies and is therefore subject totranslation risk if Sterling strengthens. To mitigate this, aproportion of the Group's foreign currency net assets arehedged using normal Group borrowings and forward contracts. Also, as many of the Group's businesses sell worldwide fromvarious countries of manufacture, so the Group is subject totransaction risk, particularly that of a weaker US Dollar. TheGroup partially hedges its major foreign exchange receipts byselling currency 12-18 months forward on a rolling basis. Inaddition the Group seeks to outsource parts, whereappropriate, to low-cost countries, which are frequently Dollar-denominated.Broadcast marketThe Group's two broadcast divisions are atrisk from a reduction in the capital expenditure requirementsof its broadcast customers and, in the US, their rentalrequirements. This dependence is changing as broadcastingmoves from TV to delivery by other modes such as internetand mobile services. To mitigate this, the Group markets itsproducts and services to all of these producers of broadcastvideo material, as well as to the religious, corporate andgovernment sectors.Low-cost competitionThe Group is at risk from low-costcompetitors who may sell similar products at lower prices,particularly for higher volume items such as photographictripods. While the Group also sources those cheaper productsfrom lower-cost countries, it combats this threat by patentingits technologies wherever possible and taking action againstany infringement, continuously innovating its products andemploying its significant marketing and distributioncapabilities.14Annual Report 2006Directors' Report continuedAlastair HewgillFinance DirectorThe Vitec Group15Delivering value to shareholdersControlling our working capitalKPI/MeasurePurposeDefinition/CalculationUnitDataSourceTargetongoingaverageValue2006 2005Key Performance Indicators (KPIs) and Other MeasuresTotalshareholderreturn (TSR)Monitor a measure ofinvestment return forshareholdersShare price growth plusdividends that have beendeclared, paid and reinvested inVitec's shares over the three yearperiod ended on 31 December2006 or 2005Share price: 30 trading dayaverage, over the preceding 30 daysaveragecompoundannualgrowth %Data-streamn/a20.4%14.8%Adjusted basicearnings pershareMonitor an indicator ofearnings performance Profit for the financial year aftertax, before discontinued operationsand significant items divided byweighted average number of sharesin issue during thefinancial year pence pershareAuditedaccountsn/a35.3p26.0pReturn onsalesProvide a measure ofoverall operationalefficiencyOperating profit beforesignificant items for the financialyear divided bytotal revenue forthe financial year% ofrevenueAuditedaccountsn/a11.3%10.3%Free cash flowMeasure cash flowgenerated before"corporate" actions (M&A,share issues, dividends,share buy-backs etc)Cash generated from operationsin the financial year afternetcapital expenditure, net interestand tax paid in the financial year£mAuditedaccountsn/a10.517.3Workingcapital %Provide an indication ofthe efficient utilisationof working capitalresourcesYear end: Net inventory plustrade receivables less tradepayables at the end of the financialyear divided bytotal revenue of thefinancial yearAverage: Average of net inventoryplustrade receivables lesstradepayables at the end of each monthof the financial year divided bytotal revenue of the financial yearExclude acquisitions in thefinancial year% ofrevenue% ofrevenueAuditedaccountsMonthlyman-agementaccounts25%25%22.0%23.1%23.1%25.9%Inventory daysProvide an indication ofhow long it takes onaverage for Vitec to turnits inventory into revenueand how ready we are tosupply customersNet inventory at the end of thefinancial year divided bytotalcost of sales of the financial yeartimesnumber of days in thefinancial yeardaysAuditedaccounts11011699Debtor daysProvide an indication ofhow long it takes onaverage for Vitec toreceive payment onaccounts receivableTrade receivables at the end ofthe financial year divided bytotal revenue of the financialyear timesnumber of days in thefinancial yeardaysAuditedaccounts55515716Annual Report 2006Directors' Report continuedInnovation and growthKPI/MeasurePurposeDefinition/CalculationUnitDataSourceTargetongoingaverageValue20062005Usage ofelectricityUsage ofgasUsage ofwaterMonitor electricity, gasand water consumptionAmount of electricity consumed inthe financial yearAmount of gas consumed in thefinancial yearAmount of water consumed in thefinancial yearExclude consumption fromacquisitions in the financial year;prior year amounts adjusted fromprevious Annual Report to includeacquisitions in that yearmegawatthoursmegawatthours'000cubicmetresInternalreportsfrom VitecBusinessUnitsn/a10,1806,91928.29,1257,09227.5(1)Number ofemployeeaccidents(2)(1)Restated to reflect more accurate information gathering.(2)Note: there were no fatal workplace injuries in 2006 or 2005.Track changes in healthand safety performanceas it directly impactshours worked peremployeeRate of non-fatal workplaceinjuries leading to absences fromwork of more than three days inthe financial yearrate per100,000employeesper yearInternalreportsfromVitecBusinessUnits10%reductionpa8351,040Revenue fromnew productsMeasures Vitec's abilityto grow by innovation% ofrevenueAuditedaccountsandinternalreportsfrom VitecBusinessUnits20%24.9%19.0%Revenue for each month of thefinancial year from productslaunched in the previous 36months divided bytotal productrevenue of the financial year times100%Products launched: includes newproducts and re-launched modifiedexisting productsNew products: includes brand newproducts and major upgrades, butnot restyling or replacementsLaunch date: date first externalrevenue achievedTotal product revenue: total Vitecrevenue excluding the BroadcastServices divisionExclude acquisitions in thecurrent financial yearLike-for-likerevenue growth Monitor volume growthexcluding effects ofacquisitions anddivestments%Auditedaccountsand, foracquiredbusinesses,monthlymanag-ementaccountsn/a10.9%3.9%Total revenue of the currentfinancial year excluding externalrevenue from acquired businessesdivided bytotal revenue of the priorfinancial year less1 times100%Acquired businesses: excludeexternal revenue for each month inthe current financial year with nocomparative amount in the samemonth of the prior financial yearMonitoring our environmental impactThe Group believes that its Key Performance Indicators and Other Measures must remain relevant to the needs of the businessand they will therefore be subject to refinement and change from time to time in accordance with the needs of the business.Key Performance Indicators (KPIs) and Other Measures continuedThe Vitec Group17Michael HarperBSc Eng, MScChairman, non-executive, British, aged 62, appointed to the Board on 14 June 2004, became Chairmanon 1 November 2004; Chairman of the Nominations Committee. Currently non-executive director of Ricardoplc, Umeco plc, BBA Group plc and Hamilton, Bermuda–Catlin Group Ltd. Formerly Chief Executive of Kiddeplc and held senior roles with Vickers plc.Gareth Rhys WilliamsBSc, MBAChief Executive, British, aged 45, appointed to the Board on 23 November 2001. Previously RegionalManaging Director, Central Europe, of BPB plc. Prior to this he held senior management positions with Rexamplc, responsible for their European film coating business and for NFI Electronics. Following initial training inIT at STC, he joined Lucas in a production management role before studying for his MBA at INSEAD. He is achartered mechanical and electrical engineer.Alastair HewgillBSc, ACMAFinance Director, British, aged 52, appointed to the Board on 14 May 2002. Previously he held seniorfinance positions within GKN plc over a period of 11 years, including Finance Director of GKN AerospaceDivision and Head of Corporate Finance for the group. Prior to that he was a management consultant withCoopers & Lybrand Deloitte, specialising in the industry and commerce sector.Sir David Bell MANon-executive, British, aged 60, appointed to the Board on 12 March 1997; member of the NominationsCommittee. Currently Chairman of the Financial Times Group, a director of Pearson plc, non-executiveChairman of the Windmill Partnership, Chairman of Common Purpose Europe and Chairman of Crisis, acharity for the homeless.Simon Beresford-WylieBANon-executive, independent, dual British and Australian, aged 47, appointed to the Board on 1 March 2006;member of the Audit Committee, the Nominations Committee and the Remuneration Committee. CurrentlyExecutive Vice President and General Manager of Networks at Nokia having joined in 1998 from Indianmobile operator Modi Telstra (Pte Ltd) where he was Chief Executive Officer. Prior to that he held variousmanagement positions within Telstra's Corporate and Government Business Unit.Nigel Moore FCANon-executive, independent, British, aged 62, appointed to the Board on 1 March 2004; Chairman of theAudit Committee, member of the Nominations Committee and of the Remuneration Committee. Formerly aLondon based partner of Ernst & Young. Currently Chairman of The TEG Group plc, a director ofIntelligentComms Ltd, Ascent Resources plc, Hochschild Mining plc and Production Services Network Ltd anda Trustee of the Butten Trust.Maria Richter BA, JDNon-executive, independent, dual American and Panamanian, aged 52, appointed to the Board on 28February 2007; member of the Audit Committee, the Nominations Committee and the RemunerationCommittee. Currently a director of Pro Mujer International, a non-executive director of The Pantry Inc andNational Grid plc and on the Private Equity Advisory Board of Republic Financial Corporation. Previously withMorgan Stanley for nine years, most recently as Managing Director of the Corporate Finance Retail Group.Prior to that she held senior positions with Salomon Brothers, Prudential Capital Corporation and PowerFunding Associates.Will WyattCBE, BANon-executive, independent, British, aged 65, appointed to the Board on 10 June 2002; Senior IndependentDirector; member of the Audit Committee and the Nominations Committee and Chairman of the RemunerationCommittee. Currently Chairman of Human Capital Ltd, Chairman of the University of the Arts London anddirector of Racing UK Ltd, Racing UK Holdings Ltd and Racecourse Media Services Ltd. Formerly ChiefExecutive, BBC Broadcast. Other posts within the BBC included Managing Director of Network Television.Roland PeateFCIS, ACMA SecretaryBoard of Directors18Annual Report 2006DirectorsThe directors during the whole of the year were Gareth RhysWilliams, Alastair Hewgill, Michael Harper, Sir David Bell, NigelMoore and Will Wyatt. Simon Beresford-Wylie was appointed tothe Board on 1 March 2006. John Potter, who in 2006completed just over seven years as a non-executive director,stood down following the Annual General Meeting in 2006.Maria Richter was appointed to the Board on 28 February2007. She was also appointed to the Audit Committee, theNominations Committee and the Remuneration Committee onthe same date.The remuneration of the directors is set out in theRemuneration Report on pages 21 to 27. Photographs andbiographies of the current directors are set out on page 17.Directors' shareholdingsExecutive directors are required to build up, over a period, ameaningful holding of shares in the Company. Other membersof the Executive Board are encouraged to do so. The value ofholdings by the executive directors at the end of 2006represented 107% and 85% (2005: 57% and 49%respectively) of the base salaries of Gareth Rhys Williams andAlastair Hewgill respectively (calculated by reference to themiddle market price of a share of The Vitec Group plc on 29December 2006, the last dealing day of 2006, which was528.5p).The table opposite sets out the beneficial interests of thosepersons who were directors at the end of the financial year.The interests in the Company's shares are shown as at 31December 2006 and 1 January 2006 or subsequent date ofappointment. Details of the directors' other interests in theCompany's shares are set out in the Remuneration Report onpages 21 to 27.Share capitalDetails of shares issued during the year are set out in Note 25to the Consolidated Accounts on page 70. An analysis ofshareholdings is shown on page 98. The middle market priceof a share of the Company on 29 December 2006, the lastday of dealing in 2006, together with the range during theyear, is also shown on page 98. For details of own shares heldsee Note m to the Company Accounts on page 94.Harris Associates4,657,56211.28Barclays PLC3,781,5429.16Prudential plc3,098,2757.50Baring Trustees (Guernsey) Limited2,698,3746.58Manfrotto SA2,478,3746.05Artisan Partners Limited Partnership2,272,5875.51Aberforth Partners LLP2,228,0695.40Hermes UK Small Companies Focus Fund(1),(2)2,056,2344.98AXA SA 2,054,6894.98Legal & General Group plc1,241,1553.00(1) Hermes Investment Management Limited notified the interest as agent for Hermes UK Small Companies Focus Fund. BT Pension Scheme Trustees Limited is theparent undertaking of Britel Fund Trustees Limited, which is the parent undertaking of Hermes Pensions Management Limited. Hermes Pensions Management isthe parent undertaking of Hermes Investment Management Limited (holding 0.91% of the Company's voting rights) and of Hermes Focus Asset ManagementLimited (holding 4.98% of the Company's voting rights). Hermes Investment Management Limited hold the voting rights under a standing proxy contained ininvestment management agreements with various underlying clients, which includes all the shares owned directly by BT Pension Scheme. Hermes Focus AssetManagement Limited hold the voting rights as General Partner under a standing proxy contained in limited partnership agreements with various limitedpartnerships.(2)Each of the following has an interest in the Company's shares by virtue of an interest in Hermes UK Small Companies Focus Fund: BT Pension Scheme TrusteesLimited, The Trustee of BT Pension Scheme(3); Royal Mail Pensions Trustees Limited and Possfund Custodian Trustee Limited; Devon County Council; The EssexCounty Council Pension Fund; Nottinghamshire County Council; Ram Trust Services Inc.(3)Has also disclosed interests totalling a further 377,370 shares in the Company; the aggregate interest is 5.90%.%Number ofvoting rightsDirectors' Report continued1 January 2006or subsequentdate ofappointment31 December2006(1)(1)(2)(2)Directors' shareholdingsChairmanMichael Harper30,00030,000Executive DirectorsGareth Rhys Williams60,63243,202Alastair Hewgill32,00224,607Non-executive DirectorsSir David Bell--Simon Beresford-Wylie2,000-Nigel Moore9,3955,695Will Wyatt675675134,704104,179(1) Includes interests of 14,172 shares by Gareth Rhys Williams and 10,004shares by Alastair Hewgill purchased in the market using funds supplied by thetwo directors and held by Halifax EES Trustees International Ltd, the trusteeused to hold shares in respect of awards made under the Deferred Bonus Plan.(2)Includes interests of 18,202 shares by Gareth Rhys Williams and 8,707shares by Alastair Hewgill purchased in the market, in respect of awardsmade under the Deferred Bonus Plan, using funds supplied by the twodirectors and held by Halifax EES Trustees International Ltd.Substantial shareholdingsAs at 20 March 2007, the Company had been notified of thefollowing interests of 3% or more of the voting rights of itsissued share capital:The Vitec GroupCommittees of the BoardThe Board has an Audit Committee, a Nominations Committeeand a Remuneration Committee. Details of those Committeesare contained in the Corporate Governance section of thisAnnual Report and in the Remuneration Report.Remuneration ReportThe Group's Remuneration Report is set out on pages 21to 27.Corporate Social Responsibility ReportThe Group's report on social, environmental and ethicalmatters is set out on pages 28 to 31. The Group has policiesin respect of the following key areas: risk and fraud,employment, whistleblowing, environment, human rights,community impact and involvement and relationships withsuppliers and customers and other stakeholders. It regularlyreviews those policies and revises them as and whennecessary.Corporate GovernanceThe Group's report on corporate governance is on pages 32to 38.DonationsDuring 2006 donations totalling £68,539 (2005: £52,896)were made by Group companies. In common with mostcompanies, the Group has limited resources and the amountof money available for charitable purposes varies from time totime. No donations were made to any political party. Forfurther information on donations refer to the section onCommunity impact and involvement set out in the CorporateSocial Responsibility Report on page 31.Payments to suppliersIt continues to be the Group's policy that the Company andindividual subsidiary companies are responsible for negotiatingterms and conditions under which suppliers operate. Onceagreed, payments to suppliers are made in accordance withthose terms and conditions, subject always to the supplierhaving complied with them. That policy will continue for thefinancial year ending 31 December 2007. For the financialyear ended 31 December 2006, the Group (including theacquisitions made during the year) paid its suppliers onaverage within 67 days (2005: 62 days (restated to reflectmore accurate information gathering)) of date of invoice.Annual General MeetingThe Annual General Meeting for 2007 will be held on Tuesday29 May 2007 at the offices of Financial Dynamics, HolbornGate, 26 Southampton Buildings, London WC2A 1PB.The Chairmen of the Board and of each of its Committees willbe in attendance at the Annual General Meeting to answerquestions from shareholders.The Company will again be making use of the electronic votingfacility provided by its registrars, Capita Registrars. The facilityhas been extended to include CREST voting for membersholding their shares in uncertificated form. For furtherinformation please refer to the section on Online services andelectronic voting set out on page 98.The business of the Annual General Meeting will include theconsideration by shareholders of the report and accounts forthe year ended 31 December 2006, the Remuneration Report,the proposed dividend, election of a director, re-election of adirector, the re-election of the auditors and the followingfurther items of business.Resolutions to reflect a number of changes in the lawresulting from the Companies Act 2006. Details are set out inthe notice of meeting.A resolution renewing the directors' authority to allot shares forcash, as if the pre-emption provisions of Section 89 of theCompanies Act 1985 did not apply. The first part of theresolution deals with the allotment of shares for cash under arights issue, giving power to make adjustments to deal withoverseas shareholders, fractions of shares and similar matters.The second part renews the power of the directors to allotshares for cash, limited to 5% of the issued share capital at 5March 2007. The authority will expire at the end of theCompany's next Annual General Meeting or, if earlier, on 29August 2008.The directors have no present intention of issuing or grantingrights over the unissued share capital, except in relation to theCompany's adopted employee share incentive arrangementsand no share issue will be made which will effectively alterthe control of the Company without prior approval of theshareholders in general meeting.Any shares held in treasury and used by the Company for thepurposes of or pursuant to the employee share schemesoperated by the Company will, so long as required underinstitutional guidelines, count towards the limits on thenumber of new shares that may be issued under the rules ofsuch employee share schemes.A resolution for a general authority for the Company to makemarket purchases of its own shares. Such a resolution wasfirst passed at the 1998 Annual General Meeting and hasbeen renewed by shareholders at each subsequent AnnualGeneral Meeting. The directors believe it is desirable to havethe power to make market purchases in the event of suitableopportunities arising. Accordingly, a resolution to again renewthe authority will be proposed at the Annual General Meeting.The authority to purchase shares would only be exercised ifthere was a resultant increase in earnings per share, and itwould be in the best interests of the Company. Should thedirectors exercise such authority, any shares so purchased maybe placed in treasury in accordance with The Companies(Acquisition of Own Shares)(Treasury Shares) Regulations2003, as amended and subsequently cancelled or transferredto satisfy awards arising under the Company's employee shareschemes or issued for cash as provided for by the Regulations.1920Annual Report 2006AuditorsThe auditors, KPMG Audit Plc, are willing to continue inoffice. A resolution will be put to the Annual General Meetingto reappoint the auditors and to authorise the Board to agreetheir remuneration.By order of the BoardRoland PeateSecretary5 March 2007Cautionary statementStatements made in the Directors' Reportcontain forward looking statements that are subject to riskfactors associated with, amongst other things, the economicand business circumstances occurring from time to time in thecountries and sectors in which the Group operates. It isbelieved that the expectations reflected in these statementsare reasonable but they may be affected by a wide range ofvariables which could cause actual results to differ materiallyfrom those currently anticipated.Directors' Report continuedThe Vitec GroupThis Report contains the information required under the 2003Combined Code on Corporate Governance and under theDirectors' Remuneration Report Regulations 2002. Aresolution to approve the Report will be proposed at the 2007Annual General Meeting. The Chairman of the RemunerationCommittee will be available to answer questions aboutdirectors' remuneration at the Annual General Meeting.Remuneration CommitteeAt the beginning of 2006, the Remuneration Committeecomprised Will Wyatt (Chairman of the Committee), NigelMoore and John Potter. On 1 March 2006 Mr Beresford-Wyliewas appointed a member of the Committee. On 24 May 2006John Potter retired as a director and member of theCommittee. Maria Richter became a member of theCommittee on her appointment to the Board on 28 February2007.Under its terms of reference, the Committee, on behalf of theBoard, determines the remuneration packages including bonusarrangements, participation in incentive schemes, pensioncontributions and all other benefits received by the executivedirectors. In the event of the termination of employment ofthose directors, the Committee would also determine anycompensation payments, after taking appropriate legal advice.The Committee also makes recommendations to the Board,within its terms of reference, on the framework of seniorexecutive remuneration including terms of service, paystructure, bonus and share incentive arrangements and otherbenefits.The Chairman, Michael Harper, the Chief Executive, GarethRhys Williams, and Sir David Bell attend meetings byinvitation of the Committee. The executive directors are notpresent when their remuneration is being considered. Theremuneration of the non-executive directors is determined bythe Board as a whole with the relevant non-executive directorabstaining when his or her remuneration is considered.Remuneration policyRemuneration packages are formulated to attract, retain andmotivate directors and senior executives of the qualityrequired, without being excessive, by reference to salary andbenefit surveys supplied by one or more external sources.During the year, the Committee received external advice fromWatson Wyatt Remuneration Consultants. Watson Wyatt alsoprovides pensions advice and services to the Company. Theytake into account the responsibilities involved andremuneration packages in comparable companies that havesimilar international operations.It is the Company's policy to make provision for pensions forexecutive directors through funded retirement benefitschemes. Up to the pensions earnings cap, retirementbenefits are provided through an approved retirement benefitscheme. In the light of the introduction of new pensionsregulations that came into force on 6 April 2006 (known as A-day), the pension arrangements for the executive directorswere reviewed and revised. For further information, see page24 and the table entitled Pensions related remuneration onpage 25.Executive directors' service contracts do not provide for pre-determined amounts of compensation in the event of earlytermination by the Company. The Committee's policy in theevent of early termination of employment is to mitigatecompensation to the fullest extent practicable. TheCommittee believes that it is beneficial for an executivedirector to take up one external non-executive appointment.Remuneration received by a director in respect of such anexternal appointment would be retained by the director.The Committee currently has no intention of amending theabove stated policy for 2007 and future years although it willbe reviewed from time to time. Chairman and the other non-executive directorsThe Chairman and the other non-executive directors do nothave service contracts but have letters of appointment. Theinitial period of their appointments is three years but theirappointments may, by mutual consent and with the approvalof the Nominations Committee and the Board, be extended fora further three years. In exceptional circumstancesappointments may be extended beyond six years by mutualconsent and with the approval of the Nominations Committeeand the Board if it is in the interests of the Group to do so.Executive directorsThe executive directors' remuneration comprises a basic salaryplus, under the Executive Bonus Scheme, Company and/orindividual performance-related elements of up to 100% ofsalary. If they achieve maximum performance in relation to theperformance-related elements of their remuneration, thoseelements would, in total, account for 50% of their total cashremuneration. Executive directors are required to defer aproportion of any annual bonus. The deferred bonus is held inthe form of shares in the Company.Executive directors also receive share incentives, companyvehicle or cash allowance, fuel where a company vehicle isprovided, medical health insurance, membership of theGroup's Pension Scheme, life assurance and additionally, forGareth Rhys Williams, contributions towards a permanenthealth arrangement.The notice period by the Company under the service contractsof the executive directors is 12 months. The normal retirementage of executive directors is 60.Gareth Rhys Williams, Chief Executive, aged 45, is employedunder a service contract dated 23 November 2001. The noticeperiod by the Company under his contract is 12 months;notice by the employee is six months. The Company may, inthe event of termination of employment, pay a sum in lieu ofnotice equal to 12 months' gross basic salary together withthe gross value of the other benefits that he is entitled toreceive under his service contract but excluding pensioncontributions and any bonus. The bonus arrangements for2007 will be calculated on the basis that up to 75% of hisbase salary relates to the achievement of operating profittargets and up to 25% of his base salary relates to specificpersonal objectives. The unexpired term of Gareth RhysWilliams' service contract, to his normal retirement date, is 15years.21Remuneration Report22Annual Report 2006Alastair Hewgill, Finance Director, aged 52, is employed undera service contract dated 17 April 2002. The notice period bythe Company under his contract is 12 months; notice by theemployee is six months. The Company may, in the event oftermination of employment, pay a sum in lieu of notice equalto 12 months' gross basic salary together with the gross valueof the other benefits that he is entitled to receive under hisservice contract but excluding pension contributions and anybonus. The bonus arrangements for 2007 will also becalculated on the basis that up to 75% of his base salaryrelates to the achievement of operating profit targets and upto 25% of his base salary relates to specific personalobjectives. The unexpired term of Alastair Hewgill's contract,to his normal retirement date, is eight years.Incentive arrangements An in-depth review of the Group's incentive arrangements forexecutive directors, other members of the Executive Board andall other participants in the Group's incentive arrangementswas carried out by Deloitte and Touche in early 2004. Thatreview resulted in the overall package of incentives, includingsalary, bonus scheme and share incentive arrangements beingrestructured. The new arrangements, agreed by theRemuneration Committee at the time, include the requirementfor executive directors to build up, over a period, a meaningfulholding of shares in the Company (see page 18 for furtherdetails), and also resulted in a new Long Term Incentive Planand a new Deferred Bonus Plan which were approved byshareholders at the Annual General Meeting in 2005. Thesenew schemes replaced the previous Long Term Incentive Planand Deferred Bonus Plan.The 2005 Long Term Incentive Plan was implemented andwas used in June 2005 and April 2006 to make awards to theexecutive directors and the other members of the ExecutiveBoard and also to the Group's key senior management belowthe level of the Executive Board as envisaged whenshareholder approval was received. The 2005 Deferred BonusPlan has been used in connection with bonuses paid in 2006arising from the Executive Bonus Scheme for 2005 and willbe used for future years.The performance conditions applicable to the Group's 2005Long Term Incentive Plan and to the matching element of the2005 Deferred Bonus Plan relate to total shareholder returnagainst a comparator group of companies of a similar size andwith similar geographical spread. Awards under the previousDeferred Bonus Plan were not subject to any performancetargets. The performance conditions under the Group's 2002Share Option Plans are expected to continue to relate toincreases in earnings per share.The combination of share incentives with performanceconditions using total shareholder return and increases inearnings per share is considered the most appropriate way ofaligning the interests of senior management with those ofshareholders.Monitoring and measuring of the performance conditions takeplace following the end of each year when the Company'sresults have been audited and again at the time of exercisesof options and awards.In line with the advice from Deloitte and Touche, a grant ofshare options was made in June 2005 under the 2002Unapproved Share Option Plan to the executive directors andthe other members of the Executive Board.A grant was made to one new member of the Executive Boardin April 2006. Further grants are planned to be made to thatgroup of executives every three years. The next grant isexpected to be in 2008.Non-executive directors are not eligible to participate in theCompany's share incentive schemes and consequently they donot hold any share options or other share incentives.This policy is reviewed at least annually and may be revisedfrom time to time. Invitations under the Group's sharesavearrangements are usually made annually and these areplanned to continue. Awards and grants take into account theoverall and flow limits advised by the Association of BritishInsurers. The Group currently has the following incentive schemes andplans under which awards are outstanding and further awardsare proposed.2002 Unapproved Share Option PlanExecutive directors and other senior employees are selected toreceive options over shares. Exercise of an option is subject togrowth in the Company's earnings per share, excludingexceptional or extraordinary items, exceeding the growth in theretail prices index over a performance period. The percentagegrowth over the retail prices index determines the proportionof the award that may be exercised. Options are exercisablebetween the third and the tenth anniversaries of their dates ofgrant.Performance condition:If the percentage growth in theearnings per share of the Company, after adjustments forexceptional or extraordinary items, exceeds the percentagegrowth in the retail prices index over the three yearperformance period by 2% per annum (the base targetthreshold), an option will become exercisable in respect ofone-third of the shares over which it is held. Full vesting takesplace when such growth over the performance period is 4%per annum or greater. A sliding scale operates for performancebetween the lower and upper thresholds. Options lapse if thebase target threshold is not achieved. There is no re-testing ofperformance.2002 Approved Share Option PlanThis plan is the same as the 2002 Unapproved Share OptionPlan and has the same performance condition. It is approvedby HM Revenue and Customs.2005 Long Term Incentive PlanUnder this plan, executive directors and other senioremployees are selected to receive awards over shares that vestin whole or in part depending on the satisfaction of aperformance condition related to Vitec's total shareholderreturn (TSR) over a period of three years, relative to acomparator group of other companies.Remuneration Report continuedThe Vitec GroupPerformance condition:If Vitec's TSR performance is at themedian of the comparator group, 35% of an award may vest.The full award may vest if Vitec's TSR performance is in thetop 20% of the comparator group. There is pro-rata straightline vesting between these two points. The RemunerationCommittee will also consider the underlying financialperformance of the Company before it confirms vesting.2005 Deferred Bonus PlanExecutive directors are required to defer a proportion (currently20%) of any cash bonuses in exchange for receiving a basicaward over shares in the Company with a value equivalent, atthe date of award, to the amount of the deferred bonus.However, subject to the discretion of the RemunerationCommittee, the executive may voluntarily decide to defer ahigher proportion up to a maximum of 100% of any bonus paidunder the annual bonus scheme. A basic award may, in normalcircumstances, be exercised by a participant after two years.However, if exercise is deferred until after three years and theexecutive remains employed by the Group, and subject to theperformance condition, the participant is entitled to receive amatching award of additional shares equal in number to thosecomprised in the basic award. Shares comprising basic awardsare purchased in the market and held in trust by Halifax EESTrustees International Ltduntil exercise. Dividends that wouldhave accrued to the deferred shares and the matching sharesover the three years will be taken into account whencalculating the final number of shares to vest.Performance conditions:If the executive remains inemployment for three years and if in that period the Company'sTSR relative to a comparator group of other companies is atmedian, or above, of the comparator group, the deferred shareswill be matched at the rate of:• one share for every three shares at median performance• one share for every one share within the top 20%performanceThere will be pro-rata straight line vesting between thesepoints.Sharesave Scheme and International Sharesave PlanThe Group operates a savings related share option scheme inthe UK and a similar international plan in respect of overseasemployees in certain countries. The scheme and plan are opento all the Group's employees, including the executive directors,in those geographical areas who have the necessary length ofservice. Under the scheme and plan, participants contract tosave a set amount each month in return for which they receivean option over a specified number of shares. At the end of thesavings period participants may exercise their options to buyshares in the Company using their savings. Exercise is notsubject to any performance condition.Five year share price performance 2002-2006Under the requirements of the Directors' Remuneration ReportRegulations 2002, the Company is required to include a graphshowing the Company's performance compared to anappropriate index. Set out below, the graph illustrates theCompany's annual total shareholder return (share price growthplus dividends that have been declared, paid and reinvested inthe Company's shares) relative to the FTSE IndustrialEngineering Index for the five year period 2002-2006,assuming an initial investment of £100. The IndustrialEngineering Index is the broad market index that includes theCompany and comprises comparable companies.Five year historical total shareholder return performance. Growth inthe value of a hypothetical £100 holding over five years.Comparison based on 30 trading day average values for both FTSEIndustrial Engineering Index and Vitec Group sharesThe following information has been audited.Directors' remunerationMichael Harper, Chairman, is currently paid a fee at the rate of£95,000 per annum. This was increased from £85,000 perannum on 1 July 2006. This fee is fixed for two years. On 1July 2006, the fee payable to the other non-executive directorswas increased from £27,500 per annum to £30,000 perannum. These fees are also fixed for two years. The previousincrease, from £25,000 per annum to £27,500 per annum,was on 1 July 2004. The next fee review for the non-executivedirectors will be on 1 July 2008. The chairmen of theRemuneration Committee and of the Audit Committee, WillWyatt and Nigel Moore respectively, receive an additional feefor their services as chairmen of those Committees. Will Wyattreceives an additional £4,000 per annum and Nigel Moorereceives £6,500 per annum. A fee of £2,000 is paid to theSenior Independent Director, Will Wyatt. The non-executivedirectors do not receive any other benefits from the Company.23The Vitec GroupFTSE IndustrialEngineering Index1401501601701801902002102202301301201101009080706050£31 Dec200131 Dec200231 Dec200331 Dec200431 Dec200531 Dec200624Annual Report 2006Gareth Rhys Williams, Chief Executive, currently receives anannual salary of £321,000, increased from £300,000 witheffect from 1 January 2007. Mr Rhys Williams is a member ofthe Vitec Group Pension Scheme and contributes 9% of hispensionable salary under that scheme. The accrual rate is onefortieth of the pensions earnings cap for each year ofpensionable service. Commencing on 6 April 2006 (A-day), MrRhys Williams was paid, with his salary, 40% of the amountby which his base salary exceeds the Company's notionalpensions earnings cap. Prior to this new arrangement theCompany made a contribution of 24% of his annual salary inexcess of the pensions earnings cap to his funded unapprovedretirement benefits scheme, in addition to a guaranteedpension related bonus of 16% of his annual salary in excessof the pensions earnings cap also paid to him.Gareth Rhys Williams is eligible for a performance-relatedbonus, based on Company performance and, when determinedby the Remuneration Committee, individual performance, ofup to 100% of base salary each year. In respect of 2006, hisbonus was calculated upon the Group's financial performanceand the achievement of personal objectives. Mr Rhys Williamswas paid a bonus of £281,250 in respect of 2006 (2005:£158,496).Alastair Hewgill, Finance Director, currently receives an annualsalary of £212,000, increased from £200,000 with effectfrom 1 January 2007. Mr Hewgill is a member of the VitecGroup Pension Scheme and contributes at the rate of 9% ofhis pensionable salary. Additionally, payments at the rate of25% of the difference between the amount of his base salaryand the pensions earnings cap are paid monthly by theCompany into Mr Hewgill's Group Personal Pension Plan. MrHewgill is eligible for a performance-related bonus based onCompany performance and, when determined by theRemuneration Committee, individual performance, of up to100% of base salary each year. Mr Hewgill was paid a bonusof £187,500 in respect of 2006 (2005: £108,039). During the year the highest paid director was Gareth RhysWilliams who received £680,941 (2005: £538,118(3)).Remuneration Report continuedThe Vitec Group25Details of the directors' remuneration for 2006 withcomparatives for 2005 are set out in the following tables:Director's nameChairmanMichael Harper90,00085,000------90,00085,000Executive DirectorsGareth Rhys Williams300,000285,00022,51122,496281,250158,49677,18072,126680,941538,118Alastair Hewgill200,000190,00013,58612,434187,500108,03923,76915,825424,855326,298Non-executive DirectorsSir David Bell28,75028,542------28,75028,542Simon Beresford-Wylie24,167-------24,167-Nigel Moore34,50032,500------34,50032,500John Potter13,75027,500------13,75027,500Will Wyatt33,00029,063------33,00029,063724,167677,60536,09734,930468,750266,535100,94987,9511,329,9631,067,021(1)The principal benefits are a company car, fuel, medical insurance and life assurance. In respect of Gareth Rhys Williams only, a cash payment of £16,408 in lieuof a company car and a contribution of £400 per month to a permanent health arrangement are included in the figures shown for 2006 benefits.(2)For the year 2005 Gareth Rhys Williams was paid a pension-related bonus of £28,854 calculated at 16% of his annual salary in excess of the pensions earningscap. During that year the Company made a contribution of 24% of his annual salary in excess of the pensions earnings cap to his funded unapproved retirementbenefits scheme (FURBS) (£43,272). That arrangement continued up to 5 April 2006. Commencing 6 April 2006 (A-day) contributions to Mr Rhys Williams'FURBS and his pension-related bonus both ceased and a salary supplement was paid to him instead - see page 24.For Alastair Hewgill, contributions beyond the earnings cap were made to a group personal pension plan. For 2006 those contributions totalled £23,769 (2005:£15,825).(3)Gareth Rhys Williams' total for 2005 has been restated to reflect the change in pension arrangements as described more fully in Note 2 above.Total2005£2006£Pensionrelatedremuneration2005£2006£Performancerelated annualbonus2005£2006£Benefits2005£2006£Salaries andfees2005£2006£Pensions related remunerationGareth Rhys Williams13,80110,7802,7302,6739,7079,42316,99214,690124,43390,90423,822Alastair Hewgill15,00811,9532,7322,8984,95510,95337,25729,124210,199153,68151,563This table should be read in conjunction with the information given on page 24.Increase intransfervalue overyear to 31Decembernetof membercontributions2006£Transfervalue ofaccrued pension at 31 December2005£2006£Transfer valueof the increasein accruedpension net ofmembercontributions2005£2006£2006£2006£2006£Accruedpension at31 December2005£Increase inaccrued pension(in excess ofprice inflation)during2005£Membercontributionstowardspension2005£(3)(1)(2)26Annual Report 2006Remuneration Report continuedDirectors' share optionsGareth Rhys WilliamsExecutive share options1996 UnapprovedSep 2002142,857 ---142,857 350-See Note 2Sep 2012 2002 UnapprovedJun 200595,000---95,000300-Jun 2008Jun 2015SAYE optionsNov 20022,451---2,451268-Jan 2008Jun 2008May 20034,266--- 4,266231-Jul 2008Dec 2008Alastair Hewgill2002 UnapprovedJun 200563,333---63,333300-Jun 2008Jun 2015SAYE optionsMay 20037,110---7,110231-Jul 2008Dec 2008315,017---315,017(1)In November 2001, a share price related cash bonus scheme was adopted under which an award equivalent to an option over 142,857 shares, representing 0.3%(2004: 0.3%) of the called up share capital of the Company, at a price of £3.50 per share, was made to Gareth Rhys Williams. This was replaced on 19September 2002 by an equivalent option over 142,857 shares at the same exercise price of £3.50 per share under the Rules of the (1996) Unapproved ExecutiveShare Option Scheme, the scheme used as the comparable for the cash bonus scheme. The total number of shares comprising the award were purchased in themarket in September 2002. These shares are being held in trust by Halifax EES Trustees International Ltd. Under the transitional arrangement, the cash bonusscheme ran in tandem with the share option and to the extent that the cash bonus was not triggered by Mr Rhys Williams prior to the first occasion upon which hebecame entitled to exercise the share option granted on 19 September 2002, the cash bonus scheme would lapse and would be replaced by the share option. Thecash bonus was not triggered and therefore the share option granted on 19 September 2002 has now replaced the share price related cash bonus award.(2)The performance condition having been satisfied, this option is now exercisable.Expiry dateDate fromwhichexercisableMarketprice atexercisedate(pence)Exerciseprice(pence)At 31December2006(shares)Optionsgrantedduringyear(shares)Optionsexercisedduringyear(shares)Optionslapsedduringyear(shares)At1 January2006(shares)Date ofgrantDirectors' long term incentivesAwards under the Long Term Incentive PlansGareth Rhys WilliamsMar 200350,485-50,485--257.5Mar 200437,455---37,455357.5Jun 200595,000---95,000300.0Apr 2006 ---57,14357,143525.0Alastair HewgillMar 200330,097-30,097--257.5Mar 200425,175---25,175357.5Jun 200563,333---63,333300.0Apr 2006---38,09538,095525.0301,545-80,58295,238316,201Market priceof a shareat the dateof award(pence)At31 December2006(shares)Awardsmadeduringthe year(shares)Awardsexercisedduringthe year(shares)Awardslapsedduringthe year(shares)Awards at1 January2006(shares)Date ofawardThe Vitec Group27Awards under theDeferred Bonus PlansGareth Rhys WilliamsJune 2003Basic7,7057,705---345437Matching13,75513,755---345437June 2005Basic10,497---10,497336Matching17,886---17,886336May 2006Core---3,6753,675505 Alastair HewgillJune 2003Basic1,6511,651---345437Matching2,9472,947---345437June 2005Basic7,056---7,056336Matching12,022---12,022336May 2006Core---2,9482,94850573,51926,058-6,62354,084(1)The share price at the end of the year and the highest and lowest prices during the year are shown in Shareholder Information and Financial Calendar on page 98.(2)Gareth Rhys Williams made a gain of £19,744 on the exercise of his June 2003 Deferred Bonus Plan Basic and Matching awards. The gain comprised £7,089 onthe Basic award, calculated as the difference between the market price at the date of award and the market price at the date of exercise, and a gain of £12,655on the Matching award, calculated at the market price on the whole award at the date of exercise.Alastair Hewgill made a gain of £4,230 on the exercise of his June 2003 Deferred Bonus Plan Basic and Matching awards. The gain comprised £1,519 on theBasic award, calculated as the difference between the market price at the date of award and the market price at the date of exercise, and a gain of £2,711 on theMatching award, calculated at the market price on the whole award at the date of exercise.The 21,460 and 4,598 shares were retained by Gareth Rhys Williams and Alastair Hewgill respectively and form part of their holdings shown in the Directors'shareholdings table on page 18.Market priceof a shareat the dateof award(pence)At31 December2006(shares)Awardsmadeduringthe year(shares)Awardsexercisedduringthe year(shares)Awardslapsedduringthe year(shares)Awards at1 January2006(shares)Date ofawardApproved by the Board of Directors on 5 March 2007 and signed on its behalf by:Roland PeateSecretaryMarketprice atexercisedate(pence)28Annual Report 2006This is the Group's fifth Corporate Social ResponsibilityReport, the first was in the Report and Accounts for 2002.Although no corporate social responsibility report waspublished for the years prior to 2002, the Group has alwaystaken a caring and considerate approach to social,environmental and ethical matters throughout its operationsworldwide and this has continued, and will continue, into thefuture. The Group regards compliance with all relevant lawsand guidelines as important and socially responsible. TheGroup's website is compliant with Part III of the DisabilityDiscrimination Act 1995, which covers access to goods andservices. For full details refer to the Accessibility Statementon the website (http://www.vitecgroup.com/accessibility.aspx).It is planned to continue the development and promotionthroughout the Group of its social responsibility and theinclusion of an environmental report in the future.The heads of each of the Group's operations are responsible atlocal level for complying with the relevant environmentalregulations in all the geographical areas in which they operate.As part of the Group's system of internal control and riskmanagement process, reporting to the Board takes placethrough the Group's Chief Executive who has ultimateresponsibility for such matters.Overall the Group continues to believe that it has limitedenvironmental impact. However, we recognise that we continueto have a responsibility to understand the impact that ouractivities have at local, national and global level. These havebeen monitored and assessed locally and solutions have beenimplemented as appropriate according to best practice, locallegal and other requirements. Over the last few years we havedeveloped and implemented a more consistent approach toadopt sound policies throughout all our operations. As part ofthis implementation programme we continue to put in placemore systems and procedures for identifying, measuring,reviewing and reporting on social, environmental and ethicalmatters. Group policies are in place in the key areas ofemployment, environment, human rights, community impactand involvement and relationships with suppliers, customersand other stakeholders. These policies have been implementedat the centre and within each operating entity. Specificresponsibility for such matters has been assigned todesignated employees. Reviews by local management takeplace at each Group location and reports are made of themajor risks in these areas. These reports identify risks, thecurrent measures being taken to control them and the stepsbeing taken to eradicate or minimise their effect in the future.The compilation of statistics commenced in 2002 and theyare being used for reporting purposes and to monitorimprovements.1. EmploymentPolicyTo comply with all relevant legislation and codes of practicerelating to employment, health and safety and equalopportunities. To provide good quality working environmentsand facilities for employees and training and developmentappropriate to each of their roles; not to discriminate in anyway; to take a flexible approach towards family responsibilitiesto assist them in establishing an appropriate work/life balance;to provide a competitive range of quality employee benefits. Tokeep the workforce informed of major events anddevelopments within the Group.ActionsEmployment policies throughout the Group already reflect thepolicy set out above.We continue to recognise the importance of involvement,motivation, training and development of our employees at alllevels. The importance of good communication and workingrelationships is actively encouraged. The Group's website continues to include micrositescontaining annual reports and accounts. It also provides agallery containing photographs of Group products and aFactsheet giving key information about the Group. The aim ofthe website as a whole is to help investors, potential investorsand employees to better understand the Group and view thewide variety of products available from Group companies.Our policy is to keep employees informed on matters relatingto their employment and on financial and economic factorsaffecting the Group. We do this through managementbriefings by the Group Chief Executive, the Group FinanceDirector and divisional heads, management conferences,through the Group's website and by internal distribution ofpress releases and internal announcements. A number of partsof the Group each have their own intranets and work is takingplace to create an intranet for the whole Group. Combiningthe various intranets will enable our employees to gain betteraccess to information and an improved understanding of ourGroup and individual business objectives and their roles inachieving them. Building and developing the skills,competencies, motivation and teamwork of our people is keyto achieving our business objectives and to ensuring bestpractices throughout the Group.Pensions briefings, consultations and, for 2007, a pre-retirement seminar are given to employees in the UK by theGroup Company Secretary and by the pensions administrators,Watson Wyatt, usually in conjunction with an externalindependent financial adviser.The Executive Board, the other senior executives of the Group,the Chief Executive and the Finance Director, meet on aregular basis. In addition, the senior managements of theGroup's operating units employ a wide variety of consultationand briefing methods, including conferences, jointcommittees, project-specific teams and briefing groups.The Group operates in many countries and our employmentpolicies, which are designed to meet local conditions andrequirements, are established on the basis of the best practicein each country in which we operate. The Group's widegeographical spread provides some opportunities foremployees to work either short term or on secondment forlonger periods of time at the Group's various locations.Encouragement is given to all employees both in the UK andoverseas to participate in the Group's savings related shareoption schemes under which options over the Company'sshares are granted to employees who enter into contracts withan external regulated savings carrier to save agreed amountsCorporate Social Responsibility ReportThe Vitec Groupeach month. Presentations are made by the Group CompanySecretary to employees both in the UK and overseas on theGroup's Sharesave Scheme and International Sharesave Plan.Invitations under the UK and the International schemes havebeen made each year since the schemes were first introducedin 1984.Ability and aptitude continue to be the determining factors inthe selection, training, career development and promotion ofall employees. We understand our responsibility as employersunder the Disability Discrimination Act 1995 and we do notdiscriminate against disabled people. If an employee is, orbecomes, disabled during his or her period of employment, wewill, if necessary and to the extent possible, adapt the workenvironment to enable the employee to continue in his or hercurrent position or retrain the employee for duties suited tothat employee's abilities following disablement. It continues tobe the Group's policy to consider applications for employmentfrom disabled people on the same basis as other potentialemployees.In the UK we have recently adopted the ACAS disciplinary andgrievance code of practice. Where relevant to the employmentrelationship we comply with the Human Rights Act in the UKwhich includes such matters as the right to a fair hearing, theright to respect for private and family life, the right of freedomof thought, conscience and religion, to freedom of expression,to assembly and association and to prohibition ofdiscrimination.Health and safetyHealth and safety training is part of the induction process fornew employees. Specific training is given, where relevant, forforklift truck, crane and hoist operation and bottle gas usageas well as fire safety and first aid training. Additional trainingis given where an employee has a specific role such asresponsibility for administering first aid.Risk assessments were introduced during 2003 in variousparts of the Group and these are in place throughout theGroup. Assessments are carried out on a regular basis and alsowhen new equipment or machinery is acquired or newprocesses are introduced.Our operations in Italy and Camera Dynamics,Communications and Anton/Bauer have Safety Committeeswith the aim of identifying potential risks facing employeesand developing solutions to mitigate risks, including trainingemployees to deal with and avoid risks. They have strongsafety records.Following the formalisation of the recording and reporting ofaccidents and related lost time statistics in 2003, theseprocedures form the basis of monthly reporting to theExecutive Board and to the Board. The refinement of thegathering and reporting of accident statistics by eachoperating unit is an ongoing process. Accident statisticscontinue to be reported to, and monitored by, the ExecutiveBoard and the Board. For information on the Group'sworkplace injuries and any fatalities please refer to the KeyPerformance Indicators and Other Measures on page 16 ofthis Annual Report.2. EnvironmentPolicyTo promote the reduction of the use of energy and waterthroughout the Group with the aim of reducing the environmentalimpacts of its operations, activities, products and services. Theapproach taken to achieve this common aim varies throughoutthe Group depending on the nature of the work carried out at thebusiness unit and the stage of development of a business unit'senergy and environmental management systems. Water, gas andelectricity usage is set out on page 16 under Key PerformanceIndicators and Other Measures.Within the framework of an environmental managementsystem at each location there are three main principles:• To identify materials, processes, products and wastes thatcause or may cause pollution and to implement measures toavoid, reduce or control pollution where technically andeconomically viable.• To comply with applicable environmental laws, regulations,codes of practice and other environmental requirements.To achieve such compliance we develop and maintainmanagement systems for identifying relevant requirementsand for monitoring the performance of related activities.• To continually enhance and improve our environmentalmanagement systems to ensure they are appropriate andeffective.ActionsThe recent key environmental actions taken are as follows:Imaging & StagingThe major improvement during 2005 was the introduction inour Italian subsidiary, Manfrotto, of environmentally friendlyde-greasing of components by using automatic washing withhot water in place of using compressed air to cleancomponents prior to assembly. This reduced repetitive operatoractions and noise levels. The water used in the process has nodetergent added. The metal filings cleaned from thecomponents fall away by means of gravity and are collectedand recycled. The oil cleaned from the components is alsocollected and recycled. The water is used for a number ofcleaning cycles until it becomes dirty and it is then disposedof by an approved disposal organisation.During 2006 a variety of environmental activities took place.These included:• Training. Internal campaign to reduce emissions and wasteby signage in the offices and factories. Environmentalawareness training also took place. In addition, a wastemanagement compliance course was attended by relevantemployees.• Wider use of outsourced advisers and services. Certificationin environment and safety to ISO 14001 standards in sevenplants is being sought. Further activities being undertakenare oil tank testing in five plants, analysis for atmosphericemissions in two plants, Waste Electrical and ElectronicEquipment (WEEE) and Restriction of Use of Certain2930Annual Report 2006Corporate Social Responsibility Report continuedHazardous Substances (RoHS) compliance in ten plants,washing machine to reduce compressed air cleaning andtube cleaning equipment in one plant.• Improved dust collection in production areas in two plants,outdoor disposal area in accordance with ISO 14001 in fiveplants, commencement of environmental analysis in twoplants and waste disposal in accordance with ISO 14001 inten plants.Tomcat and Brilliant Stages. During the latter part of 2006the Vitec Group acquired Tomcat Global Corporation.Information about its businesses is being gathered and will beavailable for the next annual report.Broadcast SystemsWithin Camera Dynamics the following action has been taken:• Waste. All waste contracts have been migrated to a singlewaste management provider. All waste is segregated inaccordance with ISO 14001 recommendations. CameraDynamics is a government registered waste producermanaging waste through fully traceable and auditable routesto government registered disposal sites. This has resulted inrenovation of the waste collection area and receptacles,optimising segregation and environmental benefits whilstminimising cost through effective waste segregation andhandling.• Energy. An assessment of initial energy saving opportunitiesat Camera Dynamics was undertaken by the Carbon Trust.The purpose of the assessment was to form the foundationof a building energy management system. The assessmentcovered gas and electricity consumption, energyperformance indicators and energy management diagnostics.It made financial calculations of the cost of heating in theproduction and assembly areas and the cost of lighting inthe offices including the likely cost savings if specific actionwas taken. The report arising from the assessment was usedto target areas where improvements could be made. Energysaving improvements have now been made in lighting by theuse of passive infrared detectors and in heating by installingmore efficient gas-fired boilers.• Drinking water. Moved from the use of bottle-fed to mains-fed systems thereby reducing the cost and need for weeklydelivery and collection of bottles.• Packaging. The packaging for a number of companieswithin Camera Dynamics has been merged and standardised.This has reduced the wide variety of packaging and itsoverall cost.• Regulatory. During 2005, Drake and Vinten in the UKcontinued implementation of the EU Directive on WEEEstarted during 2004. The UK manufacturing facilities arenow compliant in the control and management of wastearising from the production process and facilities waste.Management of disposal of electrical and electronic waste isnow WEEE compliant.During 2006 work took place to ensure compliance withRoHS by the due date. This involved analysing in-house andthird party supplied components to ensure they did notcontain restricted levels of specified materials harmful to theenvironment. Close monitoring took place to ensurecompliance with the directive by the appropriateimplementation dates, depending on the categorisation ofthe products.In addition, Green Procurement, a standard more extensivethan RoHS specified by a number of major electronicsgroups, is being introduced. Communications in the USA,although not covered by EU legislation, is taking the sameresponsible approach to waste electrical and electronicequipment and to restricting its use of certain hazardoussubstances such as solder containing lead.• Travel. The improvement of communications links acrossthe Group is taking place with the aim of reducing theamount of travel between locations.Anton/Bauer continues to be an active member of the batteryrecycling scheme in conjunction with the RechargeableBattery Recycling Corporation (RBRC). Anton/Bauer payslicensing fees to the RBRC, a non-profit public serviceorganisation created to promote the recycling of portablebatteries, and places the RBRC seal on its products. In 2006Anton/Bauer forwarded to RBRC more than 44,000 (up from31,000 in 2005) pounds of nickel cadmium, lithium ion andnickel metal hydride batteries returned to the company forrecycling. Anton/Bauer is also a member of the PRBA(Portable Recharging Battery Association) whose mission is toprovide leadership in obtaining consistent domestic andinternational solutions to environmental and other selectedissues affecting the use, recycling and disposal of smallsealed rechargeable batteries. Anton/Bauer uses energy savinglight bulbs in all areas and lead free bulbs with low mercurycontent. They also continue to recycle cardboard and tonercartridges, and all heating systems use timers for energysaving during non-working hours.The Communications companies are aware of theirenvironmental responsibility. They encourage and have putinto action a number of initiatives including recycling of tonercartridges, cardboard, paper, printed circuit boards andredundant electronic equipment. They are now RoHScompliant and, consequently, all lead solder has been removedfrom their processes. The quantity of packaging used by thebusinesses has been reduced by consolidating shipmentswherever possible into single boxes rather than a number ofseparate boxes within a larger box. In the USA based part ofthe operation there is a planned change of location from anenergy inefficient building to one that is more energy efficient.It is expected that one result of this relocation will be areduction in energy usage.Autoscript. During the latter part of 2006 the Vitec Groupacquired ALC Broadcast Limited. Information about its sitesis being gathered and will be available for the next annualreport.Broadcast ServicesThe Broadcast Services division is a rental operation with itsmain office in Burbank, California. As a rental business itsscope for reducing emissions and usage of scarce resourcesthat are already low is very limited. However, it participates inlocal printer and toner cartridge recycling programmes. It alsoThe Vitec Group31participates in a programme for the controlled disposal ofused electronic equipment containing hazardous materialssuch as computers and computer screens. Obsolete mobilephones are donated to school recycling programmes.During 2006, a facility efficiency consultant assessed theBroadcast Services division's head office in Burbank to giveadvice on reducing electricity, gas and water usage. Theresult was that the consultant had no substantive costeffective suggestions and commented that they seemed tohave things in order.During 2006, the division began a programme of replacing itsfleet of 28 delivery vehicles much more often than in pastyears. The benefits of this programme are reduced fuel andmaintenance costs and improved fuel efficiency.3. Human rightsPolicyTo comply with the laws and customs of each country in whichwe operate. Not to use child labour. Not to discriminate in anyway and to give equal opportunities to all workers.ActionsThe above policy has been part of the Group's approach formany years. The Group's operating companies are required toinclude it as part of their employee policies and to complywith it and with the Human Rights Act in the UK.4. Community impact and involvementPolicyTo contribute to local worthwhile causes and charities and toensure that the Group's operations cause minimal negativeimpact within the community.ActionsThe Vitec Group and divisional charity committees review allwritten requests for donations and decide on the level ofdonations and the charities to which donations are made.This policy was reviewed by the Board during the year andnew initiatives geared more towards helping local communitiesand projects were implemented in the UK, Italy and the USA. Staff at many of the Group's locations spend time onfundraising events, raffles etc to raise money for Macmillanand other worthwhile organisations. They are also encouragedto spend time working for their local communities.During 2006 donations totalling £68,539 (2005: £52,896)were made by Group companies. These were again madeprimarily to children's, cancer, police, fire brigade, drugrehabilitation and other similar charities. Two major projects sponsored by Manfrotto (and included inthe donations stated above) were the National Geographic AllRoads Photography Program and the Children Project 2006.The National Geographic All Roads Photography Program, ofwhich Manfrotto is the main sponsor, recognises and supportstalented photographic storytellers from around the world whoare documenting their changing cultures and communitiesthrough photography. The program provides a forum forphotographers to showcase their work to a global audience.Awardees have received cash from the All Roads PhotographyProgram and equipment from Manfrotto. For more informationand to see the 2006 awardees visitwww.nationalgeographic.com/allroads/photography.html.The Children Project 2006 aims to improve the education andself sufficiency of underprivileged children around the world.In Ethiopia, eight physiotherapists for children with mobilityproblems were financed by Manfrotto's donation. In Senegalthere have been donations towards the rebuilding of a schoolwhich was damaged by fire. In Tanzania, donations have beenmade towards the building of a well. In Ecuador, donationswent towards the building of four houses, two schoolclassrooms and the purchase of a minibus and some sewingmachines so that a trade can be learned. In Kazakhstan,donations went towards the building of a new dormitory in theArca village orphanage. In Angola, a donation was made tothe mission of the Capuchin friars who operate a welcomecentre. In Romania, donations were made to the priest ofSanta Croce of Bassano del Grappa who runs a welcomecentre for children living on the streets. 5. Relationships with suppliers, customers andother stakeholdersPolicyThe Group recognises the obligations it has towards theparties with whom it has business and other dealings such asits customers, shareholders, employees, suppliers andadvisers. Dealings with those groups of people depend uponthe honesty, integrity and enthusiasm of its employees andevery effort is made to ensure that a high standard ofexpertise and business principles is maintained in suchdealings. Where appropriate, training is given to maintain andto raise the standards.ActionsAs stated in the Directors' Report, the Group's policy withsuppliers is that individual subsidiary companies areresponsible for negotiating terms and conditions under whichsuppliers operate. Once agreed, payments to suppliers aremade in accordance with those terms and conditions, subjectalways to the supplier having complied with them. That policyhas been in place for a number of years and will continue forthe foreseeable future. We continue to review and take actionwhere appropriate to ensure the reliable and consistentsources of quality materials from which our products aremade.In all our dealings, honesty and integrity continue to beparamount. The Group's brands are a highly valuable assetand every effort is made to enhance their reputation for highquality, service and reliability.32Annual Report 2006The Listing Rules require a company to include in its annualreport and accounts a statement of how it has applied themain and supporting principles set out in the 2003 CombinedCode (the 'Code'). The Listing Rules also require a company toinclude a statement as to whether or not it has compliedthroughout the accounting period with the Code provisions. Acompany that has not complied with the Code provisions, orcomplied with only some of the Code provisions or (in the caseof provisions whose requirements are of a continuing nature)complied for only part of an accounting period, must specifythe Code provisions with which it has not complied, and(where relevant) for what part of the period such non-compliance continued, and give reasons for such non-compliance.Statement of complianceThe Board considers that it has complied with the Codethroughout the year ended 31 December 2006. The Companyregularly reviews and revises its procedures, as necessary, totake account of the requirements of the Code.The BoardThe Board met six times during the year and there is a formalschedule of matters and levels of authority which aredelegated to the executive directors, all other matters andpowers being reserved to the Board or to its Committees.Throughout the year the Board comprised two executivedirectors and a minimum of five non-executive directors. Thenumber of non-executive directors increased to six for a shorttime as a result of the appointment of Mr Beresford-Wylie on1 March 2006 but reduced to five following the retirement ofJohn Potter immediately after the Annual General Meeting.Gareth Rhys Williams was a director and the Chief Executivethroughout the year. Alastair Hewgill was the Finance Directorthroughout the year. During 2006 all the directors attended allthe Board meetings except for Sir David Bell and MrBeresford-Wylie. Sir David Bell was unable to attend theAugust and November Board meetings due to unavoidableabsences, one of which was to attend a funeral. Mr Beresford-Wylie was unable to attend the December meeting due tourgent business commitments.Maria Richter was appointed a director on 28 February 2007.She was also appointed to the Audit Committee, NominationsCommittee and Remuneration Committee.Sir David Bell, who completes ten years as a non-executivedirector in March 2007, has indicated that he will stand downas a director immediately following the Annual GeneralMeeting in May 2007.The directors bring independent character and judgement tobear on strategic matters, the performance of the Group, theadequacy of resources and standards of conduct. The roles ofthe Chairman (who is non-executive) and of the ChiefExecutive are separate and they each have a clear writtendivision of responsibilities approved by the Board.Directors, having notified the Chairman, are able to takeindependent professional advice at the Company's expense infurtherance of their duties. All new directors are given anextensive introduction to the Group, including meeting withsenior executives and visiting the Group's principal operationsboth in the UK and overseas. All directors have access to theadvice and services of the Group Company Secretary.Ongoing training for new directors and existing directors isavailable at the request of the director. Each director receivesdetails of relevant training and development courses from boththe Secretary and from external bodies such as KPMG andWatson Wyatt. The requirement for training is regularlydiscussed at meetings of the Board and of its Committees.The papers supplied for consideration by the Board areprovided on the basis that it gives all Board membersadequate time to read and, where appropriate, ask questionsprior to the meeting about the information supplied. Theinformation includes budgets, strategy papers, reviews of theGroup's financial position and operating performance andannual and interim reports and accounts. Further informationis supplied from time to time as and when requested by theBoard.The Board has an Audit Committee, a Nominations Committeeand a Remuneration Committee. Each Committee has formalterms of reference which may be viewed on the Company'swebsite and are available by request from the CompanySecretary. The terms of reference and the effectiveness of theBoard and of each Committee are regularly reviewed andchanges made where necessary. Any issues arising from thereviews of effectiveness are summarised and tabled atsubsequent Board meetings at which they are discussed andaction plans agreed.Performance evaluations of each of the directors took placeduring the year. In the case of the executive directors thisevaluation takes place by the non-executive directors regularlythroughout the year against achievement of specificobjectives. Evaluation of the Chairman was carried out by theSenior Independent Director. Evaluation of each of the othernon-executive directors was carried out by the Chairman. Eachevaluation was carried out by using written questionnaires andthe results were discussed individually with each of therelevant non-executive directors. Evaluations of theeffectiveness of each of the Committees was also carried outby the relevant Committee members. Issues arising from theevaluations were discussed and, where relevant, action wastaken. Similar evaluations are planned to take place each yearin the future.Audit CommitteeThe Committee is chaired by Nigel Moore. The other membersof the Committee are Simon Beresford-Wylie, Maria Richterand Will Wyatt. During the year the following changes tookplace. Simon Beresford-Wylie became a member of theCommittee on 1 March 2006, the same day he was appointeda director. Sir David Bell stepped down as a member of theCommittee also on 1 March 2006. John Potter retired as adirector and member of the Committee on 24 May 2006.Maria Richter became a member of the Committee on herappointment to the Board on 28 February 2007. Eachmember of the Committee is independent. During 2006 theCommittee met three times and all the members attended allthe Committee meetings. The Company's external auditorsKPMG are invited to attend meetings of the Committee on aCorporate GovernanceThe Vitec Groupregular basis and during 2006 they attended all threemeetings; two in part and one for the whole of the meeting. Attwo of the meetings the executive directors were not presentfor part of the meeting so that members of the Committeecould meet with the external auditors in private. The practiceof the Committee meeting in private with the external auditorswill continue in the future.Duties of the Committee:Financial ReportingMonitoring the integrity of the financial statements of theCompany, including its annual and interim reports, preliminaryresults announcements and any other formal announcementrelating to its financial performance, reviewing significantfinancial reporting issues and judgements which they contain.The annual financial statements of the pension funds were notreviewed by the Board as a whole.Internal Controls and Risk Management SystemsKeeping under review the effectiveness of the Company'sinternal financial controls and risk management systems; andreviewing the statements to be included in the annual reportconcerning internal controls and risk management.WhistleblowingReviewing the Company's arrangements for its employees toraise concerns, in confidence, about possible wrongdoing infinancial reporting or other matters. The Committee ensuresthat these arrangements allow proportionate and independentinvestigation of such matters and appropriate follow up action.Internal AuditThe Company does not have its own internal audit function.However, the need for such a function is regularly reviewedand considered by the Committee. (The use of third partyaudit consultants is explained more fully in the finalparagraph of Internal Control and Risk Management).External AuditConsidering and making recommendations to the Board inrelation to the appointment, re-appointment and removal ofthe Company's external auditors. The Committee oversees theselection process for new auditors and, if the auditors resign,the Committee is required to investigate the issues leading tothis and decide whether any action is required.Overseeing the relationship with the external auditorsincluding, but not limited to:• approving its remuneration, whether fees for audit or non-audit services and checking that the level of fees isappropriate to enable an adequate audit to be conducted;• approving its terms of engagement, including anyengagement letter issued at the start of each audit and thescope of the audit;• assessing annually its independence and objectivity takinginto account relevant professional and regulatoryrequirements and the relationship with the auditors as awhole, including the provision of any non-audit services;• satisfying itself that there are no relationships (such asfamily, employment, investment, financial or business)between the auditors and the Company (other than in theordinary course of business);• agreeing with the Board a policy on the employment offormer employees of the Company's auditors, thenmonitoring the implementation of this policy;• monitoring the auditors' compliance with relevant ethicaland professional guidance on the rotation of audit partners,the level of fees paid by the Company compared to theoverall fee income of the firm, office and partner and otherrelated requirements;• assessing annually the external auditors' qualifications,expertise and resources and the effectiveness of the auditprocess which shall include a report from the externalauditors on their own internal quality procedures;• meeting regularly with the external auditors, including at theplanning stage before the audit and after the audit at thereporting stage. The Committee meets the external auditorsat least once a year, without executive directors beingpresent, to discuss their remit and any issues arising fromthe audit;• reviewing and approving the annual audit plan and ensuringthat it is consistent with the scope of the audit engagement;• reviewing the findings of the audit with the externalauditors. This includes but is not limited to the following;• a discussion of any major issues that arose during theaudit,• accounting and audit judgements, and• levels of errors identified during the audit.• reviewing the effectiveness of the audit and reviewing anyrepresentation letter requested by the external auditorsbefore it is signed by management;• reviewing the management letter and management'sresponse to the auditors' findings and recommendations;• reviewing and approving the policy on the supply of non-audit services by the external auditors, taking into accountany relevant ethical guidance on the matter.A policy on the use of the external auditors for non-auditservices has been in place for a number of years. The use ofthe external auditors is subject generally to competitivenessand demonstrable competence in the relevant areas. Thepolicy is divided into three parts:• Work where use of the external auditors is deemedappropriate. This type of work includes corporate tax adviceand planning, tax compliance, accounting advice in relationto acquisitions, dividend planning, divestments, corporate3334Annual Report 2006governance/risk management advice and defined audit-related work and regulatory reporting.• Work requiring Audit Committee clearance or refinement ofVitec policy. The type of work includes reporting accountingservices, compliance services (including fraud and moneylaundering), transaction work, valuation and actuarialservices, fairness opinions and contribution in kind reports,personal tax services, management consultancy, HR orrecruitment services, remuneration consultancy and legal orother professional services relating to an audit.• Work from which the external auditors are excluded. Thisincludes internal accounting or other internal financialservices, design development or implementation of financialinformation or internal control systems, internal auditservices or their outsourcing, forensic accounting services,executive or management roles and functions, ITconsultancy, litigation support services and other financialservices such as broker, financial adviser or investmentbanking services.Reporting Responsibilities• The Committee Chairman reports to the Board on itsproceedings after each meeting on all matters within itsduties and responsibilities.• The Committee makes whatever recommendations to theBoard it deems appropriate on any area within its remitwhere action or improvement is needed.Other ResponsibilitiesThe Committee has access to sufficient resources in order tocarry out its duties, including access to the CompanySecretary for assistance as required;The Committee members are provided with training as andwhen required, both in the form of an induction programmefor new members and on an ongoing basis for all members;The Committee may oversee any investigation of activitieswhich are within its terms of reference and act as a court ofthe last resort; andAt least once a year, reviewing its own performance,constitution and terms of reference to ensure it is operating atmaximum effectiveness and recommending any changes itconsiders necessary to the Board for approval.AuthorityThe Committee is authorised to seek any information itrequires from any employee of the Company in order toperform its duties and to obtain, at the Company's expense,outside legal or other professional advice on any matter withinits terms of reference. It is also authorised to call anyemployee to be questioned at a meeting of the Committee asand when required.Remuneration CommitteeThe Committee is chaired by Will Wyatt. The other currentmembers of the Committee are Simon Beresford-Wylie, NigelMoore and Maria Richter. During the year the followingchanges took place. Simon Beresford-Wylie became amember of the Committee on 1 March 2006, the same day hewas appointed a director. Sir David Bell stepped down as amember of the Committee on 1 March 2006. John Potterretired as a director and member of the Committee on 24 May2006. Maria Richter became a member of the Committee onher appointment to the Board on 28 February 2007. Eachmember of the Committee is independent. During 2006, theCommittee met three times and, apart from Simon Beresford-Wylie who was unable to attend the December meeting due tourgent business commitments, all the members attended allthe Committee meetings.Duties of the Committee:• determining and agreeing with the Board the framework orbroad policy for the remuneration of the Company'sChairman, the executive directors, the Company Secretaryand such other members of the executive management as itis designated to consider. No director or manager may beinvolved in any decisions as to their own remuneration;• in determining such policy, taking into account all factorswhich it deems necessary. The objective of such policy is toensure that members of the executive management of theCompany are provided with appropriate incentives toencourage enhanced performance and are, in a fair andresponsible manner, rewarded for their individualcontributions to the success of the Company;• reviewing the ongoing appropriateness and relevance of theremuneration policy;• approving the design of, and determining targets for, anyperformance-related pay schemes operated by the Companyand approving the total annual payments made under suchschemes;• reviewing the design of all share incentive plans for approvalby the Board and shareholders. For any such plans,determining each year whether awards will be made, and ifso, the overall amount of such awards, the individual awardsto executive directors and other senior executives and theperformance targets to be used;• determining the policy for, and scope of, pensionarrangements for each executive director and other seniorexecutives;• ensuring that contractual terms on termination, and anypayments made, are fair to the individual, and the Company,that failure is not rewarded and that the duty to mitigateloss is fully recognised;• within the terms of the agreed policy and in consultationwith the Chairman and/or Chief Executive as appropriate,determining the total individual remuneration package ofeach executive director and other senior executives includingbonuses, incentive payments and share options or othershare awards;Corporate Governance continuedThe Vitec Group• in determining such packages and arrangements, give dueregard to any relevant legal requirements, the provisions andrecommendations in the Code and the UK Listing Authority'sListing Rules and associated guidance;• reviewing and noting annually the remuneration trendsacross the Company or Group;• overseeing any major changes in employee benefitsstructures throughout the Company or Group;• agreeing the policy for authorising claims for expenses fromthe Chief Executive and Chairman;• ensuring that all provisions regarding disclosure ofremuneration including pensions, as set out in the Directors'Remuneration Report Regulations 2002 and the Code arefulfilled; and• being exclusively responsible for establishing the selectioncriteria, selecting, appointing and setting the terms ofreference for any remuneration consultants who advise theCommittee, and to obtain reliable, up-to-date informationabout remuneration in other companies. The Committeeshall have full authority to commission any reports or surveysthat it deems necessary to help it fulfil its obligations.Reporting Responsibilities• The Committee Chairman reports formally to the Board onits proceedings after each meeting on all matters within itsduties and responsibilities.• The Committee makes whatever recommendations to theBoard it deems appropriate on any area within its remitwhere action or improvement is needed.Other Responsibilities• The Committee, at least once a year, reviews its ownperformance, constitution and terms of reference to ensureit is operating at maximum effectiveness and recommendsany changes it considers necessary to the Board forapproval.AuthorityThe Committee is authorised by the Board to seek anyinformation it requires from any employee of the Company inorder to perform its duties. The Committee is also authorisedby the Board, in connection with the Committee's duties, toobtain, at the Company's expense, any outside legal or otherprofessional advice.Nominations CommitteeThe Committee is chaired by Michael Harper. The othermembers of the Committee are currently Sir David Bell, SimonBeresford-Wylie, Nigel Moore, Maria Richter and Will Wyatt.Simon Beresford-Wylie became a member of the Committee on1 March 2006, the same day he was appointed a director. JohnPotter retired as a director and member of the Committee on 24May 2006. Maria Richter became a member of the Committeeon her appointment to the Board on 28 February 2007.During 2006, the Committee met on four occasions but alsomet by conference telephone and with the executive directorsin attendance on a number of occasions to consider anddiscuss progress on the appointment of an additional non-executive director. All the members attended all theCommittee meetings except for Sir David Bell who was unableto attend the August and November Committee meetings dueto unavoidable absences, one of which was to attend afuneral, and Simon Beresford-Wylie who was unable to attendthe December meeting due to urgent business commitments.The Committee is delegated authority by the Board to dealwith succession planning and making recommendations to theBoard on all new Board appointments.Duties of the Committee:• regularly reviewing the structure, size and composition(including the skills, knowledge and experience) required ofthe Board in the future compared to its current position andmaking recommendations to the Board with regard to anychanges;• giving full consideration to succession planning for directorsand other senior executives, taking into account thechallenges and opportunities facing the Company, and theskills and expertise needed on the Board in the future;• being responsible for identifying and nominating for theapproval of the Board, candidates to fill Board vacancies asand when they arise;• before appointment is made by the Board, evaluating thebalance of skills, knowledge and experience on the Board,and, in the light of this evaluation preparing a description ofthe role and capabilities required for a particularappointment. In identifying suitable candidates theCommittee:• uses open advertising or the services of external advisersto facilitate the search;• considers candidates from a wide range of backgrounds;and• considers candidates on merit and against objectivecriteria, taking care that appointees have enough timeavailable to devote to the position;• keeping under review the leadership needs of the Company,both executive and non-executive, with a view to ensuringthe continuing ability of the Company to compete effectivelyin the marketplace;• keeping up to date and fully informed about strategic issuesand commercial changes affecting the Company and themarket in which it operates;• reviewing annually the time required from non-executivedirectors. Performance evaluation should be used to assesswhether the non-executive directors are spending enoughtime to fulfil their duties; and3536Annual Report 2006• ensuring that on appointment to the Board, non-executivedirectors receive a formal letter of appointment setting outclearly what is expected of them in terms of timecommitment, Committee service and involvement outsideBoard meetings.The Committee also makes recommendations to the Boardconcerning:• formulating plans for succession for both executive and non-executive directors and in particular for the key roles ofChairman and Chief Executive;• suitable candidates for the role of Senior IndependentDirector;• membership of the Audit and of the RemunerationCommittees, in consultation with the Chairmen of thoseCommittees;• the re-appointment of any non-executive director at theconclusion of their specified term of office having given dueregard to their performance and ability to continue tocontribute to the Board in the light of the knowledge, skillsand experience required;• the continuation (or not) in service of any director who hasreached the age of 70;• the re-election by shareholders of any director under the'retirement by rotation' provisions in the Company's articlesof association having due regard to their performance andability to continue to contribute to the Board in the light ofthe knowledge, skills and experience required;• any matters relating to the continuation in office of anydirector at any time including the suspension or terminationof service of an executive director as an employee of theCompany subject to the provisions of the law and theirservice contract; and• the appointment of any director to executive or other officeother than to the positions of Chairman and Chief Executive,the recommendation for which would be considered at ameeting of the full Board.Reporting Responsibilities• The Committee Chairman reports formally to the Board onits proceedings after each meeting on all matters within itsduties and responsibilities.• The Committee makes whatever recommendations to theBoard it deems appropriate on any area within its remitwhere action or improvement is needed.Other ResponsibilitiesThe Committee, at least once a year, reviews its ownperformance, constitution and terms of reference to ensure itis operating at maximum effectiveness and recommends anychanges it considers necessary to the Board for approval.AuthorityThe Committee is authorised by the Board to seek anyinformation it requires from any employee of the Company inorder to perform its duties. The Committee is also authorisedby the Board, in connection with the Committee's duties, toobtain, at the Company's expense, any outside legal or otherprofessional advice.Appointments and re-elections to the Board:The Chairman and the other non-executive directors areappointed for an initial period of three years which, with theapproval of the Nominations Committee and the Board, wouldnormally be extended for a further three years. In exceptionalcircumstances, appointments of non-executive directors maybe extended beyond six years, with the approval of theNominations Committee, the Board and the individual directorconcerned, if it is in the interests of the Group to do so.Under the Company's Articles of Association, each director isrequired to be re-elected at the third Annual General Meetingfollowing that at which he or she was last elected or re-elected. Maria Richter will be proposed for election at theAnnual General Meeting for 2007. Nigel Moore will retire andwill be proposed for re-election at that meeting.Sir David Bell, who will have completed ten years as a non-executive director on 12 March 2007, will be standing downfollowing the Annual General Meeting for 2007.Relations with ShareholdersThe Board continues to recognise the importance ofmaintaining regular contact with its shareholders to ensurethat its businesses, strategy and remuneration policies areunderstood and that any concerns are addressed in aconstructive way. The Board communicates with itsshareholders through a combination of public announcementsthrough the Stock Exchange, analyst briefings, road shows andpress interviews at the time of the announcements of theinterim and the full year results and, when appropriate, atother times in the year. The executive directors, the Chairmanand the Senior Independent Director also meet with investorsfrom time to time during the year. The Annual GeneralMeeting offers a further opportunity for the directors to meetwith shareholders.At meetings of shareholders, the level of proxy votes received,together with the numbers of votes in favour, against andwithheld, is announced after each resolution has been dealtwith on a show of hands. Separate resolutions are proposed foreach issue upon which shareholders are asked to vote. TheGroup's website contains details of the resolutions and thevoting thereon.The Company has complied with the requirement set out inthe Code in respect of shareholders' meetings to send thenotice of annual general meeting and related papers at least20 working days before the meeting. It will continue to complywith the requirement.Internal control and risk managementThe Board is responsible for the Group's system of internalcontrol to safeguard shareholders' investment and theCorporate Governance continuedThe Vitec GroupCompany's assets. However, any system can only providereasonable assurance against material misstatement or loss.As part of its responsibility, the Board regularly, and at leastannually, reviews the effectiveness of its internal controls. TheGroup has systems and procedures for internal control that aredesigned to provide reasonable control over the activities ofthe Group and to enable the Board to fulfil its legalresponsibility for the keeping of proper accounting records,safeguarding the assets of the Group and detecting fraud andother irregularities. However, it is recognised that it is in thenature of any business that business and commercial risksmust be taken and that for a business to succeed, enterprise,initiative and the motivation of employees are key elementsthat must not be unduly stifled. It is not the intention of theGroup to avoid all commercial risks and commercialjudgements will have to be made in the course of themanagement of the business.The Board has adopted a risk-based approach to establishingthe system of internal control. The application, and theprocess, followed by the Board in reviewing the effectivenessof the system of internal control during the year are as follows:• operating company management is charged with the ongoingresponsibility for identifying risks facing each of thebusinesses and for putting in place procedures to monitorand manage risks.• this system has been in place for the year under review andup to the date of approval of the annual report andaccounts.• the responsibilities of the chief executive officer and chieffinancial officer at each operating unit to manage riskswithin their businesses are periodically reinforced by Groupexecutive management.• major commercial, technological and financial risks to theGroup are formally assessed during the annual long termbusiness planning process around mid-year. These plans andthe attendant risks to the Group are reviewed andconsidered by the Board.• large capital projects, product development projects andacquisitions and disposals require Board approval.• the process by which the Board reviews the effectiveness ofinternal control has been agreed by the Board anddocumented. This involves regular reviews by the Board, of themajor business risks of the Group together with the controls inplace to manage those risks as reported to the Board by thechief executives of each division. In addition, each yearbusinesses formally review, in detail, all of their business risksand their internal controls, including finance, cash, IT, sales,purchasing and logistics. They then prepare statements thatdescribe the extent of their compliance with control objectives.These statements are approved by the chief executive officerand chief financial officer of each operating unit andsubmitted to Group executive management for review. Anysignificant matters arising from this review are formallyreported to the Board by the Finance Director. The risk andcontrol identification and certification process is monitored andperiodically reviewed by Group financial management.• A centralised database of risks facing the Group, as well aseach individual business, and an evaluation of the impactand likelihood of those risks is maintained and updatedregularly.• The Board has established a control framework within whichthe Group operates. This contains the following keyelements:• organisational structure with clearly defined lines ofresponsibility, delegation of authority and reportingrequirements.• defined expenditure authorisation levels.• on-site and telephone conferencing operations reviewscovering all aspects of each business are conducted byGroup executive management on a regular basisthroughout the year.• comprehensive system of financial reporting. The annualbudget and long term plan of each operating company arereviewed in detail and approved by the executive directors.The Board approves the overall Group's budget and plans.Monthly actual results are reported against prior year andmonthly budgets. Forecasts are revised where necessary butformally at least once every quarter. Any significant changesand adverse variances are questioned by the Group executivedirectors and remedial action is taken where appropriate.Group tax and treasury is co-ordinated centrally. There isweekly cash and treasury reporting to Group financialmanagement and periodic reporting to the Board on theGroup's tax and treasury position.The Board considers that it has fully complied with the Codeduring the year and up to the date of approval of the annualreport and accounts and that it accords with Turnbullguidance.The Group does not have an internal audit function. However,the need for such a function is regularly reviewed. The currentconclusion of the Board is that an internal audit function isnot required given the scale, diversity and complexity of theGroup's activities. Where required, third party auditconsultants, independent from the companies' externalauditors, are used on specific assignments. The Companybelieves it can access professional internal audit support inthe relevant country more effectively than by having aninternal department. Three such outsourced audits took placein 2006.Going concernThe directors have made appropriate enquiries and considerthat the Group has adequate resources to continue inoperational existence for the foreseeable future. Accordingly,the directors continue to adopt the going concern basis inpreparing the accounts.3738Annual Report 2006Statement of directors' responsibilities inrespect of the directors' report and thefinancial statementsThe directors are responsible for preparing the Annual Reportand the Group and parent Company financial statements, inaccordance with applicable law and regulations. Company law requires the directors to prepare Group and parentCompany financial statements for each financial year. Underthat law they are required to prepare the Group financialstatements in accordance with IFRSs as adopted by the EU andapplicable law and have elected to prepare the parent Companyfinancial statements in accordance with UK AccountingStandards and applicable law (UK Generally AcceptedAccounting Practice).The Group financial statements are required by law and IFRSsas adopted by the EU to present fairly the financial position andthe performance of the Group; the Companies Act 1985provides in relation to such financial statements that referencesin the relevant part of that Act to financial statements giving atrue and fair view are references to their achieving a fairpresentation.The parent Company financial statements are required by law togive a true and fair view of the state of affairs of the parentCompany.In preparing each of the Group and parent Company financialstatements, the directors are required to:• select suitable accounting policies and then apply themconsistently;• make judgments and estimates that are reasonable andprudent;• for the Group financial statements, state whether they havebeen prepared in accordance with IFRSs as adopted by theEU;• for the parent Company financial statements, state whetherapplicable UK Accounting Standards have been followed,subject to any material departures disclosed and explained inthe parent Company financial statements; and • prepare the financial statements on the going concern basisunless it is inappropriate to presume that the Group and theparent Company will continue in business.The directors are responsible for keeping proper accountingrecords that disclose with reasonable accuracy at any time thefinancial position of the parent Company and enable them toensure that its financial statements comply with the CompaniesAct 1985. They have general responsibility for taking such stepsas are reasonably open to them to safeguard the assets of theGroup and to prevent and detect fraud and other irregularities.Under applicable law and regulations, the directors are alsoresponsible for preparing a Directors' Report, Directors'Remuneration Report and Corporate Governance Statement thatcomply with that law and those regulations.The directors are responsible for the maintenance and integrityof the corporate and financial information included on theCompany's website. Legislation in the UK governing thepreparation and dissemination of financial statements maydiffer from legislation in other jurisdictions.Disclosure of information to auditorsThe directors who held office at the date of approval of thisDirectors' Report confirm that, so far as they are each aware,there is no relevant audit information of which the Company'sauditors are unaware; and each director has taken all thesteps that they ought to have taken as a director to makethemselves aware of any relevant audit information and toestablish that the Company's auditors are aware of thatinformation.Corporate Governance continuedThe Vitec GroupWe have audited the group and parent company financialstatements (the ''financial statements'') of the Vitec Group plcfor the year ended 31 December 2006 which comprise theGroup Income Statement, the Group and Parent CompanyBalance Sheets, the Group Cash Flow Statement, the GroupStatement of Recognised Income and Expense and the relatednotes. These financial statements have been prepared underthe accounting policies set out therein. We have also auditedthe information in the Directors' Remuneration Report that isdescribed as having been audited.This report is made solely to the company's members, as abody, in accordance with section 235 of the Companies Act1985. Our audit work has been undertaken so that we mightstate to the company's members those matters we are requiredto state to them in an auditors' report and for no otherpurpose. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than thecompany and the company's members as a body, for our auditwork, for this report, or for the opinions we have formed.Respective responsibilities of directors andauditorsThe directors' responsibilities for preparing the Annual Reportand the group financial statements in accordance withapplicable law and International Financial ReportingStandards (IFRSs) as adopted by the EU, and for preparingthe parent company financial statements and the Directors'Remuneration Report in accordance with applicable law andUK Accounting Standards (UK Generally Accepted AccountingPractice) are set out in the Statement of Directors'Responsibilities on page 38.Our responsibility is to audit the financial statements and thepart of the Directors' Remuneration Report to be audited inaccordance with relevant legal and regulatory requirementsand International Standards on Auditing (UK and Ireland).We report to you our opinion as to whether the financialstatements give a true and fair view and whether the financialstatements and the part of the Directors' Remuneration Reportto be audited have been properly prepared in accordance withthe Companies Act 1985 and, as regards the group financialstatements, Article 4 of the IAS Regulation. We also report toyou whether in our opinion the information given in theDirectors' Report is consistent with the financial statements. In addition we report to you if, in our opinion, the company hasnot kept proper accounting records, if we have not received allthe information and explanations we require for our audit, or ifinformation specified by law regarding directors' remunerationand other transactions is not disclosed. We review whether the Corporate Governance Statement reflectsthe company's compliance with the nine provisions of the 2003Combined Code specified for our review by the Listing Rules ofthe Financial Services Authority, and we report if it does not. Weare not required to consider whether the Board's statements oninternal control cover all risks and controls, or form an opinionon the effectiveness of the group's corporate governanceprocedures or its risk and control procedures.We read the other information contained in the Annual Reportand consider whether it is consistent with the auditedfinancial statements. We consider the implications for ourreport if we become aware of any apparent misstatements ormaterial inconsistencies with the financial statements. Ourresponsibilities do not extend to any other information.Basis of audit opinionWe conducted our audit in accordance with InternationalStandards on Auditing (UK and Ireland) issued by the AuditingPractices Board. An audit includes examination, on a test basis,of evidence relevant to the amounts and disclosures in thefinancial statements and the part of the Directors' RemunerationReport to be audited. It also includes an assessment of thesignificant estimates and judgments made by the directors in thepreparation of the financial statements, and of whether theaccounting policies are appropriate to the group's and company'scircumstances, consistently applied and adequately disclosed.We planned and performed our audit so as to obtain all theinformation and explanations which we considered necessaryin order to provide us with sufficient evidence to givereasonable assurance that the financial statements and thepart of the Directors' Remuneration Report to be audited arefree from material misstatement, whether caused by fraud orother irregularity or error. In forming our opinion we alsoevaluated the overall adequacy of the presentation ofinformation in the financial statements and the part of theDirectors' Remuneration Report to be audited.Opinion In our opinion:• the group financial statements give a true and fair view, inaccordance with IFRSs as adopted by the EU, of the state ofthe group's affairs as at 31 December 2006 and of its profitfor the year then ended;• the group financial statements have been properly preparedin accordance with the Companies Act 1985 and Article 4of the IAS Regulation; • the parent company financial statements give a true and fairview, in accordance with UK Generally Accepted AccountingPractice, of the state of the parent company's affairs as at31 December 2006; • the parent company financial statements and the part of theDirectors' Remuneration Report to be audited have beenproperly prepared in accordance with the Companies Act1985; and • the information given in the Directors' Report is consistentwith the financial statements. KPMG Audit PlcChartered Accountants LondonRegistered Auditor 5 March 200739Independent Auditors' Report to the Members of The Vitec Group plc40Annual Report 2006Consolidated Income StatementFor the year ended 31 December 2006NotesTotal£m Restructuringcosts andPropertyprofits£m Amortisationof acquiredintangiblesand Otherfinancialexpenseitems£mBeforesignificantitems£m Total£m Restructuringcosts andPropertyprofits£m Amortisationof acquiredintangiblesand Otherfinancialexpenseitems£m Beforesignificantitems£m Revenue3 Existing operations217.3217.3193.2193.2Acquisitions5.05.01.71.7Continuing operations222.3222.3194.9194.9Cost of sales (129.1)(129.1)(115.6)(115.6)Gross profit93.293.279.379.3 Other operating income5-- 0.40.4--0.30.3 Operating expenses4/5(68.0)(0.6)(1.5)(70.1)(59.3)(0.2)(0.9)(60.4) Operating profit3/6 Existing operations25.1(0.3)(1.1)23.719.8-(0.6)19.2Acquisitions0.1(0.3)-(0.2)0.2(0.2)-- Continuing operations25.2(0.6)(1.1)23.520.0(0.2)(0.6)19.2Interest payable on bank borrowings (1.5)(1.5)(1.5)(1.5) Interest income0.10.10.20.2 Pension scheme: Interest charge (2.1)(2.1)(2.0)(2.0) Expected return on assets2.62.62.22.2 Other financial income/(expense)(0.2)0.2-(0.5)(0.5)(1.0) Net financial expense5/9(1.1)0.2(0.9)(1.6)(0.5)(2.1) Profit before tax24.1(0.4)(1.1)22.618.4(0.7)(0.6)17.1 Taxation11(9.6)0.4(9.2)(7.7)--(7.7) Profit from continuing operations14.5(0.4)(0.7)13.410.7(0.7)(0.6) 9.4 Profit from discontinued operation3--0.40.4 Profit for the year (attributable toEquity Shareholders)14.5(0.4)(0.7)13.411.1(0.7)(0.6)9.8 Earnings per share12Continuing operations: Basic earnings per share32.6p22.9p Diluted earnings per share32.2p22.7p Discontinued operation: Basic earnings per sharenil p1.0p Diluted earnings per sharenil p1.0p Total: Basic earnings per share32.6p23.9p Diluted earnings per share32.2p23.7p (1)See Note 5.Significant items (1)Significant items (1)2006 2005The Vitec Group41Consolidated Statement of Recognised Income and ExpenseFor the year ended 31 December 2006Actuarial gain on pension obligations2.20.5 Currency translation differences on foreign net investments(7.0)2.4 Net gain/(loss) on hedge of net investment in foreign subsidiaries1.3(0.2) Cash flow hedging reserve: Amounts released to income statement0.6(0.8) Effective portion of changes in fair value1.4(0.7) Net (expense)/income recognised directly in equity(1.5)1.2 Profit for the year13.49.8 Total recognised income for the year11.911.0 2006£m 2005£m Consolidated Balance SheetAs at 31 December 200642Annual Report 2006AssetsNon-current assetsProperty, plant and equipment1335.133.6Intangible assets1434.119.9Investments150.7- Deferred tax assets164.75.874.659.3Current assetsInventories1741.131.3Trade and other receivables1838.637.0Derivative financial instruments192.30.2Current tax assets20-0.9Cash and cash equivalents219.412.791.482.1Total assets166.0141.4LiabilitiesCurrent liabilitiesBank overdrafts211.90.9Bank loans190.1-Trade and other payables2337.131.5Derivative financial instruments19-0.9Current tax liabilities209.97.6Provisions245.01.254.042.1Non-current liabilitiesBank loans1926.317.2Other payables230.20.2Post-employment obligations285.07.5Provisions243.02.7Deferred tax liabilities160.71.135.228.7Total liabilities89.270.8Net assets76.870.6EquityShare capital8.28.2Share premium3.22.7Translation reserve(7.5)(1.8)Other reserves 2.90.9Retained earnings70.060.6Total equity2576.870.6Approved by the Board on 5 March 2007 and signed on its behalf Alastair HewgillDirectorNotes2006£m 2005£m Consolidated Cash Flow Statement For the year ended 31 December 2006The Vitec Group43Cash flows from operating activities:Profit for the year 13.49.8 Adjustments for: Taxation9.27.7 Depreciation8.98.9 Amortisation of intangibles1.71.2 Net gain on disposal of property, plant and equipment(1.5)(1.6) Fair value losses on derivative financial instruments(0.2)(0.4) Cost of equity-settled employee share schemes1.20.3 Financial income(2.7)(2.4) Financial expense3.64.5 Operating profit before changes in working capital and provisions:33.628.0 (Increase)/decrease in inventories(9.2)3.0 Increase in receivables(2.1)(0.8) Increase in payables4.43.1 Increase/(decrease) in provisions2.1(3.4) Adjustments for foreign exchange losses(0.1)(0.1) Cash generated from operations:28.729.8 Interest paid(1.7)(1.8) Tax paid(5.5)(1.6) Net cash flow from operating activities21.526.4Cash flows from investing activities:Proceeds from sale of property, plant and equipment2.02.1 Purchase of property, plant and equipment(12.0)(11.1) Software costs capitalised as intangible assets(1.2)(0.6) Interest received0.20.5 Acquisition of investment(0.7)- Acquisition of subsidiaries, net of cash acquired(15.8)(4.6) Net cash flow from investing activities(27.5)(13.7)Cash flows from financing activities:Proceeds from the issue of shares0.5- Purchase of own shares(0.9)- Borrowing/(repayment) of bank loans9.1(8.2) Dividends paid(6.5)(6.1) Net cash flow from financing activities2.2(14.3) Decrease in cash and cash equivalents 22(3.8) (1.6) Cash and cash equivalents at 1 January11.813.4 Exchange rate movements(1)(0.5) - Cash and cash equivalents at 31 December217.5 11.8 (1)Exchange rate movements result from the adjustment of opening balances and cash flows in the year to closing exchange rates.2006£m 2005£m Notes44Annual Report 2006Notes to the Consolidated AccountsThe Vitec Group Accounting Policies Under IFRS1a Reporting Entity The Vitec Group plc (the "Company") is a company domiciled in the United Kingdom. The consolidatedfinancial statements of the Company as at and for the year ended 31 December 2006 comprise the Company and itssubsidiaries (together referred to as the "Group").1b Basis of Preparation The financial statements are presented in Sterling. They are prepared on the historical cost basisexcept that the following assets and liabilities are stated at their fair value: • Derivative financial instruments• Share options as part of employee share schemes• Financial assets used to fund the Group's defined benefit pension obligations (this fair value is stated net of theactuarial value of the associated pension obligations)The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates andassumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses.The estimates and associated assumptions are based on historical experience and various other factors that are believed tobe reasonable under the circumstances, the results of which form the basis of making the judgements about carrying valuesof assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates arerecognised in the period in which the estimate is revised if the revision affects only that period, or in the period of therevision and future periods if the revision affects both current and future periods.Those judgements made by management in the application of IFRS that have significant effect on the financialstatements and the estimates that are considered by the directors to have a significant risk of material adjustment in thenext year are discussed in Note 30.1c Statement of ComplianceThe Group financial statements have been prepared and approved by the directors in accordancewith International Financial Reporting Standards as adopted by the EU ('Adopted IFRSs'). The Company has elected toprepare its parent Company financial statements in accordance with UK GAAP.2 Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in theseconsolidated financial statements.Basis of Consolidation Subsidiaries are entities controlled by the Group. Control exists when the Group has the power,directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.The results of subsidiaries sold or acquired during the year are included in the accounts up to, or from, the date that controlpasses.Intra-Group balances, and any unrealised gains and losses or income and expenses arising from intra-Group transactions,are eliminated in preparing the consolidated financial statements.Business Combinations All business combinations are accounted for by applying the purchase method. In respect ofbusiness acquisitions that have occurred since 1 January 2004, goodwill represents the excess of the cost of theacquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities ofthe acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss.In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents theamount previously recorded under UK GAAP.Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and isno longer amortised but is tested annually for impairment. The Group's investments in equity securities and certain debt securities are classified as available-for-sale financialassets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairmentlosses, and foreign exchange gains and losses on available-for-sale monetary items, are recognised directly in equity.When an investment is de-recognised, the cumulative gain or loss in equity in transferred to profit or loss.The Vitec Group45Impairment The carrying amounts of the Group's assets are reviewed at each balance sheet date to determine whetherthere is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated.For goodwill, the recoverable amount is estimated at each balance sheet date.An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds itsrecoverable amount. Impairment losses are recognised in the income statement. Once recognised, an impairment lossis not reversed.The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less coststo sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-taxdiscount rate that reflects current market assessments of the time value of money and the risks specific to the asset.Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of anygoodwill allocated to the cash-generating units and then to reduce the carrying amount of the other assets in the unit ona pro-rata basis.Revenue Revenue, which excludes value added tax and sales between Group companies, represents the value of productsand services sold. Revenue from the sale of goods is measured at the fair value of the consideration received orreceivable, net of returns and allowances, trade discounts and volume rebates. Other than for long term contracts, thetreatment of which is set out separately below, revenue arising from product sales is recognised when the significantrisks and rewards of ownership have been transferred to the buyer, which is normally when title passes to the customer.Revenue arising from asset rental is recognised over the duration of the rental contract at the gross amount billed to thecustomer.No revenue is recognised if there are significant uncertainties regarding the recovery of the consideration due, associatedcosts or the possible return of goods and continuing management involvement with the goods.Long Term Contracts Contract revenue and expenses are recognised in the income statement in proportion to the stage ofcompletion of the contract, to the extent that the contract outcome can be estimated reliably. The stage of completionis assessed by reference to surveys of work performed. An expected loss on a contract is recognised immediately in theincome statement.Contract work in progress is stated at costs incurred, less those transferred to the income statement, after deductingforeseeable losses and payments on account not matched with turnover.Amounts recoverable on contracts are included in receivables and represent revenue recognised in excess of paymentson account.Foreign Currency Transactions in foreign currencies with overseas customers and suppliers are converted at the date atwhich transactions occur. Monetary assets and liabilities are translated at the period-end rates and the gains or losses on translation are includedin the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreigncurrency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilitiesdenominated in foreign currencies that are stated at fair value are translated using exchange rates ruling at the date thefair value was determined.Foreign currency gains and losses on inter-company loans are recorded directly in reserves if they form part of a netinvestment and repayment is neither planned nor likely to occur in the foreseeable future.Foreign trading profits and cash flows are translated at a weighted average rate for the period. The assets and liabilitiesof overseas companies, including goodwill and fair value adjustments arising on consolidation, are translated usingforeign exchange rates ruling at the balance sheet date. Differences on translation of net investments in overseas companies, and of related hedges, are taken directly to thetranslation reserve. They are released to the income statement on disposal.46Annual Report 2006Notes to the Consolidated Accounts continuedPension Costs The costs of providing pensions for employees under defined contribution schemes are expensed asincurred.The Group's net obligation in respect of defined benefit pension plans is calculated separately for each plan byestimating the amount of future benefit that employees have earned in return for their service in the current and priorperiods. That benefit is discounted to determine its present value, and the fair value of any plan assets is deducted.The discount rate for UK schemes has been derived based on redemption yields on appropriate British Governmentbonds, plus a margin representing the yield premium on long-dated AA corporate bonds over British Government bonds.The calculation is performed by a qualified actuary using the projected unit credit method. The Group recognises theongoing service cost in the income statement as part of operating profit. The Group recognises the net of the unwindingof the discount (above) and the return on plan assets in the income statement as part of net financial expense. Allactuarial gains and losses are recognised in the Statement of Recognised Income and Expense. The Group's netobligations in respect of overseas defined benefit pension plans are estimated by qualified actuaries using appropriatemethodologies.Past-service costs are recognised immediately in the income statement, unless the changes to the pension plan areconditional on the employees remaining in service for a specified period of time (the vesting period). In this case, thepast-service costs are amortised on a straight-line basis over the vesting period.Property, Plant and Equipment Depreciation is provided at rates estimated to write off the cost or valuation of the relevantassets less their estimated residual values by equal annual amounts over their expected useful lives. Residual valuesand expected useful lives are reassessed annually. No depreciation is provided on freehold land. Other fixed assets aredepreciated at the rates indicated below:Freehold and long leasehold buildings 21/2% – 5% on cost or valuationLeasehold improvementsover the remaining period of the leasePlant and machinery 121/2% – 25% on costMotor vehicles 25% – 331/3% on costEquipment, fixtures & fittings 10% – 331/3% on costRental equipment 20% – on costItems of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Inaccordance with IFRS 1, certain land and buildings that had been revalued to fair value prior to 1 January 2004 aremeasured on the basis of deemed cost, being the revalued amount at the date of that revaluation.Research and Development The Group incurs expenditure on research projects and on projects to apply research findingsto gain new scientific or technical knowledge and understanding. This expenditure is recognised in the incomestatement as incurred. Once detailed criteria have been met that confirm that the product or process is both technically and commerciallyfeasible and the Group has sufficient resources to complete the project, any material further expenditure incurred on theproject is capitalised. The capitalised expenditure includes the cost of materials, direct labour and an appropriateportion of overheads.Capitalised expenditure is amortised over the life of the project and is stated at cost less accumulated amortisation andimpairment losses.Other Intangible Assets Acquired computer software licences are capitalised on the basis of the costs incurred to acquireand bring to use the specific software. These costs are amortised using the straight-line method over their estimateduseful lives.Intangible assets arising on acquisition are amortised at the rates indicated below:Backlog 100% in first yearBrand 6.7% – 20% on costCustomer relationships 6.7% – 20% on costTechnology 6.7% – 20% on costCosts associated with maintaining computer software programmes are recognised as an expense as incurred. Costs thatare directly associated with the production of identifiable and unique software products controlled by the Group, andthat will probably generate economic benefits exceeding costs beyond one year, are capitalised and recognised asintangible assets.The Vitec Group47Computer software development costs recognised as assets are amortised using the straight-line method over theirestimated useful lives not exceeding five years.Inventories Inventories are valued at the lower of cost and net realisable value, less progress payments. Net realisablevalue is the estimated selling price in the ordinary course of business, less the estimated costs of completion and sellingexpenses. Cost is based on the first-in first-out principle and includes the cost of materials, direct labour and productionoverheads (based on normal operating capacity) incurred in bringing stocks and work in progress to their present locationand condition. Provisions for inventories are recognised when the book value exceeds its net realisable value.Derivatives and Hedge Accounting The Group uses derivative financial instruments ('derivatives') to hedge its exposure toforeign exchange risks arising from operational activities. The Group does not hold or issue derivatives for tradingpurposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivatives are recognised initially at fair value and, subsequent to initial recognition, are measured at fair value. The fairvalue of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of thequoted forward price. The fair value of 'simple' option contracts is their quoted market price at the balance sheet date. Derivatives are de-recognised when they mature or are sold.The gain or loss on re-measurement to fair value is recognised immediately in the income statement unless thederivatives qualify for hedge accounting.Cash Flow HedgesWhere a derivative is designated as a hedge of the variability in cash flows of a highly probable forecast transaction ('ahedging instrument'), the effective part of any gain or loss on the hedging instrument is recognised directly in equity.This gain or loss is removed from equity and recognised in the income statement in the same period during which thehedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately inthe income statement.If a hedging instrument expires or is sold but the hedged forecast transaction is still expected to occur, the cumulativegain or loss at that point remains in equity and is recognised in accordance with the above policy when the transactionoccurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognisedin equity is recognised immediately in the income statement.Hedge of Monetary Assets and LiabilitiesWhere a derivative is used to hedge economically the foreign exchange exposure of a recognised monetary asset orliability, no hedge accounting is applied and any gain or loss on the hedging instrument is recognised in the incomestatement.Hedge of a Net Investment in a Foreign OperationThe portion of the gain or loss on an instrument used to hedge a net investment in a foreign operation that isdetermined to be an effective hedge is recognised directly in equity. The ineffective portion is recognised immediatelyin the income statement. The effective portion will be recycled into the income statement on the sale of the foreignoperation.Interest Bearing Borrowings Interest bearing borrowings are stated in the balance sheet at cost, being the fair value ofconsideration, after the deduction of issue costs, which are recognised in the income statement over the term of therelated borrowings.Income Tax The tax expense in the income statement represents the sum of tax currently payable and deferred tax.Current tax is the expected tax payable on the taxable income for the year, using tax rates substantively enacted at thebalance sheet date, and any adjustment to tax payable in respect of previous years.Deferred tax is provided using the balance sheet liability method, providing for temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amountof assets and liabilities, using tax rates enacted at the balance sheet date.Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits andunused tax losses, to the extent that it is probable that taxable profit will be available against which the deductibletemporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except:48Annual Report 2006Notes to the Consolidated Accounts continued• Where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognitionof an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affectsneither the accounting profit nor taxable profit or loss; and• In respect of deductible temporary differences associated with investments in subsidiaries, where deferred tax assetsare only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable futureand taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent thatit is no longer probable that sufficient taxable profit would be available to allow all or part of the deferred income taxassets to be utilised. Deferred tax liabilities are not recognised for the following temporary differences:• Goodwill not deductible for tax purposes or the initial recognition of an asset or liability in a transaction that is not abusiness combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit orloss; and• Differences relating to investments in subsidiaries to the extent that the timing of the reversal is controlled by theCompany and they will probably not reverse in the foreseeable future. IAS 12 requires deferred tax to be provided in respect of undistributed profits of overseas subsidiaries unless the parentis able to control the timing of remittances and it is probable that such remittances will not be made in the foreseeablefuture. As the Group is able to control the timing of remittances from overseas subsidiaries, no provision has been madefor any tax on undistributed profits of overseas subsidiaries. Similarly, no deferred tax assets or liabilities have beenrecognised in respect of temporary differences associated with investments in subsidiaries.Employee Share Schemes The Group operates a number of share based incentive schemes, some of which entitle thebeneficiary to shares (equity-settled) and others that entitle the beneficiary to cash (cash-settled). The schemes in placeprior to 2005 were based on share price movements. A new equity-settled scheme was set up in 2005 that is based onTotal Shareholder Returns (TSR).The fair values of options are calculated using Black-Scholes or Monte Carlo simulation models. For equity-settled options, income statement charges are made based on the fair value of these options at the date ofgrant and on the estimated number of options expected to vest after adjusting for lapses due to leavers during the life ofthe scheme and achievement of any non-market-based vesting conditions (for example, profitability and sales growthtargets). Subsequently, at each balance sheet date prior to vesting of the relevant awards, the Group revises theestimates of the number of options that are expected to vest after adjusting for expected leavers and estimatedachievement of non-market-based vesting conditions. The Group recognises the expense in the income statement and acorresponding adjustment to equity.The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, isrecognised as an expense, with a corresponding increase in liabilities, over the period in which the employees becomeunconditionally entitled to payment. The liability is re-measured at each reporting date and at settlement date. Anychanges in the fair value of the liability are recognised as personnel expense in profit or loss.The Group makes charges to the income statement for any potential employer's National Insurance liability on optionsgranted, based on an estimate of the fair value of the option. The charge is spread over the vesting period of the option.Leases Payments made under operating leases are charged to the income statement on a straight-line basis. The Groupdoes not have any finance leases.Assets held for short term rental are recorded as plant and machinery within property, plant and equipment anddepreciated over their estimated useful lives. Rental income from these assets is recognised as earned on a straight-linebasis over the rental period.Trade and Other Receivables Trade and other receivables are stated at their cost less provision for doubtful debts.The Vitec Group49Dividends Dividends are recognised as a liability in the period in which they are declared.Provisions Provisions are recognised in the balance sheet when the Group has a present legal or constructive obligation asa result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. Ifthe effect is material, provisions are determined by discounting the expected future cash flows at an appropriate pre-taxdiscount rate. Provisions for warranties, based on historical warranty data, are recognised when the underlying products or services aresold. Provisions for restructuring are recognised when the Group has approved a detailed and formal restructuring planand the restructuring has either commenced or has been announced. Provisions for onerous contracts are recognisedwhen the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to bereceived under it.Segmental Reporting A segment is a distinguishable component of the Group that is engaged either in providing productsor services (business segment), or in providing products and services within a particular economic environment(geographical segment), which is subject to risks and rewards that are different from those of other segments. TheGroup reports separate information on its material operations for each of the Group's segments. The Group's primarysegment is the business sector and its secondary segment is geographical area.Net Financial Expense Net financial expense comprises interest payable on borrowings, interest receivable on fundsinvested, the amortisation of loan costs, non-utilisation fees on the Group's loan facilities, foreign exchange gains andlosses on external or inter-company loans or investments to the extent that they are recognised in the income statement,the finance element of the charge or credit relating to defined benefit pension schemes and the costs of derivatives tothe extent that they are recognised in the income statement.Cash and Cash Equivalents Cash and Cash equivalents represent cash on hand and demand deposits at banks. Demanddeposits are short term highly liquid investments that are readily convertible to known amounts of cash without penaltyand that are subject to an insignificant risk of changes in value. Bank overdrafts that are repayable on demand andform an integral part of the Group's cash management are included as a component of cash and cash equivalents for thepurpose of the statement of cash flows.New Standards and Interpretations Not Yet Adopted A number of new standards, amendments to standards andinterpretations are not yet effective for the year ended 31 December 2006 and have not been applied in preparing theseconsolidated financial statements:IFRS 7 – Financial Instruments: Disclosures and the Amendment to IAS 1 – Presentation of Financial Statements:Capital Disclosures requires extensive disclosures about the significance of financial instruments for an entity's financialposition and performance, and qualitative and quantitative disclosures on the nature and extent of risks. IFRS 7 andamended IAS 1, which become mandatory for the Group's 2007 financial statements, will require additional disclosureswith respect to the Group's financial instruments and share capital.IFRS 8 – Operating Segments: Implementation of this standard is not expected to have a material impact on the Group'sresults, assets or liabilities.IFRIC 9 – Reassessment of Embedded Derivatives requires that a reassessment of whether embedded derivatives shouldbe separated from the underlying host contract should be made only when there are changes to the contract. IFRIC 9,which becomes mandatory for the Group's 2007 financial statements, is not expected to have any impact on theconsolidated financial statements.50Annual Report 20063 Segment ReportingPrimary format - by businesssegments2005£m 2006£m 2005£m 2006£m 2005£m 2006£m 2005£m 2006£m 2005£m 2006£m Imaging & StagingBroadcast SystemsBroadcast ServicesCorporate andUnallocatedConsolidatedRevenue from external customers:Sales94.676.2100.591.54.07.8--199.1175.5 Services----23.219.4--23.219.4 Total revenue from external customers94.676.2100.591.527.227.2--222.3194.9 Inter-segment revenue(1)1.11.31.71.2--(2.8)(2.5)-- Total revenue95.777.5102.292.727.227.2(2.8)(2.5)222.3194.9 Operating profit beforesignificant items16.613.66.95.21.71.2--25.220.0 Amortisation of acquired intangibles(0.5)(0.2)(0.1)-----(0.6)(0.2) Profit on the sale of property-0.30.4-----0.40.3Restructuring costs--(1.5)(0.9)----(1.5)(0.9)Segment result16.113.75.74.31.71.2--23.519.2 Net financial expense(0.9)(2.1)Taxation(9.2)(7.7)Profit for the period Continuing operations13.49.4Discontinued operation(2) -0.413.49.8Segment assets67.648.663.352.118.120.32.91.0151.9122.0Unallocated assets Cash and cash equivalents9.412.79.412.7Current tax assets-0.9-0.9 Deferred tax assets4.75.84.75.8Total assets166.0141.4Segment liabilities24.219.419.216.43.74.63.23.650.344.0Unallocated assets Bank overdrafts1.90.91.90.9 Bank loans26.417.226.417.2Current tax liabilities9.97.69.97.6Deferred tax liabilities0.71.10.71.1Total liabilities89.270.8Cash flows from operating activities13.917.96.39.23.86.6(2.5)(7.3)21.526.4Cash flows from investing activities(6.1)(7.6)(4.0)(2.2)(2.6)(4.0)(14.8)0.1(27.5)(13.7)Cash flows from financing activities(0.7)-----2.9(14.3)2.2(14.3)Capital expenditure(including assets acquired within acquisitions) Property, plant and equipment5.83.33.02.44.05.40.10.112.911.2Intangible assets4.22.02.2-0.1---6.52.0(1)Inter-segment pricing is determined on an arm's length basis. (2)In 2005, income from discontinued operation of £0.4 million arose on the release of a previous provision of £0.4 million for the upgrade of retail unitsrelating to the Retail Display segment that was divested in 2003.Notes to the Consolidated Accounts continuedThe Vitec Group51Revenue from external customers:by location of customer13.19.769.656.9107.098.132.630.2--222.3194.9 Segment assets30.623.545.840.455.947.215.19.94.51.0151.9122.0Unallocated assets Cash and cash equivalents9.412.79.412.7Current tax assets-0.9-0.9Deferred tax assets4.75.84.75.8Total assets166.0141.4Cash flows from operating activities2.31.515.317.37.614.6(1.2)0.3(2.5)(7.3)21.526.4Cash flows from investing activities0.1(1.6)(4.9)(3.2)(3.7)(4.3)(4.2)(4.7)(14.8)0.1(27.5)(13.7)Cash flows from financing activities(0.2)---(0.5)---2.9(14.3)2.2(14.3)Capital expenditure(including assets acquired within acquisitions) Property, plant and equipment2.91.74.83.34.85.80.30.30.10.112.911.2Intangible assets2.0-0.40.53.00.11.11.4--6.52.0Secondary format -by geographical segments2006£m 2005£m 2006£m 2005£m 2006£m 2005£m 2006£m 2005£m 2006£m 2005£m 2006£m 2005£m United KingdomThe Rest of EuropeThe AmericasThe Rest ofthe WorldCorporate andUnallocatedConsolidated2006£m 2005£m Analysis of net operating expenses Marketing, selling and distribution costs29.227.0Research, development and engineering costs(1)8.77.8Administrative expenses - restructuring costs1.50.9- amortisation of acquired intangible assets0.60.2- other administrative expenses30.124.532.225.6Net operating expenses70.160.4(1)No development costs have been capitalised in accordance with the Group accounting policies. Engineering costs are incurred as part of active productdevelopment programmes in the manufacturing companies.4 Analysis of Net Operating Expenses52Annual Report 20065 Significant Items Significant items are those items of financial performance that the directors consider should be separately disclosed to assist inthe understanding of the underlying trading and financial performance achieved by the Group and in making projections offuture results.Other operating income Other operating income of £0.4 million relates to profit on the sale of property fixed assets (Broadcast Systems division).Prior year other operating income of £0.3 million relates to profit on the sale of property fixed assets (Imaging & Stagingdivision).Operating expensesOf the significant items included in net operating expenses, £0.6 million relates to the amortisation of intangible assetsacquired as part of the acquisitions, and £1.5 million relates to the ongoing restructuring costs in Broadcast Systems (primarilyinventory write off, relocation and severance in connection with the actions taken to enable the business to operate in a moreintegrated manner).Prior year significant items included £0.2 million of amortisation of intangible assets acquired as part of the Kata acquisition,and £0.9 million of ongoing restructuring costs in Broadcast Systems (primarily severance in connection with the actions takento enable the business to operate in a more integrated manner).Other financial income/(expense)Significant items included in other financial expense comprise the following items:The Group uses options as part of its hedging of future foreign exchange cash flows. As such options are held to maturity, theultimate net amount charged to the income statement in respect of any option will always equate to the initial premium paidfor that option. However, as a result of the time value of such options being marked-to-market at each balance sheet date,volatile income and expenses can be introduced between periods and such amounts are therefore identified as significant otherfinancial expense. A £nil amount (2005: £0.3 million loss) relating to this volatile premium on options was recorded insignificant items within other financial expense. An expense of £0.2 million (2005: £0.5 million) relating to the amortisation ofoptions was recorded as a non-significant item within other financial expense.Currency translation differences arising on long term intra-Group funding loans that are similar in nature to equity arecharged/credited to reserves. Currency translation gain of £0.2 million (2005: £0.2 million loss) arising on certain other intra-Group funding balances that do not meet this strict criteria but are very similar in nature are recorded in significant itemswithin other financial expense. The following items are included in operating profitAmortisation of acquired intangible assets0.60.2Amortisation of capitalised software and development costs1.11.0Depreciation8.98.9Net gain on disposal of property, plant and equipment(1.5)(1.6)Employee share based incentive schemes1.50.3Operating lease rental expense Plant, machinery and vehicles0.30.3 Property3.53.1Fees payable to the Company's auditors for the audit of the Company's annual financial statements0.10.1Fees payable to the Company's auditors and its associates for other services:The audit of the Company's subsidiaries pursuant to legislation0.40.3Other services relating to taxation0.20.2Other services relating to corporate financial transactions0.10.1All other services-0.12006£m 2005£m 6 Operating ProfitNotes to the Consolidated Accounts continuedThe Vitec Group53Aggregate remuneration of all employees during the yearWages and salaries 50.445.2Employers' social security costs 6.76.2Employers' pension costs - defined benefit schemes2.22.2Employers' pension costs - defined contribution schemes0.40.4Other employment benefits1.61.1Cost of equity-settled employee share schemes1.20.3Cost of cash-settled employee share schemes0.3-62.855.42006£m 2005£m 2006£m 2005£m 7 EmployeesFees for non-executive duties0.20.2Remuneration for executive duties1.10.81.31.02006£m 2005£m 8 Directors' RemunerationThe emoluments, share options, awards under incentive schemes and pension entitlements of the directors are disclosed in theRemuneration Report on pages 21 to 27.The combined remuneration of the directors of the Group is set out below Average number of employees during the yearImaging & Staging751650Broadcast Systems746704Broadcast Services166171Head Office13131,6761,53854Annual Report 2006Financial expensesInterest payable on bank borrowings (1.5)(1.5)Interest charge on pension scheme liabilities (2.1)(2.0)Other financial expense:Net fair value losses in financial instruments(1)(0.2)(0.8)Net foreign exchange losses(2)0.2(0.2)Other financial expense-(1.0)(3.6)(4.5)Financial incomeInterest income 0.10.2Expected return on assets in the pension scheme 2.62.2 2.72.4Net financial expense (0.9)(2.1)(1) The Group uses options as part of its hedging of future foreign exchange cash flows. As such options are held to maturity, the ultimate net amount charged to theincome statement in respect of any option will always equate to the initial premium paid for that option. However, as a result of the time value of such optionsbeing marked-to-market at each balance sheet date, volatile income and expenses can be introduced between periods and such amounts are therefore identifiedas significant other financial expense. A £nil amount (2005: £0.3 million loss) relating to this volatile premium on options was recorded in significant itemswithin other financial expense. An expense of £0.2 million (2005: £0.5 million) relating to the amortisation of options was recorded as a non-significant itemwithin other financial expense.(2)Currency translation differences arising on long term intra-Group funding loans that are similar in nature to equity are charged/credited to reserves. Currencytranslation gain of £0.2 million (2005: £0.2 million loss) arising on certain other intra-Group funding balances that do not meet this strict criteria but are verysimilar in nature are recorded in significant items within other financial expense.2006£m 2005£m 9 Net Financial ExpenseCost of goods sold0.2(0.8) Net financial gain/(loss)0.2(0.2) Total net foreign exchange gains/(losses)0.4(1.0) 2006£m 2005£m 10 Net Foreign Exchange Gains/(Losses) The exchange gains/(losses) charged to the income statement are included as follows:Notes to the Consolidated Accounts continuedThe Vitec Group55Current tax expenseCurrent year before significant items9.36.4Adjustment for prior years-0.29.36.6Tax credit relating to significant items(0.4)-Current tax expense after significant items8.96.6Deferred tax expenseOrigination and reversal of temporary differences(0.3)0.1Amortisation of permanent differences0.30.3Benefit of tax losses recognised0.31.4Adjustment for prior years-(0.7)0.31.1Total income tax expense in income statement9.27.72006£m 2005£m 11 TaxRecognised in the income statementReconciliation of effective tax rateProfit before tax and significant items24.118.4Income tax using the domestic corporation rate30%7.330%5.4Effect of tax rates in foreign jurisdictions14%3.414%2.6Prior year adjustment--1%0.2Non-deductible expenses3%0.74%0.7Tax-deductible expenses not recognised in the income statement---3%(0.6)Tax-exempt revenues-5%(1.3)-3%(0.6)Tax effect of profit elimination on intra-Group inventory-2%(0.4)-1%(0.1)Other -(0.1)-0.140%9.642%7.7Tax credit relating to significant items(0.4)-Tax charge before significant items9.27.7All of the income tax relates to overseas tax. There is no income tax expense relating to the UK as a result of UK losses.Associated with the restructuring costs of £1.5 million in significant items is a tax credit of £0.4 million relating torestructuring costs incurred in Germany.2006%2006£m 2005%2005£m 56Annual Report 200612 Earnings Per Ordinary ShareThe calculation of basic earnings per share is based on profit after tax of £13.4 million (2005: £9.8 million) and on theweighted average number of shares in issue during the year of 41,107,593 (2005: 41,084,054).Adjusted basic earnings per share is presented as the directors consider that this gives a useful additional indication of theongoing earnings performance of the Group.This calculation is based on profit after tax but before significant items and discontinued operations. In 2006 this profit was£14.9 million (2005: £10.7 million).Profit for the financial year13.49.832.623.9 Less: discontinued operations-(0.4)-(1.0)13.49.432.622.9Add back: significant items1.11.32.73.1Earnings before significant items and discontinued operations14.510.735.326.02006£m Profit2005£m2006penceEarnings per share2005penceReconciliation of earnings and its effect on basic earnings per share and adjusted basic earnings per shareBasic weighted average number of shares41,107,59341,084,05432.623.9Dilutive potential ordinary shares: Employee share options391,459179,712(0.3)(0.1)Deferred bonus plan82,10589,029(0.1)(0.1) Diluted weighted average number of shares41,581,15741,352,79532.223.72006 Number of shares20052006penceEarnings per share2005penceReconciliation of shares and its effect on basic earnings per share and diluted earnings per shareThe calculation of diluted earnings per share of 32.2 pence (2005: 23.7 pence) is based on profit after tax of £13.4 million(2005: £9.8 million) and on 41,581,157 (2005: 41,352,795) ordinary shares, calculated as follows: Notes to the Consolidated Accounts continuedThe Vitec Group5713 Property, Plant and EquipmentCostAt 1 January 200595.019.760.115.2 Currency translation adjustments3.7(0.2)3.80.1Acquisitions0.1--0.1 Additions11.10.68.71.8Disposals(5.3)(1.9)(2.5)(0.9)At 31 December 2005104.618.270.116.3At 1 January 2006104.618.270.116.3Currency translation adjustments(6.6)(0.4)(5.6)(0.6)Acquisitions0.90.80.1-Additions12.02.88.11.1Disposals(6.8)(0.3)(5.1)(1.4)At 31 December 2006104.121.167.615.4DepreciationAt 1 January 200564.38.245.310.8Currency translation adjustments2.6-2.50.1 Depreciation charge for the year8.90.76.91.3Disposals(4.8)(1.7)(2.3)(0.8)At 31 December 200571.07.252.411.4At 1 January 200671.07.252.411.4Currency translation adjustments(4.6)(0.2)(4.0)(0.4)Depreciation charge for the year8.90.96.91.1Disposals(6.3)(0.2)(4.8)(1.3) At 31 December 200669.07.750.510.8Carrying amounts At 1 January 200530.711.514.84.4At 31 December 2005 and 1 January 200633.611.017.74.9 At 31 December 200635.113.417.14.6(1)Plant, machinery and vehicles includes broadcast equipment rental assets with an original cost of £34.4 million (2005: £40.0 million) and accumulateddepreciation of £24.6 million (2005: £28.2 million).Capital commitments at 31 December 2006 for which no provision has been made in the accounts amount to £0.1 million (2005: £0.1 million).Total£m Land andbuildings£mPlantmachineryand vehicles£mEquipmentfixtures andfittings£m(1)58Annual Report 2006CostAt 1 January 200521.6-16.05.6Currency translation adjustment1.4-1.30.1Additions0.6--0.6Acquisitions6.81.45.4-At 31 December 200530.41.422.76.3At 1 January 200630.41.422.76.3Currency translation adjustment(3.0)(0.3)(2.4)(0.3)Additions1.2--1.2Acquisitions16.75.3(1)11.4(2)-At 31 December 200645.36.431.77.2Amortisation and impairment lossesAt 1 January 20058.8-6.42.4Currency translation adjustment0.5-0.5-Amortisation in the year1.20.2-1.0At 31 December 200510.50.26.93.4At 1 January 200610.50.26.93.4Currency translation adjustment(1.0)-(0.9)(0.1)Impairment charge ----Amortisation in the year1.70.61.1At 31 December 200611.20.86.04.4Carrying amountsAt 1 January 200512.8-9.63.2At 31 December 2005 and 1 January 200619.91.215.82.9At 31 December 200634.15.625.72.8(1)Acquired intangible assets of £5.3 million arose on the acquisition of Bogen Imaging KK, Petrol, Autoscript, and Tomcat. These are amortised using thestraight-line method over their estimated useful lives (see Note 26).(2)£11.4 million represents goodwill arising on the acquisitions of Petrol (£2.3 million), Autoscript (£4.4 million) and Tomcat (£4.7 million) in 2006 (seeNote 26).Acquiredintangibleassets£m Total£m Goodwill£mCapitalisedsoftware £m14 Intangible AssetsNotes to the Consolidated Accounts continuedThe Vitec Group59UnitImaging & Staging13.18.5Broadcast Services2.93.2Broadcast Systems9.74.1Total25.715.8The impairment tests for all the above units are based on value in use calculations. These calculations use cash flowprojections based on actual operating results and five year projections. Cash flows thereafter are extrapolated using a one to twopercent growth rate and are appropriate because these businesses are long term in nature. These growth rates are consistentwith the long term average growth rates for these industries. A pre-tax discount rate of 13 to 15% has been used in discountingthe project cash flows for all the above units.The calculations demonstrated that no impairment had arisen in respect of goodwill.2006£m 2005£m Impairment tests for cash-generating units containing goodwillGoodwill is analysed as follows:15 Fixed Asset InvestmentsDuring the year, the Group acquired a minority shareholding in Media Numerics Ltd at a cost of £0.7 million. The investmentis stated at cost as it is a non-quoted investment whose fair value cannot be reliably measured.60Annual Report 2006The Group's principal subsidiaries at 31 December 2006 are listed below. All subsidiaries are 100% owned within the Group. Country of incorporationVitec Group US Holdings IncUSA Vitec Holdings LimitedGuernsey (changed from Vitec Luxembourg Holdings Sarl in May 2006) Vitec Investments LimitedUK* Broadcast Systems ALC Broadcast LimitedUK Anton/Bauer IncUSA Camera Dynamics LimitedUK* (name changed from Vinten Broadcast Limited in December 2006) Centro de Produccion Profesional CPP LimitadaCosta Rica(name changed to Camera Dynamics Limitada in February 2007) Sachtler Corporation of AmericaUSA (name changed to Camera Dynamics Inc in January 2007) Sachtler GmbH & Co KGGermany (name changed to Camera Dynamics GmbH & Co KG in January 2007) Vinten IncUSA (merged into Sachtler Corporation of America (now called Camera Dynamics Inc) in January 2007) Vitec Group Communications IncUSA Vitec Group Communications LimitedUK* Imaging & StagingBogen Imaging IncUSA Gitzo SAFrance Gruppo Manfrotto SrlItaly Kata Vitec I LimitedIsrael Lino Manfrotto & Co SpAItaly Litec SrlItaly Tomcat Global CorporationUSA Broadcast Services Vitec Broadcast Services IncUSA * Indicates companies directly owned by the parent CompanyA complete list of subsidiary companies will be included in the next annual return to the Registrar of Companies.Principal subsidiaries15 Fixed Asset Investments continuedNotes to the Consolidated Accounts continuedThe Vitec Group6116 Deferred Tax Assets and LiabilitiesAssetsInventories1.20.4(0.1)0.9Intangible assets1.7(1.0)(0.3)3.0Tax value of loss carry-forwards recognised0.30.1-0.2Property, plant and equipment1.5(0.2)-1.74.7(0.7)(0.4)5.8LiabilitiesIntangible assets(0.4)-(0.1)(0.3)Property, plant and equipment-0.6- (0.6)Tax value of loss carry-forwards recognised(0.2)(0.2)--Inventories(0.1)-0.1(0.2) (0.7)0.4-(1.1) Net4.0(0.3)(0.4)4.7 2006£m Recognisedin income£m Recognisedin reserves£m 2005£m AssetsInventories0.9 0.1 -0.8Intangible assets3.0(0.7)0.33.4Tax value of loss carry-forwards recognised0.2(1.4)-1.6Property, plant and equipment1.70.4(0.1)1.45.8(1.6)0.27.2 LiabilitiesIntangible assets(0.3)-(0.3)-Property, plant and equipment(0.6)0.5(0.1)(1.0)Inventories(0.2)-1.2(1.4)(1.1)0.50.8(2.4) Net4.7(1.1)1.04.82005£m Recognisedin income£m Recognisedin reserves£m 2004£m UK tax losses25.425.4 Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit willbe available against which the Group can utilise the benefits therefrom.No taxes have been provided for liabilities which may arise on the distribution of unremitted earnings of subsidiaries on thebasis of control, except where distributions of such profits are planned. Cumulative unremitted earnings of overseassubsidiaries and associates totalled approximately £58.0 million at 31 December 2006 (2005: £55.0 million). It is notpracticable to calculate the tax which would arise on remittance of these amounts: it would be substantially lower than statutoryrates after giving effect to foreign tax credits.2006£m 2005£m Unrecognised deferred tax assetsDeferred tax assets have not been recognised in respect of the following items:62Annual Report 2006Raw materials and components12.79.9 Work in progress8.65.9 Finished goods19.815.5 41.131.3 See Note 30, Accounting Estimates and Judgements, for details of the provision held against inventory.2006£m 2005£m 17 InventoriesCurrent receivables Trade receivables31.230.5Amounts recoverable on long term contracts0.20.7 Other receivables4.74.3 Prepayments and accrued income 1.41.2 37.536.7 Non-current receivables Prepayments and accrued income 0.1- Other receivables1.00.31.10.3Total receivables38.637.02006£m 2005£m 18 Trade and Other Receivables Notes to the Consolidated Accounts continuedThe Vitec Group6319 Derivative Financial InstrumentsAn explanation of the Group's treasury policy and controls is included in the Financial Review on page 13. Exposure to credit, interest rate and currency risks arises in the normal course of the Group's business. Derivative financial instrumentsare used to hedge exposure to fluctuations in foreign exchange rates only.Credit RiskThe Group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations areperformed on all customers requiring credit over a certain amount. The Group does not require collateral in respect of financial assets.Investments are allowed only in liquid securities and only with counterparties that have a credit rating equal to or better than the Group.Transactions involving derivative financial instruments are with counterparties with whom the Group has a signed netting agreement aswell as sound credit ratings. Given their high credit ratings management does not expect any counterparty to fail to meet itsobligations.At the balance sheet there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by thecarrying amount of each financial asset, including derivative financial instruments, in the balance sheet.Interest Rate RiskAll the Group's borrowings and investments are at floating rates. Given the Group's low net debt, management believes that the benefitsof fixing a proportion of its interest costs are outweighed by the costs.Foreign Currency RiskThe Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than thefunctional currency of the business unit. The currencies giving rise to this risk are primarily US$, Euros and Japanese Yen.The Group aims to hedge 75 per cent of its forecasted foreign currency exposure in respect of forecasted sales and purchases for thefollowing 12 months and up to 50 per cent of the exposure for between 12 months and 18 months. The Group uses forward exchangecontracts ("forwards"), simple options and "cylinders" (a combination of two offsetting simple options at different rates) to hedge itsforeign currency risk. The majority of these contracts have maturities of less than one year at the balance sheet date.In respect of other monetary assets and liabilities held in currencies other than Sterling, the Group ensures that the net exposure is keptto an acceptable level, by buying or selling foreign currencies at spot rates where necessary to address short term imbalances.Forecasted TransactionsThe Group classifies its derivatives hedging forecasted transactions as cash flow hedges and states them at fair value. The fair value ofthese derivatives as 1 January 2006 was adjusted against the opening balance of the hedging reserve at that date. Recognised Assets and LiabilitiesChanges in the fair value of derivatives that economically hedge monetary assets and liabilities in foreign currencies and for which nohedge accounting is applied are recognised in the income statement. Both the changes in fair value of the derivatives and the foreignexchange gains and losses relating to the monetary items are recognised as part of "Cost of Sales" . Hedge of net investment in foreign subsidiaryThe Group's US$, Euro and Yen loans and certain forward contracts are designated as a hedge of the Group's investment in subsidiariesoverseas. Inter-company loans for which payment is not planned in the foreseeable future are classified as net investments and so aretaken to reserves.Sensitivity AnalysisIn managing interest rate and currency risks the Group aims to reduce the impact of short term fluctuations on the Group's earnings.Over the longer term, however, permanent changes in foreign exchange and interest rates would have an impact on consolidatedearnings.At 31 December 2006, it is estimated that a general increase of one percentage point in interest rates would decrease the Group'sprofit before tax by approximately £0.2 million. This reflects increased interest costs on the Group's borrowings and increased interestincome on the Group's investments.64Annual Report 2006Notes to the Consolidated Accounts continued19 Derivative Financial Instruments continuedFair ValueThe fair values together with the carrying amounts shown in the balance sheet are as follows:Forward exchange contracts - Assets 1.6 0.1 Forward exchange contracts - Liabilities -(0.9) Option exchange contracts - Assets0.70.1 Cash at bank and in hand9.412.7Trade receivables31.230.5Trade payables(20.3)(16.6)Bank overdraft(1.9)(0.9) Other borrowings(0.1)- Floating rate borrowings(1)(26.3)(17.2) (5.7)7.8Market rates have been used to determine fair values.(1)Floating rate borrowings are used for the purpose of net investment hedging.Estimation of Fair ValuesThe following summarises the major methods and assumptions used in estimating the fair values of financial instrumentsreflected in the table: DerivativesForwards are marked-to-market by calculating the contractual forward price and deducting the current spot rate. Options and cylinders are marked-to-market by obtaining quotes from banks of their market value as at the 31 December. (i) Maturity profile of Derivatives2006Fair valueand book value £m2005Fair valueand book value £ma) Fair value of financial assets and liabilitiesForward exchange contracts - Assets1.61.6- Option exchange contracts - Assets0.70.7-2.32.3-2005£m£m£mForward exchange contracts - Assets0.10.1- Forward exchange contracts - Liabilities(1.1)(1.0)(0.1)Option exchange contracts - Assets0.10.1-(0.9)(0.8)(0.1)All the options are to sell US Dollars for Euro and have an exercise price between US$1.15 = c1 and US$1.31 = c1.Interest bearing loans and borrowingsAll interest bearing loans and borrowings are at floating rates. Therefore, the fair value ofthese loans and borrowings is their carrying value.Trade and other receivables/payablesFor trade receivables and payables with a remaining life of less than one year, the notionalamount is deemed to reflect the fair value. All other trade receivables and payables are discounted to determine the fair value.Total2006£mWithinone yearor less£mMore thanone yearbut not morethan twoyears£mThe Vitec Group65Other borrowings0.1- Overdrafts1.9 0.9 Bank loans 26.3 17.2 Total borrowings28.318.1 Forward exchange contracts- 0.9 Gross financial liabilities28.3 19.02006£mGroup2005£mb) Financial liabilitiesi) Analysis of borrowingsWithin one year or less2.0 1.7 More than one year but not more than two years- 0.1 More than two years but not more than five years26.3 17.2 28.3 19.0On 25 January 2005 the Group signed a five year £100 million Multicurrency Revolving CreditFacility Agreement with asyndicate of UK banks.The total amount of bank loans and overdrafts any part of which falls due after five years is £nil (2005: £nil).The Group had the following undrawn borrowing facilities at the end of the period.2006£mGroup2005£mii) Maturity profileExpiring in one year or less- uncommitted facilities13.1 8.6 More than two years but not more than three years- committed facilities73.7 82.8 Total86.8 91.42006£m2005£m66Annual Report 2006Notes to the Consolidated Accounts continuedYen1.0 1.0 Sterling2.02.0 US$5.15.1 Euro20.220.2 At 31 December 200628.328.3 Sterling0.90.9 US$3.53.5 Euro13.713.7 At 31 December 200518.118.1 The floating rate borrowings comprise bank loans and overdrafts bearing interest at rates based on LIBOR.Total £mFloating rateborrowings £mCurrency19 Derivative Financial Instruments continuediii) Interest rate profileCurrencySterling- 0.2 US$4.86.3Euro3.85.4Other0.80.8Total cash balances9.412.7Forward exchange contracts1.60.1Option contracts0.70.1Gross financial assets11.712.9The floating rate financial assets comprise bank deposits bearing interest at rates based on local money market rates.Sterling, US$, Euro and Yen balances within the UK can be offset. The forward exchange and option contracts all mature within 18 months.Floatingrate2006£mFloatingrate2005£mc) Financial assetsThe Vitec Group6720 Current TaxThe current net tax liability of £9.9 million (2005: £6.7 million) represents the amount of income taxes payable in respect ofcurrent and prior periods.Cash and cash equivalents9.412.7 Bank overdrafts(1.9)(0.9) Cash and cash equivalents in the cash flow statement7.511.8 2006£m 2005£m 21 Cash and Cash EquivalentsDecrease in cash and cash equivalents(3.8)(1.6) Loan taken over on acquisition of businesses(0.9)- Net (borrowing)/repayment of loans(9.1)8.2 (Increase)/reduction in net debt resulting from cash flows(13.8)6.6 Exchange on cash movements(0.5)- Exchange on loan movements0.8(0.7) Exchange rate movements0.3(0.7) Movements in net debt in the period(13.5)5.9Net debt at 1 January(5.4)(11.3) Net debt at 31 December(18.9)(5.4)Exchange rate movements result from the adjustment of opening balances and cash flows in the year to closing exchangerates. (1)Net debt constitutes cash and cash equivalents, bank overdrafts and bank loans.2006£m 2005£m 22 Reconciliation of Decrease in Cash and Cash Equivalents to Movement in Net Debt (1)Current trade and other payables Payments received on account0.10.3 Trade payables20.316.6 Other tax and social security costs2.01.9 Other payables7.25.8 Accruals and deferred income7.56.9 37.131.5 Non-current trade and other payablesOther payables0.10.1 Accruals and deferred income0.10.1 0.20.2 2006£m 2005£m 23 Trade and Other Payables68Annual Report 200624 ProvisionsAt 1 January 2006 3.90.21.02.7-Provisions utilised during the year(2.4)(0.8)(0.3)(1.0)(0.3)Charged to the income statement 3.21.50.5-1.2Acquisition of subsidiary undertaking 3.9--3.9-Currency translation adjustments(0.6)(0.1)(0.1)(0.4)-At 31 December 20068.00.81.15.20.9Non-current 3.0--3.0-Current5.00.81.12.20.98.00.81.15.20.9The contingent consideration on acquisition of subsidiaries of £5.2 million relates to the following acquisitions:• Kata – As at 31 December 2005, management's estimate of the realistic actual payout was US$4.6 million (£2.7 million).In 2006 consideration of US$2.0 million (£1.0 million) was paid out. As at the end of 2006, the maximum remainingcontingent consideration payable is US$7.1 million (£3.6 million) conditional upon its future sales and profitability in2006 and 2007. Management's estimate at 31 December 2006 of a realistic actual payout is US$2.6 million (£1.3million).•Petrol – The maximum potential contingent consideration payable is US$3.4 million (£1.8 million), conditional upon theachievement of profitability targets in 2006. Management's estimate at 31 December 2006 of a realistic actual payout isUS$3.1 million (£1.7 million).•Autoscript – The maximum potential contingent consideration payable is £2.0 million, conditional on the achievement ofprofitability targets for 2007 and 2008. Management's estimate at 31 December 2006 of a realistic actual payout is £1.5million.•Tomcat – The maximum potential contingent consideration payable is US$7.0 million (£3.6 million), conditional on theachievement of profitability targets in 2007 to 2009. Management's estimate at 31 December 2006 of a realistic actualpayout is US$1.4 million (£0.7 million).The remaining provisions comprise warranty provisions of £1.1 million (2005: £1.0 million), other provision for the earlytermination of property lease of £0.9 million, and the provision for restructuring of £0.8 million (2005: £0.2 million). Thewarranty provision is calculated based on the sale of products under warranty and is consistent with previous years. Theprovision is expected to be utilised over the warranty period (up to five years). The restructuring and early termination ofproperty lease provision will be utilised during 2007.Total£mRestructuring£mWarranty£m Contingentconsiderationon acquisitionof subsidiaries£m Other£m Notes to the Consolidated Accounts continuedThe Vitec Group69TotalEquity£m Retainedearnings£m CapitalRedemptionreserve£m Cash flowhedgingreserve £m SharePremium£m Translationreserve£m ShareCapital£m 25 Capital and ReservesAt 1 January 20058.22.7(4.0)1.60.856.165.4Total recognised income for the year2.2(1.5)10.311.0Dividends paid(6.1)(6.1)Equity-settled transactions, net of tax0.30.3At 31 December 20058.22.7(1.8)1.6(0.7)60.670.6 At 1 January 20068.22.7(1.8)1.6(0.7)60.670.6Total recognised income for the year(5.7)2.015.611.9Purchase of own shares(0.9)(0.9)Dividends paid(6.5)(6.5)Equity-settled transactions, net of tax1.21.2Premium on new shares issued-0.50.5At 31 December 20068.23.2(7.5)1.61.370.076.8Translation reserve The translation reserve comprises all currency translation differences arising from the translation of the financial statements of foreign operations, as well as from the translation of monetary items designated as foreign net investments and hedges of net investment in foreign subsidiaries.Cash flow hedging reserve The cash flow hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flowhedging instruments related to hedged transactions that have not yet occurred.During the year, the £0.6 million relating to derivatives in cash flow hedging relationships was released to the incomestatement in 'Cost of sales'. Also, further derivatives were acquired for cash flow hedging relationships which were valued at£1.4 million at the end of the year. The total movement in the cash flow hedging reserve during the year was therefore £2.0million.Capital redemption reserve This reserve was created in 1999 when the Company purchased, and subsequently cancelled, 885,000 ordinary shares.Purchase of own sharesOwn shares held are recognised as a deduction from retained earnings. In 2002 the Company purchased 142,857 own shares,representing 0.3% (2005: 0.3%) of the called up share capital of the Company at an average price of 314.26p per share inconnection with a share option made to the Chief Executive. In 2006 the Company purchased 189,210 own shares,representing 0.4% of the called up share capital of the Company at an average price of 482.80p per share in connection withshare incentive awards made by the Company in previous years. These shares are being held in trust by Halifax EES TrusteesInternational Ltd.Dividends After the balance sheet date the following dividend was recommended by the directors. The dividend has not been provided forat the year end and there are no tax consequences. 10.1p per share (2005: 9.4p) 4.2 3.92006£m 2005£m 70Annual Report 2006The authorised share capital at 31 December 2006 consisted of 65,000,000 (2005: 65,000,000) ordinary shares of 20peach, of which 41,277,250 were allotted and fully paid. The movement during the year was: At 31 December 2006 the following options had been granted and remained outstanding under the Company's share optionschemes:At 1 January 200641,086,7198.2 Exercise of share options190,531- At 31 December 200641,277,2508.2 SharesIssued sharecapital£m United Kingdom SAYE schemes232,241231p-492p2007-2013 International SAYE schemes141,266231p-436p2007-2011 Executive schemes1,214,944298p-653p2007-2012 1,588,451 On 19 April 2006, awards over an aggregate of 364,649 shares in the Company were made to 71 senior Group executivesunder the Company's 2005 Long Term Incentive Plan. The total number of shares outstanding at 31 December 2006 underthe Company's Long Term Incentive Plan and 2005 Long Term Incentive Plan was 1,027,705 (2005: 914,279). The terms ofthe awards and the related performance conditions are described in the Remuneration Report.On 17 May 2006, Basic awards over an aggregate of 11,715 shares in the Company were made to six senior Group executivesunder the Company's 2005 Deferred Bonus Plan (any Matching Award will be calculated on vesting). The total number ofshares outstanding at 31 December 2006 under the Company's Deferred Bonus Plan was 122,834 (2005: 140,161). Theterms of the awards and the related performance conditions are described in the Remuneration Report.Number ofsharesExercise pricesDatesnormallyexercisable25 Capital and Reserves continuedNotes to the Consolidated Accounts continuedThe Vitec Group7126 Acquisitions of BusinessesDue to the number of acquisitions and the complexity of the pre-acquisition structures of certain businesses, managementconsider that it is impracticable to disclose the results of the combined entity as though all the acquisitions were effected at 1January 2006.Goodwill is calculated as the excess of purchase consideration over the fair value of those intangible and tangible net assetsacquired that can be separately identified in accordance with IFRS. It therefore represents assets that do not meet therecognition criteria as separable assets in accordance with IFRS.Petrol Bags On 16 January 2006 the Group acquired the net assets of Petrol Bags, the designer and manufacturer of broadcastvideo bags and accessories. The cash consideration including acquisition expenses amounted to US$3.1 million (£1.8 million)and there is an estimated contingent consideration of US$3.1 million (£1.7 million) conditional upon future profitabilitytargets. Based on an assessment of the fair values of the tangible and intangible assets, goodwill of £2.3 million arose onacquisition.As part of the fair value exercise, intangible fixed assets comprising brand name (£0.1 million) and customer relationships(£0.1 million) were identified.The acquisition was funded from existing cash resources and has been accounted for using the acquisition method ofaccounting.Net assets acquiredIntangible assets-0.20.2Deferred tax on intangible assets-0.30.3Inventories0.30.20.5Trade and other receivables0.2-0.20.50.71.2Purchased goodwill2.3Total purchase consideration, including expenses and contingent consideration3.5Net outflow of cash in respect of acquisitions Total purchase consideration, including expenses3.5 Contingent consideration(1.7)Cash paid for acquisition, including expenses1.8Cash acquired-Total outflow of cash from Group1.8The results of Petrol have been included in the Broadcast Systems division and comprise:External revenue0.7Inter-segment revenue0.8Total revenue1.5 Cost of sales(1.0) Operating expenses(0.3)Operating profit0.2(1)Operating expenses include £0.1 million of amortisation of intangible assets.Bookvalue£m Fair valueadjustments£mAsadjusted£m £m (1)£m 72Annual Report 200626 Acquisitions of Businesses continuedBogen Imaging KK On 5 May 2006 the Group acquired the Japanese photographic distribution activities for its Manfrottophotographic and video camera and lighting supports and its Kata photographic bags, from Honjo & Co in Kobe, and for itsGitzo photographic and video camera supports, from KFC Ltd in Tokyo. The cash consideration including acquisition expensesamounted to Yen191.5 million (£0.9 million). Based on an assessment of the fair values of the tangible and intangible assets,goodwill of £nil arose on acquisition.As part of the fair value exercise, intangible fixed assets comprising customer relationships (£0.8 million) were identified.The acquisition was funded from existing cash resources, and has been accounted for using the acquisition method ofaccounting. Net assets acquiredIntangible assets-0.80.8Inventories0.2-0.2Trade and other payables(0.1)-(0.1)0.10.80.9Purchased goodwill- Total purchase consideration, including expenses0.9Net outflow of cash in respect of acquisitionsTotal purchase consideration, including expenses0.9Contingent consideration-Cash paid for acquisition, including expenses0.9Cash acquired-Total outflow of cash from Group0.9The results of Bogen Imaging KK, a new Vitec Group company that commenced trading on 1 June 2006, havebeen included in the Imaging & Staging division and comprise: External revenue2.1Inter-segment revenue-Total revenue2.1Cost of sales(1.3)Operating expenses(1.1)Operating loss(0.3)(1)Operating expenses include £0.1 million of amortisation of intangible assets.Bookvalue£m Fair valueadjustments£mAsadjusted£m £m £m (1)Notes to the Consolidated Accounts continuedThe Vitec Group73Autoscript On 31 October 2006 the Group acquired all the issued share capital of ALC Broadcast Ltd, the holding company of'Autoscript', the leading providers of prompting hardware and software to the broadcast industry. The net cash consideration(after taking account of £0.2 million cash in the business at acquisition date and including acquisition expenses) amounted to£5.0 million and there is an estimated contingent consideration of £1.5 million conditional upon future profitability targets.Based on an assessment of the fair values of the tangible and intangible assets, goodwill of £4.4 million arose on acquisition.As part of the fair value exercise, intangible fixed assets comprising brand name (£0.5 million), brand technology (£0.2 million)and customer relationships (£1.0 million) were identified.The acquisition was funded from existing cash resources and has been accounted for using the acquisition method ofaccounting.Net assets acquiredIntangible assets0.71.01.7 Property, plant and equipment0.1-0.1Inventories0.40.10.5Trade and other receivables0.8-0.8Loan(0.2)-(0.2)Cash and cash equivalents0.2-0.2Trade and other payables(0.8)-(0.8)1.21.12.3Purchased goodwill4.4Total purchase consideration, including expenses6.7Bookvalue£m Fair valueadjustments£mAsadjusted£m Net outflow of cash in respect of acquisitionsTotal purchase consideration, including expenses6.7Contingent consideration(1.5)Cash paid for acquisition, including expenses5.2Net cash acquired(0.2)Total outflow of cash from Group5.0The results of Autoscript have been included in the Broadcast Systems division and comprise:£m External revenue0.7Inter-segment revenue- Total revenue0.7Cost of sales(0.5) Operating expenses(0.3)Operating profit(0.1)(1)Operating expenses include £0.1 million of amortisation of intangible assets.£m (1)74Annual Report 200626 Acquisitions of Businesses continuedTomcat On 7 November 2006 the Group acquired all the issued share capital of Tomcat Global Corporation (Tomcat), a leadingUS manufacturer of aluminium structures for live events. The net cash consideration (after taking account of £1.0 million cashin the business at acquisition date and including acquisition expenses) amounted to US$13.5 million (£7.1 million) and thereis an estimated contingent consideration of US$1.4 million (£0.7 million) conditional upon future profitability targets. Basedon an assessment of the fair values of the tangible and intangible assets, goodwill of US$9.0 million (£4.7 million) arose onacquisition. As part of the fair value exercise, intangible fixed assets comprising brand name (£0.8 million) and customer relationships(£1.8 million) were identified.The acquisition was funded from existing cash resources and has been accounted for using the acquisition method ofaccounting.Net assets acquiredIntangible assets-2.62.6Deferred tax on intangible assets-(0.4)(0.4)Property, plant and equipment1.0-1.0Inventories1.91.9Trade and other receivables0.7-0.7Bank loan(0.7)-(0.7)Cash and cash equivalents1.0-1.0Tax payable0.1-0.1Trade and other payables(2.1)-(2.1)1.92.24.1Purchased goodwill4.7Total purchase consideration, including expenses and contingent consideration8.8Bookvalue£m Fair valueadjustments£mAsadjusted£m Net outflow of cash in respect of acquisitionsTotal purchase consideration, including expenses8.8 Contingent consideration(0.7) Cash paid for acquisition, including expenses8.1 Cash acquired(1.0) Total outflow of cash from Group (excluding bank loan acquired)7.1 The results of Tomcat have been included in the Imaging & Staging division and comprise:£m External revenue1.5 Inter-segment revenue- Total revenue1.5 Cost of sales(1.1) Operating expenses(0.4) Operating profit-(1)Operating expenses include £nil of amortisation of intangible assets.£m (1)Notes to the Consolidated Accounts continuedThe Vitec Group75On 31 May 2005 the Group acquired the business and assets of Kata International Limited and Kata Professional (Kimchi andTishler) Limited (Kata), the designer and manufacturer of premium protective carrying bags for cameras and accessories in thephotographic and broadcast markets. The net cash consideration (after taking account of £0.1 million cash in the business atacquisition date and including acquisition expenses) amounted to US$8.3 million (£4.6 million) and there is an estimatedcontingent consideration of US$4.6 million (£2.5 million) conditional upon future sales and profitability targets. Based on anassessment of the fair values of the tangible and intangible assets, goodwill of £5.4m arose on acquisition. As part of the fair value exercise, intangible fixed assets comprising sales order backlog (£0.1 million), brand name (£0.3million) and customer relationships (£1.0 million) were identified.The acquisition was funded from existing cash resources and contingent consideration, and has been accounted for using theacquisition method of accounting. Net Assets acquiredIntangible assets-1.41.4Deferred tax on intangible assets(0.3)(0.3)Property, plant and equipment0.1-0.1Inventories0.40.20.6Trade and other Receivables0.7-0.7Cash and cash equivalents0.1-0.1Trade and other Payables(0.8)-(0.8)0.51.31.8Purchased goodwill5.4Total purchase consideration, including expenses7.2Bookvalue£m Fair valueadjustments£mAsadjusted£m Net outflow of cash in respect of acquisitionsTotal purchase consideration, including expenses7.2 Contingent consideration(2.5) Cash paid for acquisition, including expenses4.7 Net cash acquired(0.1) Total outflow of cash from Group4.6 The results of Kata for the seven months ending 31 December 2005 have been included in the Imaging & Staging division andcomprise:£m External revenue1.7Inter-segment revenue0.9 Total revenue2.6Cost of sales(1.6) Operating expenses(1.0)Operating profit-Management has taken the option under IFRS 3 not to disclose the full year results because of the complexity of the pre-acquisition structure of the business. (1)Operating expenses include £0.2 million of amortisation of intangible assets.£m (1)76Annual Report 2006Notes to the Consolidated Accounts continuedExpiring within one year2.90.33.20.6Expiring two to five years6.20.26.44.6Expiring after five years3.6-3.69.512.70.513.214.7(1)Leasing commitments at 31 December 2005 comprised £13.7 million of land and buildings and £1.0 million of other commitments.Land andbuildings£m Other£m Total2006£m 2005£m 27 Operating LeasesGross leasing commitments28 Employee Benefits28a Share Based PaymentsGroup employees participate in a number of employee incentive schemes including a sharesave plan, an unapproved shareoption plan, a long term incentive plan and a deferred bonus plan. The recognition and measurement principles in IFRS 2have not been applied to awards granted before 7 November 2002 in accordance with the transitional provisions in IFRS 1 andIFRS 2.Share option plansThe share option plans currently operated by the Group are:2002 Sharesave and International Sharesave Plan ("SAYE")This is a share option plan. Employees can elect at the outset to save a fixed amount per month into the Sharesave Plan. Thevesting period is either three, five or seven years. At the vesting date, the employees have the option to use the savings topurchase shares at a discount to the share price (determined at the date of grant). The option expires six months after vesting.2002 Approved Share Option PlanThis plan is approved by HM Revenue and Customs. Executive directors and other senior employees are selected to receiveoptions over shares. Exercise of an option is subject to growth in the Company's earnings per share, excluding exceptional orextraordinary items, exceeding the growth in the retail prices index over a performance period. The percentage growth over theretail price index determines the proportion of the award that may be exercised. Options are exercisable between the third andthe tenth anniversaries of their dates of grant.2002 Unapproved Share Option Plan ("USOP")The USOP is a share option plan. Options are granted with a vesting period of three years. There is an Earnings Per Share("EPS") performance condition attached to the awards. If this performance condition is met, exercise is possible after the thirdanniversary of date of grant but before the tenth anniversary .For awards granted prior to 2005, 100% of awards vest if the EPS growth over three years increases by more than cumulativeRPI + 9.30%. If the EPS growth is lower than this, but more than cumulative RPI + 3.03%, then between 33.3% and 100%of the awards will vest. If the EPS growth is less than cumulative RPI + 3.03%, then no awards will vest.(1)Expiring within one year----Expiring two to five years-0.20.20.5Expiring after five years-----0.20.20.5 The Group leases a number of office, warehouse and factory facilities under operating leases. None of the leases includecontingent rentals. During the year ended 31 December 2006, £3.8 million (2005: £3.4 million) was recognised as anexpense in respect of operating leases and £0.2 million (2005: £0.2 million) was recognised as income in respect ofsubleases in the income statement.Land andbuildings£m Other£m Total2006£m 2005£m Leasing incomeThe Vitec Group77For awards granted in 2005 and subsequent years (until replaced or varied by the Committee), 100% of the awards vest if theEPS growth over three years increases by more than cumulative RPI + 12%. If the EPS growth is lower than this, but more thancumulative RPI + 6%, then between 33% and 100% of the awards will vest. If the EPS growth is less than cumulative RPI +6%, no awards will vest.Awards are settled with shares.Options outstanding under the 2002 Sharesave Plan and 2002 Unapproved Share Option Plan as at 31 December 2006together with their exercise prices and vesting periods, are as follows:NumberoutstandingWeightedaverageexercise price£Weightedaverageremainingcontractual life(years)Range ofexercise prices££2.21 to £2.4066,824 2.31 1.9 £2.61 to £2.80176,016 2.70 2.1 £2.81 to £3.00446,875 2.98 7.6 £3.41 to £3.60369,857 3.55 6.6 £4.01 to £4.2064,964 4.113.6 £4.21 to £4.4012,871 4.363.2 £4.81 to £5.00596 4.92- £5.01 to £5.20140,138 5.104.3 £5.21 to £5.4037,367 5.32 5.9 £5.41 to £5.60238,249 5.49 3.8 £5.61 to £5.8019,100 5.76 2.4 £6.21 to £6.4011,000 6.25 0.4 £6.41 to £6.604,594 6.531.3 Total1,588,451 3.805.3 Options granted, exercised and lapsed during the years ended 31 December 2006 and 2005 under these share option planswere as follows:Weightedaverageexercise price£USOPWeightedaverageexercise price£SharesaveAwards @ 31/12/2004552,591 2.92 1,322,394 4.28 Exercised5,614 2.51- - Lapsed52,007 3.06 264,443 4.93 Expired35,696 4.92 - - Granted74,303 2.73 358,639 3.00 Awards @ 31/12/2005533,577 2.75 1,416,590 3.84 Awards exercisable @ 31/12/2005143,7222.99572,7344.93Exercised171,548 2.67 -- Lapsed36,679 2.91 222,2172.78 Expired24,893 4.20 -- Granted73,050 4.16 20,5715.25 Awards @ 31/12/2006373,507 2.95 1,214,944 4.05Awards exercisable @ 31/12/20064,6564.23572,7344.93The weighted average share price at the date of exercise for share options exercised during the year was £4.42 (2005: £3.31).78Annual Report 2006Notes to the Consolidated Accounts continued28 Employee Benefits continuedShare award plansLong Term Incentive Plan ("LTIP")The LTIP are subject to the similar performance conditions as the USOP, with the target for all of the shares to vest being EPSgrowth over the vesting period of at least cumulative RPI + 36%. If the EPS growth is lower than this, but more thancumulative RPI + 9%, then between 25% and 100% of the awards will vest. If the EPS growth is less than cumulative RPI+9%, no awards will vest. Employees are not entitled to dividends on the awarded shares until they vest.Awards are settled with shares.2005 Long Term Incentive Plan ("2005 LTIP")The 2005 LTIP are also subject to performance conditions but these conditions are market related, based on the TotalShareholder Return (TSR) of the Company over a three year period compared to the TSR of comparator companies over asimilar period. At the end of the performance period, the TSR of the Company and the comparator companies shall becalculated and ranked from highest to lowest. All awards will vest if the Company's TSR growth is in or above the 20thpercentile. If the Company's TSR performance lies between the 50th and 20th percentile, between 35% and 100% of theawards will vest. For the 2006 awards, the performance period commences on 1 January 2006.Employees are entitled to dividends on the awarded shares that are paid over the performance period - these are paid either ascash or the equivalent number of shares at the vesting date. Awards are settled with shares.2005 Deferred Bonus Plan ("DBP")Under the 2005 DBP, employees can exchange up to 100% of their bonus in a financial period for shares of the same value.These awards will vest three years after the date of grant (or immediately if the employee leaves the Company). Awards, in anyform other than an option, can be exercised within a period of one year (or an alternative period as determined by the Companyfor leavers).The employee may also receive matching shares at the end of the vesting period. The number of matching shares is dependenton the outcome of a market performance condition. At the end of the performance period, the TSR of the Company and thecomparator companies are calculated and ranked from highest to lowest. All awards will vest if the Company's TSR growth is inthe top 20%. No awards will vest if the Company's TSR performance is below the median. Where the Company's TSR growthis between the median and the 20th percentile, awards will vest on a straight line basis between 0% and 100%. For the 2006awards, the performance period commences on 1 January 2006.The Vitec Group79Nature of Arrangement"Save as you"Save as you"Save as youShare optionShare awardShare awardearn" schemeearn" schemeearn" schemeplanplanplanDate of Grant2 May 20062 May 20062 May 200619 April 200619 April 200617 May 2006Number of instruments granted 43,15425,7364,16020,571364,64911,715Basic/ 11,715MatchingExercise Price£4.11/£4.36(1)£4.11/£4.36(1)£4.11£5.25n/an/aShare price at date of grant£5.04£5.04£5.04£5.02£5.02£5.05Contractual Life (years)3.55.57.51034SettlementSharesSharesSharesSharesSharesSharesExpected volatility(2)19.8%26.7%25.0%27.0%18.3%17.5%Expected option life atgrant date (years)3.255.257.253.5n/an/aRisk free interest rate4.7%4.7%4.7%4.6%n/an/aExpected dividend (dividendyield)3.1%3.1%3.1%3.1%n/an/aExpected departures (perannum from grant date)5%5%5%5%5%0%Expected outcome of meetingnon-market related performancecriteria (at the grant date)n/an/an/a100%n/an/aFair value per grantedinstrument determined at thegrant date£1.23/£1.09(1)£1.53/£1.42(1)£1.56£1.09£4.13£5.05/£4.10Valuation modelBlackBlackBlackBlackMonteBlack Scholes/ ScholesScholesScholesScholesCarloMonte Carlo(1)For the Sharesave three year and five year awards, the exercise price for awards made to US employees was different from those granted to European employees.The first figure represents awards granted to European employees while the second figure relates to awards granted to employees in the US. (2)The expected volatility is based on historical volatility determined by the analysis of daily share price over a period commensurate with the expected lifetime ofthe award and ending on the date of grant of the award.(3)For the LTIP 2005 and the DBP matching award, a Monte Carlo valuation methodology has been used. Under this valuation method, the share price for Vitec isprojected to the end of the performance period as is the Total Shareholder Return for Vitec and the companies in the comparator group. Based on theseprojections, the number of awards that will vest is determined and then the present value of this outcome is calculated. Thousands of simulations are run andthe fair value of the award is calculated as the average present value of these outcomes.(4)Represents fair value for basic and matching award respectively.(5)Assumed 100% vesting. See page 78 for relative performance condition.2002 UK andInternationalSharesavePlan three yearArrangement2002 UK andInternationalSharesavePlan five year2002 UK andInternationalSharesavePlan seven year2002UnapprovedShare OptionPlan2005 LongTerm IncentivePlan2005DeferredBonus PlanThree yearservice periodand savingsrequirementVesting conditionsFive yearservice periodand savingsrequirementSeven yearservice periodand savingsrequirementEPS growthrelative toRPI andthree yearservice periodRelative TSRperformanceagainstcomparatorgroup andthree yearservice periodExchange ofcash bonusfor sharesand threeyear serviceperiodFor share options and share awards granted during the year the following information is provided:(3)(4)(3), (5)(3)80Annual Report 2006Notes to the Consolidated Accounts continued28 Employee Benefits continuedThe amounts recognised in the income statement for share based payment transactions with employees for the year ended 31December 2006 was £1,500,000 (2005: £328,000), of this £1,283,000 (2005: £300,000) related to equity-settled sharebased payment transactions.The liability recognised in the balance sheet for cash-settled awards as at 31 December 2006 was £246,000 (2005: £29,000).The total intrinsic value as at 31 December 2006 for cash-settled awards which had vested by this date was £36,000.28b Post-employment ObligationsDefined benefit plans - pensions and other post-retirement plan disclosuresAmounts recognised on the Group balance sheetPlan assetsEquities29.627.3Bonds10.39.2Other2.62.4Total fair value of plan assets42.538.9Present value of defined benefit obligation(47.5)(46.4)Net (deficit) recognised in the Group balance sheet(5.0)(7.5)Analysis of net recognised deficitUK pension fund(1.0)(3.1)Total funded plans(1.0)(3.1)Italian pension scheme(3.0)(3.2)Other unfunded plans(1.0)(1.2)Total unfunded plans(4.0)(4.4)Liability recognised in the Group balance sheet(5.0)(7.5)Amounts recognised in the Group income statementAmounts in net operating costsCurrent service costs - defined benefit schemes2.22.2Employers' pension costs - defined contribution schemes0.40.42.62.6Amounts in net financial expenseExpected return on plan assets(2.6)(2.2)Interest cost2.12.0(0.5)(0.2)Total amounts charged to the income statement2.12.42006£m 2005£m 2006£m 2005£m The Vitec Group81Inflation rate3.02.82.8Expected rate of salary increases(1)5.04.84.8Rate of increase of pensions in payment(2)3.02.82.8Rate of increase for deferred pensions3.02.82.8Discount rate5.24.85.3(1)These exclude an age-related allowance for promotional and merit awards.(2)In addition, we have made allowance for the special pension increase guarantees applying to certain executive members of the Scheme.The assumptions relating to longevity underlying the pension liabilities at the balance sheet date are based on standardactuarial mortality tables and include an allowance for future improvements in longevity. The assumptions are equivalent toexpected longevity at age 65 for members in normal health approximately as follows: - pensioners currently aged 65: ranging from 19 years to 22 years - non-pensioners currently aged 45: ranging from 21 years to 24 years31 December2006% pa 31 December2005% pa31 December2004% paUK Pension SchemeThe nature of the scheme is a funded final salary scheme, closed to new entrants.i) Assumptions used to determine defined benefit obligation31 December2005£m31 December2006£m31 December2004£miii) Reconciliation of funded status at 31 December 2006Present value of defined benefit obligation(43.5)(42.0)(36.5)Assets at fair value 42.538.930.7Funded status(1.0)(3.1)(5.8)Unrecognised past service cost---Unrecognised net gain/(loss)---Effect of asset ceiling---Defined benefit asset/(liability) (1.0)(3.1)(5.8)Equities29.67.827.37.821.37.9Bonds10.34.79.24.37.44.8Property2.16.21.26.31.46.8Cash/net current assets-4.80.63.8-3.8Insurance policies0.55.20.64.80.65.3Total value of assets42.538.930.7Note: the asset values shown are, where relevant, estimated bid values of market securities.Fair value at 31December 2006£mExpected longterm rate ofreturn at 31December 2006% paFair value at 31December 2005£mExpected longterm rate ofreturn at 31December 2005% paFair value at 31December 2004£mExpected longterm rate ofreturn at 31December 2004% paii) Scheme assets and expected rate of returnA summary of the assets of the scheme, classified into the major asset classes, is shown below, together with the expectedreturn on each major asset class.82Annual Report 2006Notes to the Consolidated Accounts continuedYear ending31 December2006£mYear ending31 December2005£mGroup service cost1.51.5Interest cost2.01.9Expected return on assets(2.6)(2.2)Past service costs--Curtailments--Settlements--Total pension expense/(income)0.91.2Year ending31 December2005£mYear ending31 December2006£mYear ending31 December2004£mb) Statement of Recognised Income and Expense (SORIE)Actuarial gain/(loss) recognised in SORIE during the period2.00.5(0.3)Year ending31 December2006£mYear ending31 December2005£mv) Return on assets for year to 31 December 2006Expected return on assets2.62.2Actuarial gain/(loss) on assets 1.04.0Actual return on assets 3.66.2Year ending31 December2006£mYear ending31 December2005£mvi) Reconciliation of present value of defined benefit obligation (DBO) for the year to 31 December 2006Present value of DBO at start of year42.036.5Group service cost1.51.5Interest cost2.01.9Employee contributions0.40.4Actuarial (gain)/loss on change of assumptions(1.0)3.6Experience (gain)/loss-(0.1)Actual benefit payments and expenses(1.4)(1.8)Past service costs--Curtailments--Settlements--Present value of DBO at end of year43.542.0iv) Pension expense for year to 31 December 2006a) Components of pension expense28 Employee Benefits continuedThe Vitec Group8331 December2006£m31 December2005£mvii) Reconciliation of the fair value of assets for the year to 31 December 2006Fair value of assets at start of year38.930.7Expected return on assets 2.62.2Actuarial gain/(loss) on plan assets1.04.0Group contributions1.03.4Employee contributions0.40.4Actual benefit payments(1.2)(1.5)Administration expenses paid(0.2)(0.3)Curtailments--Settlements--Fair value of assets at end of year42.538.9Year to31 December2006£mYear to31 December2005£mviii) Reconciliation of change in funded status for the year to 31 December 2006Defined benefit asset/(liability) at start of year (3.1)(5.8)Total pension (expense)/income(0.9)(1.2)Employer contributions actually paid1.03.4Benefits paid directly by Group--Gain/(loss) recognised in SORIE2.00.5Gain/(loss) due to exchange rate movements--Defined benefit asset/(liability) at end of year(1.0)(3.1)Yearcommencing1 January2007£mix) Expected 2007 contributionsGroup Contributions1.0Employee Contributions0.4Italian pension provisionIn accordance with Italian law, Italian employees are entitled to a lump sum payment ("TFR") from their employers when theyresign or retire. The TFR is accrued over the years in which the employee is in service. In each year, the accrued amount is increased by 6.91% ofthe employee's gross annual salary. At the end of each year, the employee's TFRs are revalued by 1.5% plus 75% of the nationalincrease in the consumer price index (as published by the Italian National Statistical Institute "ISTAT").After eight years of service, an employee can ask his employer to advance up to 70% of his total TSR. Once the employee has leftthe Company and received the balance of his TSR, the Company is not liable for any further pension obligations in respect of thatemployee. The International Financial Reporting Interpretations Committee (IFRIC) of IASB (International Accounting Standard Bureau) hasestablished that, in accordance with IAS 19, TFRs must be accounted for as defined benefit pension schemes and the presentvalue of the TFRs must be computed using actuarial assumptions.84Annual Report 2006Notes to the Consolidated Accounts continued31 December2006%pa31 December2005%paAssumptions used to determine defined benefit obligationInflation rate2%2%Expected rate of salary increases2%2%Expected salary increase on promotion10.54%10.54%Discount rate4.33%4.33%2006£m2005£mPension expense for the year to 31 December 2006Group service cost 0.5 0.5Interest cost 0.1 0.1Total pension expense 0.6 0.62006£m2005£mStatement of Recognised Income and Expense (SORIE) Actuarial gain/(loss) recognised in SORIE during the period0.2-2006£m2005£mReconciliation of present value of defined benefit obligation (DBO) for the year to 31 December 2006Present value of DBO at start of year(3.2)(2.9)Group service cost(0.5)(0.5)Interest cost(0.1)(0.1)Actuarial gain/(loss)0.2-Contributions paid0.60.3Present value of DBO at end of year(3.0)(3.2)29 Post balance sheet events There are no post balance sheet events to report.28 Employee Benefits continuedThe Vitec Group8530 Accounting Estimates and JudgementsManagement discussed with the Audit Committee the development, selection and disclosure of the Group's critical accountingpolicies and estimates and the application of these policies and estimates.Key sources of estimation uncertainty Note 14 contains information about the assumptions and their risk factors relating to goodwill impairment. In Note 19 detailedanalysis is given of the foreign exchange exposure of the Group and risks in relation to foreign exchange movements.Provisions for bad debts The carrying amount of receivables at the year end was £32.7 million (2005: £32.0 million). The provision for bad debt as at1 January 2006 was £1.5 million (2005: £1.6 million). During the year, £0.2 million (2005: £0.4 million) of this provisionwas utilised to write off bad debts and the provision was increased by £0.3 million (2005: £0.3 million) as part of the normaltrade receivable ageing assessments, with the charge going to "administrative costs" in the income statement. Effects oftranslation reduced the provision by £0.1 million (2005: £nil). The trade receivables impairment provision as at 31 December2006 was £1.5 million (2005: £1.5 million). Management believe that this provision is adequate to cover the risk of baddebts.Provisions for inventory obsolescenceThe carrying amount of inventory at the year end was £48.6 million (2005: £37.6 million). The provision for inventoryobsolescence as at 1 January 2006 was £6.3 million (2005: £6.3 million). During the year, £0.9 million (2005: £0.9 million)of this prior year provision was utilised to scrap obsolete inventory. The provision was increased by £1.9 million (2005: £0.7million) as part of normal inventory provisioning assessments with the charge going to "cost of sales" in the income statement,and £0.6 million (2005: £nil) for inventory write off relating to restructuring at Broadcast Systems with the charge going to"operating expenses" in the income statement. Effects of translation reduced the provision by £0.4 million (2005: (£0.2million)). The provision for inventory obsolescence as at 31 December 2006 was £7.5 million (2005: £6.3 million). Warranty ProvisionsIncluded within provisions is an amount of £1.1 million for warranty provisions. Management believe that these provisions areadequate to cover the risk of warranty claims against the Group.Post-employment obligations A number of accounting estimates and judgements are incorporated within the provisions for post-employment obligations.These are described in more detail in Note 28.Share based payments A number of accounting estimates and judgements are incorporated within the provisions for share based payments. These aredescribed in more detail in Note 28.86Annual Report 2006Notes to the Consolidated Accounts continued31 Related Party TransactionsIdentity of related parties The Group has a related party relationship with its subsidiaries (these are listed in Note 15 on page 60), with its keymanagement personnel and directors of subsidiary entities.Transactions with directors of subsidiariesLino Manfrotto, a director (until 30 April 2006) of Feltre Stampi, a subsidiary of Gruppo Manfrotto Srl, is president andshareholder of Mancor Spa, a company from which Gruppo Manfrotto rents properties used in its business under operatingleases that expired at the end of 2006. Abramo Manfrotto, a non-executive director of Gruppo Manfrotto Srl, is also director ofMancor Spa. Rents paid to Mancor Spa in 2006 totalled c216,273, £147,425 (2005: c212,958, £145,702). At 31December 2006, there were no outstanding amounts payable to Mancor Spa (2005: nil). Abramo Manfrotto is also sole administrator of Antide Srl, a company specialising in world-wide web sites and e-mail services.Group companies paid Antide a total of c67,914, £46,295 during the year (2005: c45,081, £30,844) for products andservices. At 31 December 2006, there was c14,184, £9,669 outstanding and payable to Antide Srl (2005: c8,653, £5,920).Abramo Manfrotto is also Managing Director of Alu Spa (disposed of by the Group in December 2003). Sales of GruppoManfrotto products and services to Alu in 2006 totalled c848,317, £578,266 (2005: c1,144,460, £783,019). At 31December 2006, there was c277,045, £188,851 outstanding, payable by Alu Spa (2005: c863,782, £590,984). Sales of Aluproducts and services to Gruppo Manfrotto companies in 2006 were US$65,120, £35,399 and c44,950, £30,641 (2005:c72,198, £49,397). At 31 December 2006, there was c3,428, £2,337 outstanding and payable to Alu Spa (2005: c2,430,£1,663).Mitchell Clark, President of Tomcat Global Inc, is the owner of Bobawaba Ltd, a company from which Tomcat UK and BrilliantStages rents properties. Rents paid to Bobawaba Ltd since the acquisition of Tomcat by the Vitec Group totalled £3,700.Mitchell Clark also owns 50% of MRC/EC LLC, a company from which Tomcat USA rents properties. Rents paid to MRC/ECLLC since the acquisition of Tomcat by the Vitec Group totalled US$20,830, £11,323. At 31 December 2006, there were nooutstanding amounts payable to Bobawaba Ltd or MRC/EC LLC. Mitchell Clark is also the owner of Logic Productions Inc. The company car used by Mitchell Clark is owned by LogicProductions Inc and leased to Tomcat USA. Lease payments made to Logic Productions Inc since the acquisition of Tomcat bythe Vitec Group totalled US$2,780, £1,511.John James is Chief Executive Officer of Tomcat USA. He is also owner of LCOAT GP, Inc a company which sells powdercoatingservices to Tomcat USA. Sales of LCOAT services to Tomcat USA since the acquisition of Tomcat USA by Vitec Group wereUS$79,383, £43,152. At 31 December 2006, there was US$45,000, £24,462 outstanding and payable to LCOAT.Transactions with key management personnelKey management personnel are classed as the directors (including the non-executive directors) and the members of theExecutive Board. The Chief Executive, Gareth Rhys Williams, and the Finance Director, Alastair Hewgill, are directors of theCompany and are also members of the Executive Board. However, for the purposes of the following paragraphs and to avoiddouble counting, their interests and remuneration have been excluded from the information relating to the Executive Board.Executive directors of the Company and their immediate relatives control 0.224% (2005: 0.165%) of the shares of theCompany. Non-executive directors control 0.102% (2005: 0.096%). Members of the Executive Board control 0.070% (2005:0.058%) of the shares of the Company.The remuneration of the directors is set out on pages 21 to 27. The remuneration of the members of the Executive Board in2006 was: salaries £743,979 (2005: £706,091); performance-related bonuses £646,009 (2005: £347,528); short termemployee benefits (company car and medical insurance) £55,235 (2005: £43,279). In addition to their salaries, the aggregate of which is set out below, the Group also contributes to a number of pensionarrangements, each one specific to the country in which the individual member of the Executive Board is based. Members ofthe Executive Board and the executive directors are eligible to participate in the Group's executive bonus scheme and its shareincentive arrangements. The cost to the Company in 2006 arising from share incentive awards was £1,037,000 (2005:£135,000).The Vitec Group87Company Balance SheetAs at 31 December 2006Fixed assetsTangible assetsg1.71.8Investmentsh228.1236.6229.8238.4Current assetsDebtorsi4.2 4.2Cash at bank and in hand1.45.35.69.5Creditors- due within one yearj(112.8)(154.0)Net current liabilities(107.2) (144.5)Total assets less current liabilities122.693.9Creditors- due after more than one yearj(26.3) (17.2)Provisions for liabilities and chargesk-(0.1)Net assets96.376.6Capital and reservesCalled up share capitall8.28.2Share premium accountm3.22.7Capital redemption reservem1.61.6Revaluation reservem0.90.9Other reservesm53.753.7Profit and loss accountm28.79.5Shareholders' funds - equity96.376.6Notes2006£m 2005£m Approved by the Board on 5 March 2007 and signed on its behalf Alastair HewgillDirector88Annual Report 2006Reconciliation of Movements in Shareholders' FundsFor the year ended 31 December 2006 Profit/(loss) for the financial year 25.4 (1.2) Dividends (6.5) (6.1) Retained profit/(loss) for the year 18.9 (7.3) Equity-settled transactions1.2-Reserve for own shares(0.9)- Premium on new shares issued0.5 - Net increase/(decrease) in shareholders' funds 19.7 (7.3) Opening shareholders' funds 76.6 83.9 Closing shareholders' funds 96.3 76.62006£m2005£m The Vitec Group89Notes to the Company Accountsa Basis of PresentationThe accounts have been prepared in accordance with applicable UK accounting standards and under the historical costaccounting rules modified to include the revaluation of certain land and buildings. Under Section 230 (4) of the Companies Act 1985 the Company is exempt from the requirement to present its own profit andloss account. Under FRS 1 the Company is exempt from the requirement to present a cash flow statement on the grounds that this isincluded in the Group consolidated accounts. b Accounting PoliciesThe following accounting policies have been applied consistently in dealing with items which are considered material in relationto the financial statements.Fixed assets and depreciation Depreciation is provided to write off the cost or valuation of the relevant assets less the estimated residual value of tangiblefixed assets by equal annual amounts over their expected useful economic lives. No depreciation is provided on freehold land.Other fixed assets are depreciated as follows:Freehold buildings 21/2% – 5% on cost or valuation Short leasehold property over the remaining period of the lease Motor vehicles 25% – 331/3% on costEquipment, fixtures & fittings 10% – 331/3% on costFixed assets are stated at cost except that, as allowed under FRS 15 Tangible Fixed Assets, on adoption of that Standard in theyear ending 31 December 2000 when the book amounts of revalued land and buildings were retained. These book values arebased on the previous revaluation on 31 March 1989 and have not been subsequently revalued.Foreign currencies Transactions in foreign currencies are recorded using the monthly average rate of exchange ruling at the date of the transaction.Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balancesheet date and the gains or losses on translation are included in the profit and loss account.Leases Rentals under operating leases are charged to the profit and loss account on a straight-line basis.Post-retirement benefits The Company participates in a UK group pension scheme providing benefits based on both final pensionable salary and oncontributions paid. The assets of the scheme are held separately from those of the Company. The Company is unable to identifyits share of the underlying assets and liabilities of the scheme on a consistent and reasonable basis and therefore, as requiredby FRS 17 Retirement Benefits, accounts for the scheme as if it were a defined contribution scheme. As a result, the amountcharged to the profit and loss accounts represents the contributions payable to the scheme in the year.Taxation The charge for taxation is based on the profit/(loss) for the year and takes into account taxation deferred because of timingdifferences between the treatment of certain items for taxation and accounting purposes.Deferred tax is recognised in respect of all timing differences between the treatment of certain items for taxation andaccounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19.Employee share schemesThe share option programme allows employees to acquire shares of the Company. The fair value of options granted is recognisedas an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over theperiod during which the employees become unconditionally entitled to the options.For cash-settled share based payment transactions the fair value of the amount payable to the employee is recognised as anexpense with a corresponding increase in liabilities. Where the expense of the option relates to an employee of another Groupentity, this cost is recharged to that entity.Dividends on shares presented within shareholders' fundsDividends unpaid at the balance sheet date are only recognised as a liability at that date to the extent that they areappropriately authorised and are no longer at the discretion of the Company. Unpaid dividends that do not meet these criteriaare disclosed in the notes to the financial statements.90Annual Report 2006d Directors' RemunerationThe emoluments, share options, awards under incentive schemes and pension entitlements of the directors are disclosed in theRemuneration Report (see pages 21 to 27).Wages and salaries1.51.5Employers' social security costs0.20.2Employers' pension costs0.20.21.91.92006£m2005£m c EmployeesAggregate remuneration of all employees during the yearHead Office131320062005Average number of employees during the yearInvestmentsFixed asset investments are stated individually at cost less, where appropriate, provision for impairment in value. Financial InstrumentsFinancial instruments have been recognised in accordance with Group accounting policies. Derivative financial instrumentshave had no financial impact on these accounts due to equal and opposite internal instruments written with certain of theCompany's operating subsidiaries.Derivatives are recognised initially at fair value, and subsequent to initial recognition at fair value. The fair value of forwardexchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted fair price. Thefair value of option contracts is their quoted market price at the balance sheet date.Derivatives are de-recognised when they mature or are sold.The gain or loss on re-measurement to fair value is recognised immediately in the profit and loss account unless the derivativesqualify for hedge accounting.Hedge of Monetary Assets and LiabilitiesWhere a derivative is used to hedge economically the foreign exchange exposure of a recognised monetary asset or liability, nohedge accounting is applied and any gain or loss on the hedging instrument is recognised in the profit and loss account.Hedge of a Net Investment in a Foreign OperationThe portion of the gain or loss on an instrument used to hedge a net investment in a foreign operation that is determined to bean effective hedge is recognised directly in equity. The ineffective portion is recognised immediately in the profit and lossaccount. The effective portion will be recycled into the income statement when the foreign operation will be sold.Final dividends paid in respect of prior year but not recognised as liabilities in that year3.93.6Interim dividends paid in respect of the current year2.62.5Aggregate amount of dividends paid in the financial year6.5 6.1 A final 2006 dividend of 10.1p per share, which will absorb £4.2 million (2005: 9.4p absorbing £3.9 million) has beenrecommended by the Board. 2006£m2005£m e DividendsThe aggregate amount of dividends comprises:Notes to the Company Accounts continuedThe Vitec Group91Cost or valuationAt 1 January 2006 and at 31 December 20063.43.00.10.3 DepreciationAt 1 January 2006 1.61.3-0.3Charge for the year 0.1 0.1--At 1 January 20061.81.70.1-At 31 December 2006 1.71.4-0.3 Net book value At 1 January 20061.81.70.1-At 31 December 20061.71.60.1-Total£m Land andbuildings£m Motorvehicles£mEquipmentfixtures andfittings£m g Tangible Fixed AssetsNet book value of land and buildings at cost or valuation comprise the followingCarried at valuation (open market basis - 31 March 1989)1.61.7Freehold1.61.7The land and buildings shown above at a revalued net book value of £1.6 million would have been stated under historical costat £0.7 million and a net book value of £0.2 million.The revalued amount of the land and buildings has been retained as allowed for by the transitional provisions set out in FRS 15Tangible Fixed Assets.The Company had the following annual commitments under operating leases:Expiring two to five years0.10.12006£m2005£m 2006£m2005£m Land and buildingsf PensionsThe Company is a member of a larger UK Group wide pension scheme providing benefits based both on final pensionable payand on contributions. Because the Company is unable to identify its share of the scheme assets and liabilities on a consistentand reasonable basis, as required by FRS17 Retirement Benefits, the scheme has been accounted for in these financialstatements as if the scheme was a defined contribution scheme. At 31 December 2006, the UK scheme had a deficit of £1.0million (2005: £3.1 million).The contributions paid by the Company in the year amounted to £0.2 million (2005: £0.2 million). The expected Company contributions in 2007 are £0.2 million.Further details of the UK pension scheme are disclosed on pages 80 to 84.92Annual Report 2006Notes to the Company Accounts continuedCostAt 1 January 2006262.9103.1159.8 Repayment of loans(29.1)-(29.1) At 31 December 2006233.8103.1130.7 ProvisionAt 1 January 200626.35.720.6 Reversal of impairment(20.6)-(20.6) At 31 December 20065.75.7- Net Book ValueAt 1 January 2006236.697.4139.2At 31 December 2006228.197.4130.7 Total£m Investmentsin othershares£mLoans£m h Fixed Asset InvestmentsInvestments at cost or written down valueAmounts falling due within one yearAmounts owed by subsidiaries1.01.5 Other debtors0.51.1 Derivative financial instruments - forward exchange contracts1.61.1 Derivative financial instruments - option exchange contracts0.70.1 Tax recoverable0.20.3 Prepayments and accrued income0.20.1 4.24.22006£m2005£m i DebtorsAmounts falling due within one yearBank overdrafts (unsecured)42.7- Amounts owed to subsidiaries65.8151.0 Derivative financial instruments - forward exchange contracts1.61.1 Derivative financial instruments - option exchange contracts0.70.1 Other creditors0.40.1 Accruals and deferred income1.61.7 112.8154.0 Amounts falling due after more than one year Bank loans (unsecured)26.317.2 26.317.2In order to eliminate foreign currency gains or losses on the Company's external borrowings in foreign currency equal andopposite foreign currency loans have been made to the Company's principal subsidiary, Vitec Investments Limited. These inter-company loans are repayable on demand.The inter-company loans have decreased the Company's cash balances resulting in an overdraft at 31 December 2006. Thiscash has not left the Group and as a result of the Group's Balance Offset Agreement with HSBC Bank plc, interest is onlycharged on the Group's overall net UK cash position. The Company's overdraft was eliminated in February 2007 by the receiptof a £45.0 million loan from Vitec Investments Limited.2006£m2005£m j CreditorsThe Vitec GroupThe Vitec Group93At 1 January 2006 0.1Profit and loss account (0.1) At 31 December 2006-Deferredtax£m k Provisions for Liabilities and ChargesComposition of deferred tax provision Accelerated tax depreciation allowances-0.1 -0.1 The deferred tax provision was released in 2006 as it was no longer required.2006£m2005£m l Share CapitalThe authorised share capital at 31 December 2006 consisted of 65,000,000 (2005: 65,000,000) shares of 20p each, ofwhich 41,277,250 were allotted and fully paid. The movement during the year was:la Share based paymentsDetails of the share based payments can be found on page 76. lb Share option schemes Details of the share option schemes can be found on page 76.At 1 January 200641,086,7198.2 Exercise of share options190,531- At 31 December 200641,277,2508.2SharesIssued sharecapital£m 94Annual Report 2006At 1 January 20062.71.60.99.744.09.5 Premium on new shares issued0.5----- Profit for the year-----25.4 Dividends paid-----(6.5) Equity-settled transactions-----1.2 Own shares purchased-----(0.9) At 31 December 20063.21.60.99.744.028.7Other reserves represents the capitalisation of the share premium account, £22.7 million in 1989 and £37.3 million in 1995,less £16.0 million of share repurchases in 1995.In 2002 the Company purchased 142,857 own shares, representing 0.3% (2005: 0.3%) of the called up share capital of theCompany at an average price of 314.26p per share in connection with a share option made to the Chief Executive. In 2006the Company purchased 189,210 own shares, representing 0.4% of the called up share capital of the Company at an averageprice of 482.80p per share in connection with share incentive awards made by the Company in previous years. These sharesare being held in trust by Halifax EES International Ltd.SharePremiumaccount£m CapitalRedemptionreserve£m Revaluationreserve£m Mergerreserve£mOtherreserves£mProfitand lossaccount£mm ReservesWithin one year or less42.7-More than two years but not more than five years26.317.2 69.017.2The total amount of bank loans and overdrafts any part of which falls due after five years is £nil (2005: £nil).2006£m 2005£m ii) Maturity profileBank overdrafts42.7- Bank loans26.317.2 Gross financial liabilities69.017.2 2006£m 2005£m n Financial Instrumentsa) Financial liabilitiesi) Analysis of borrowingsExpiring in one year or less- uncommitted facilities13.18.6 More than two years but not more than five years- committed facilities73.782.8 Total86.891.4 On 25 January 2005 the Company signed a five year £100 million Multicurrency Revolving Credit Facility Agreement with asyndicate of UK banks. The Company had the following undrawn borrowing facilities at the end of the period:2006£m 2005£m Notes to the Company Accounts continuedThe Vitec GroupThe Vitec Group95CurrencyYen1.01.0 US$5.15.1 Euro21.621.6 Sterling41.341.3 At 31 December 200669.069.0 US$3.53.5 Euro13.713.7 At 31 December 200517.217.2 The floating rate borrowings comprise bank loans and overdrafts bearing interest at rates based on LIBOR.Total£m Floating rateborrowings£m iii) Interest rate profileCurrencySterling-5.6 US$1.4- Euro-(0.3) 1.45.3 The floating rate financial assets comprise bank deposits bearing interest at rates based on local money market rates. Sterling, US$, Euro and Yen balances within the UK can be offset as a result of the Group's Balance Offset Agreement withHSBC Bank plc.Floating rate2006£m Floating rate 2005£m b) Financial assetsCash at bank and in hand1.45.3 Bank overdraft(42.7)- Floating rate borrowings(26.3)(17.2) Forward exchange contracts - Assets1.61.1 Forward exchange contracts - Liabilities(1.6)(1.1) Option exchange contracts - Assets0.70.1 Option exchange contracts - Liabilities(0.7)(0.1) (67.6)(11.9) Fair valueand Book value2006£mFair valueand Book value2005£mc) Fair value of financial assets and liabilities96Annual Report 2006Market rates have been used to determine fair values.The Company has equal and opposite internal foreign exchange contracts matching the external foreign exchange contracts the Company has taken out with financial institutions.Estimation of Fair ValuesThe following summarises the major methods and assumptions used in estimating the fair values of financial instrumentsreflected in the table:DerivativesForwards are marked-to-market by calculating the contractual forward price and deducting the current spot rate. Options and cylinders are marked-to-market by obtaining quotes from banks of their market value as at 31 December. Forward exchange contracts - Assets1.6- Option exchange contracts - Assets0.7- 2.3-Within oneyear or less£m2006More thanone yearbut not morethan twoyears£mForward exchange contracts - Assets0.1- Forward exchange contracts - Liabilities (0.9)0.1 Option exchange contracts - Assets0.1- (0.7)0.1In 2006 forward option contracts selling US Dollars and purchasing Euros, totalling US$23.6 million (2005: US$21.9 million),were taken out to cover anticipated US Dollar currency receipts within the Group covering the period January 2007 to March2008 and the unrecognised gains on all these options at 31 December 2006, based on the exchange rates on that date, were£0.7 million (2005: £nil). The Group's foreign exchange hedging policy is set out in the Financial Review.Interest bearing loans and borrowings All interest bearing loans and borrowings are at floating rates. Therefore, the fair value of these loans and borrowings is their carrying value. o Related Party Transactions As the results of the Company are being presented together with its consolidated financial statements, the Company has takenadvantage of the exemption contained in FRS 8 and has, therefore, not disclosed transactions or balances with entities whichform part of the Group.p Post Balance Sheet EventsThere are no post balance sheet events to report.£m2005£m(i) Maturity profile of DerivativesNotes to the Company Accounts continuedn Financial Instruments continuedThe Vitec GroupThe Vitec Group97Five Year Financial SummaryYear ended 31 DecemberIFRSUK GAAPRevenue222.3 194.9 185.4 192.8 182.2 Operating profit before significant items 25.2 20.0 17.8 17.8 24.7 Net interest on bank borrowings (1.4) (1.3) (1.6) (1.7) (1.6) Other financial income/(expense) 0.3 (0.3) 0.3 - -Profit before tax and significant items24.1 18.4 16.5 16.1 23.1 Cash generated from operations 28.7 29.8 22.5 28.7 35.4 Net interest paid (1.5) (1.3) (1.6) Tax paid (5.5) (1.6) (1.4) Operating cash flow21.726.9 19.5 Net capital expenditure on property, plant and equipment and software and development costs capitalised as intangible assets (11.2) (9.6) (8.4) Free cash flow(1)10.5 17.3 11.1 2.9 21.1Capital employedIntangible fixed assets 34.1 19.9 12.8 10.1 11.0 Tangible fixed assets 35.1 33.6 30.7 34.5 42.7 Other net assets 22.5 17.8 27.2 29.3 24.4 91.7 71.3 70.7 73.9 78.1Financed by Shareholders' funds - equity 76.8 70.6 64.2 59.8 62.4 Net debt 18.9 5.4 11.3 10.4 11.9 Deferred tax (4.0) (4.7) (4.8) 3.7 3.8 91.7 71.3 70.7 73.9 78.1Statistics Operating profit (%) before significant items 11.3 10.2 9.6 9.3 13.6 Effective tax rate (%) before significant items 40.0 42.0 45.0 39.8 39.4 Adjusted basic earnings per share (p)(2)35.3 26.0 22.2 23.9 34.1 Basic earnings per share (p) 32.6 23.9 18.8 13.6 18.3 Dividends per share (p) 16.5 15.5 15.0 22.7 22.7 Year end mid-market share price (p) 528.5 375.0 286.0 346.0 277.5 (1)Free cash flow is the cash generated from operations less interest, tax and capital expenditure on property, plant and equipment and capitalised IT costs.(2)Differences between Adjusted basic and Basic earnings per share arise from significant items in the years in question.(3)Shareholders' funds have been restated to show the investment held in respect of grants under share option schemes as a deduction.(4)A full explanation of the transition from UK GAAP to IFRS is provided in the prior year financial statements.2006£m2003(Restated)£m 2002(Restated)£m 2004£m (3)(3)2005£m98Annual Report 2006Shareholder enquiriesFor enquiries about your shareholding, such as dividends or loss of share certificate, please contact the Company's registrars,Capita Registrars, Northern House, Woodsome Park, Fenay Bridge, Huddersfield, West Yorkshire HD8 0LA, telephone 0870 1623100 (UK only) or +44 (0)20 8639 2157 (Overseas only).Online services and electronic votingVitec has arranged with Capita Registrars to use its online services. By logging on to www.capitaregistrars.com and selectingPortal (Shareholders) you can make a transaction or dividend payment enquiry, add or change a dividend mandate or changeyour registered address.The Company will again be making use of Capita Registrars' electronic voting facility. By logging on to www.capitaregistrars.comand selecting Portal (Shareholders) you will find details of the Annual General Meeting including the venue and text ofresolutions. Shareholders have the facility to vote for, against or withhold and can split or restrict votes, appoint the Chairman ofthe meeting or a third party as their proxy and include any instruction text. The facility includes CREST voting for membersholding their shares in uncertificated form. To use the above facilities, shareholders will need to input a unique User ID that canbe applied for on your first visit to the site. To be allocated a User ID you will need your Investor Code, which can be found onyour dividend stationery and share certificates. User IDs previously issued will still be valid.Should you experience any difficulties using these facilities please contact the Capita Registrars helpline on the numbers givenabove.Share price informationThe middle market price of a share of The Vitec Group plc share on 29 December 2006, the last dealing day of 2006, was528.5p. During the year the share price fluctuated between 375p and 565p. The Company's share price is available from theGroup's website www.vitecgroup.com, with a 15 minute delay, and from the Financial Times web site www.ft.com with a similardelay. Up-to date market information and the Company's share price are available from the Cityline service operated by theFinancial Times by telephoning 0906 843 0000, keying 2 for share prices and entering Vitec's share code 4404.Shareholder Information and Financial CalendarFinancial calendarAnnual General Meeting29 May 2007Ex-dividend date for 2006 final dividend2 May 2007Record date for 2006 final dividend4 May 2007Proposed 2006 final dividend payment date31 May 2007Announcement of 2007 interim resultsSeptember 2007Proposed 2007 interim dividend payment dateNovember 2007Analysis of shareholdings as at 31 December 2006Shares heldNumber of holders% of holdersNumber of shares% of sharesUp to 1,00062853.04253,4690.611,001 to 5,00033127.96805,4261.955,001 to 10,000715.99513,3681.2410,001 to 50,000625.241,498,1213.6350,001 to 100,000302.532,312,5965.60100,001 and over625.2435,894,27086.971,184100.0041,277,250100.00Institutions and companies41034.6339,115,47494.76Individuals including directors and their families77465.372,161,7765.241,184100.0041,277,250100.00The Vitec GroupThe Vitec Group99100Annual Report 2006Bogen Imaging565 East Crescent AvenuePO Box 506RamseyNJ 07446-0506USATel:+1 (201) 818 9500Fax:+1 (201) 818 9177www.bogenimaging.usIFF and LitecVia Raffaello 3131021 Mogliano Veneto (TV)ItalyTel:+39 (041) 596 0000Fax:+39 (041) 597 0186www.litectruss.comBrilliant Stages2 Hillgate HitchinHertfordshireSG4 0RYUK Tel:+44 (0)1462 455366Fax:+44 (0)1462 436219www.brilliantstages.comManfrotto and AvengerVia Sasso Rosso 19PO Box 216I-36061 Bassano del Grappa ItalyTel:+39 (0424) 555855Fax:+39 (0424) 808999www.manfrotto.comGitzoZA de Mondetour RN 10Le Bois Paris 28630 Nogent Le PhayeFrance Tel:+33 (1) 4 397 6065Fax:+33 (1) 4 397 6064www.gitzo.comTomcat2160 CommerceMidlandTexas 79703USATel:+1 (432) 694 7070Fax:+1 (432) 689 3805www.tomcatglobal.comKataPO Box 450788 Hartom StreetBeck-Tech Science BuildingHar HotzvimJerusalem91450 IsraelTel:+972 2 5911000 Fax:+972 2 5400504www.kata-bags.comImaging & StagingAudio Specialties Group / BexelBexel Broadcast Services (BBS) – Bexel Fiber Optic Solutions (BFS)Bexel Technical Services (BTS) – Broadcast Video Gear (BVG)Intercom Specialties (ICS) - Systems Wireless (SWL)2701 North Ontario StreetBurbank, CA 91504USATel:+1 (818) 841 5051Fax:+1 (818) 841 1572www.a-s-group.comwww.bexel.comBroadcast ServicesAnton/Bauer14 Progress DriveSheltonCT 06484USATel:+1 (203) 929 1100Fax:+1 (203) 925 4988www.antonbauer.comAutoscriptUnit A8Poplar Business Park10 Prestons RoadLondonE14 9RLUKTel:+44 (0)20 7588 1427Fax:+44 (0)20 7515 9529www.autoscript.tvCamera Dynamics -OConnor100 Kalmus DriveCosta MesaCA 92626USATel:+1 (714) 979 3993Fax:+1 (714) 957 8138www.ocon.comCamera Dynamics -SachtlerErfurter Strasse 16D-85386 EchingGermanyTel:+49 (89) 3215 8200Fax:+49 (89) 3215 8227www.sachtler.comCamera Dynamics - Vintenand Vinten RadamecWilliam Vinten BuildingWestern WayBury St EdmundsSuffolkIP33 3TBUKTel:+44 (0)1284 752121Fax:+44 (0)1284 750560www.vinten.comwww.vintenradamec.comPetrol Bags3 Hasolelim StreetTel-Aviv 67897IsraelTel:+972 3 5621631Fax:+972 3 5621632www.petrolbags.comVitec Group Communications - Clear-Com and DrakeAmericas and Asia4065 Hollis StreetEmeryvilleCA 94608USATel:+1 (510) 496 6600Fax:+1 (510) 496 6699www.vitecgroupcomms.comVitec Group Communications -Clear-Com and DrakeEurope, Middle East and Africa7400 Beach DriveCambridge Research ParkWaterbeachCambridgeCB5 9TPUKTel:+44 (0)1223 815000Fax:+44 (0)1223 815099www.vitecgroupcomms.comBroadcast SystemsGroup DirectoryDesigned by level3creative.comPrinted by Rubicon Corporate Print LimitedThe Vitec Group plcDirectorsMichael Harper BSc Eng, MSc Chairman*Gareth Rhys Williams BSc, MBA Chief ExecutiveAlastair Hewgill BSc, ACMA Finance DirectorSir David Bell MA*Simon Beresford-Wylie BA*Nigel Moore FCA*Maria Richter BA, JD*Will Wyatt CBE, BA**Non-executiveSecretaryRoland Peate FCIS, ACMAGroup head officeOne Wheatfield WayKingston Upon ThamesSurrey KT1 2TUUnited Kingdomtel:+44 (0)20 8939 4650fax:+44 (0)20 8939 4680email:info@vitecgroup.comweb:www.vitecgroup.comRegistered officeWilliam Vinten BuildingWestern WayBury St EdmundsSuffolk IP33 3TBUnited KingdomRegistered in England No 227691

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