Parity Group plc
Annual Report 2012

Plain-text annual report

Parity Group plc Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London, SW19 3RU Tel: 0845 873 0790 Fax: 020 8545 6355 www.parity.net stock code: PTY Perivan Financial Print 228174 Parity Group plc Report and Accounts Year ended 31 December 2012 228174 PARITY COVER.indd 1 228174 PARITY COVER.indd 1 26/04/2013 16:50 26/04/2013 16:50 About Parity The Parity Group operates in two distinct fi elds: PARITY PROFESSIONALS Parity Resources provides skilled IT professionals, consultants and project managers to a wide range of leading UK companies on a temporary and permanent basis. Parity Talent Management provides graduate selection, training, placement and career development services. PARITY DIGITAL SOLUTIONS Building on its core expertise, Parity is creating a unique, Creative Technology, marketing services business through acquisition. This division currently comprises: Inition is a leading 3D technology specialist that creates leading edge marketing installations. Systems provides business intelligence development and consulting to both the private and public sectors. IT Professional Services Digital Media & Marketing Services Contents 01 Headlines 02 Chairman’s Statement 03 Operating Review 06 Financial Review 09 Board of Directors 10 Directors’ Report 12 Social, Environmental and Ethical Policies 13 Corporate Governance Report 17 Remuneration Report 22 Independent Auditor’s Report 23 Consolidated Income Statement 24 Statement of Comprehensive Income 25 Statements of Changes in Equity 26 Statements of Financial Position 27 Statements of Cash Flows 28 Notes to the Accounts IBC Corporate Information IBC Advisors Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY Corporate information Registered office Wimbledon Bridge House 1 Hartfi eld Road, Wimbledon London, SW19 3RU Tel: 0845 873 0790 Fax: 020 8545 6355 Registered in England & Wales No. 3539413 Registrars Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA Tel: 0870 600 3964 Fax: 0870 600 3980 Advisors Auditors KPMG Audit Plc 8 Salisbury Square London EC4Y 8BB Bankers RBS Group 9th Floor 280 Bishopsgate London EC2M 4RB PNC Business Credit 8-14 The Broadway Hayward’s Heath West Sussex RH16 3AP Equiniti offer a range of information on-line. You can access information on your shareholding, indicative share prices and dividend details and fi nd practical help on transferring shares or updating your details at www.shareview.co.uk Financial advisors & stockbrokers N+1 Singer One Bartholomew Lane London EC2N 2AN Solicitors Pinsent Masons 30 Crown Place London EC2A 4ES Enquiries concerning shareholdings in Parity Group plc should be directed, in the fi rst instance, to the Registrars, Equiniti, as above. Investor relations MHP Communications 60 Great Portland Street London W1W 7RT Tel: 020 3128 8100 Further information for shareholders including copies of the Annual and Interim Reports can be obtained from the company secretary’s offi ce at the registered offi ce address below or from the Parity Group website at www.parity.net The Company Secretary Parity Group plc Wimbledon Bridge House 1 Hartfi eld Road, Wimbledon, London, SW19 3RU Or by email to: cosec@parity.net Parity has offices in: London Wimbledon Edinburgh Camberley Sale Belfast For all general enquires call 0845 873 0790 228174 PARITY COVER.indd 2 228174 PARITY COVER.indd 2 26/04/2013 16:50 26/04/2013 16:50 Headlines Parity Group plc reports good growth and a return to underlying profi tability ❚ Revenues up 7.2% at £85.9m (2011: £80.1m) ❚ Adjusted EBITDA1 of £1.27m (2011: £0.36m) ❚ Group Profi t before non-recurring items and tax £0.28m (2011: £0.71m loss) ❚ Group loss for the year reduced to £1.39m (2011: £2.30m) ❚ Divisional results for 2012 – o Resources • £4.0m divisional contribution2 (2011: £3.5m) • Contractor numbers up 15% to 880 at year end (2011: up 10% to 772) • Expanded portfolio now more balanced towards private sector o Systems • £1.29m divisional contribution2 (2011: £1.86 m) • Margins remained stable at 20% • First TechLab IP initiative announced o Talent Management • £0.67m divisional contribution2 (2011: £0.46m) • 14 clients gained following entry in GB market during 2012 • Wins included Sheffi eld Hallam University, the Welsh Assembly and the National Skills Academy o Inition (acquired May 2012) • £0.26m divisional contribution2 • Trading well with fi rst earnout target achieved 3 months early • Clients in 2012 included Jaguar Land Rover, Gadget Show and Castrol O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 1 In assessing the performance of the business, the directors use a non-GAAP measure “Adjusted EBITDA” being the statutory measure, prior to non-recurring items and share based compensation. Non-recurring items and share based compensation are detailed in note 4. Adjusted EBITDA is reconciled to operating loss in note 4. 2 Divisional contribution in this narrative refers to the segment contribution before central costs3, tax, interest, non-recurring items and investment costs. 3 Central costs represent all centrally managed costs, and include Corporate, Finance, HR, IT and Property costs. 01 228174 PARITY pp01-22.indd 01 228174 PARITY pp01-22.indd 01 / / P f 26/04/2013 17:00 26/04/2013 17:00 Chairman’s Statement Philip Swinstead OBE 2012 Results I am pleased to report that we made further good progress in 2012, returning to a Group profit before tax and non-recurring items for the first time since 2009. New growth-oriented strategies have been implemented by the Board across, all divisions and the results are apparent. Revenues increased to £85.9m in 2012 from £80.1m in 2011; and in a challenging market for IT services Resources increased its divisional contribution as did Talent Management which won 14 clients following its GB marketing initiative. In addition the Group made its first move into the digital media market with the acquisition of Inition Limited in May 2012, which has performed well achieving its first earn-out profit target three months early. The Group’s Techlab initiative agreed in principle in January 2013, a joint venture with Royal Holloway, University of London to develop their innovative social media search algorithm. Before non-recurring items and tax the Group returned a profit of £0.28m compared to a loss of £0.71m in 2011. A Group loss for the year of £1.39m attributable to shareholders compares to £2.30m loss in 2011. Non-recurring items in the year were £1.22m including transaction costs of £0.84m relating to the acquisition of Inition, and other on-going and aborted acquisition costs. During the year we sublet 8,430 sq. ft. of unused office space in Wimbledon. The Group now holds no empty office space. Divisional results and current trading are discussed in the CEO’s Report. Cash, Dividend and Investments Cash at year end was £2.87m (2011: £5.24m) following an outlay of £1.5m cash for the Inition first stage payment, pension deficit payments of £1.0m and transaction costs. There were £0.46m of investment costs in 2012 (2011: £0.69m) which completed the two year investment programme intended to reduce costs, transition the Group into profitable work and initiate its digital media strategy. The Board decided to place shares to the value of £0.6m (net) in January 2013 to provide funding for the Inition payment and on-going transaction costs. Banking arrangements with PNC have been in place since late 2010 with a maximum facility of £15m, which the Board believes is adequate for the Group’s current and future requirements. Recently this facility was extended to December 2014. The Board has decided not to pay a dividend for the 2012 financial year; but will continue to reconsider this policy each year. Strategy Having returned the Group to profitability the Board can concentrate on growing its Resources, Talent Management, Systems and Inition divisions; whilst making strategic moves in the digital media market towards its ambition of becoming a significant early mover in the new Creative Technology sector of this market. This will be underpinned by a strong technology edge; particularly in areas such as 3D, augmented and virtual reality, interactive applications and mobile App developments. 02 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY In the last quarter of 2012 we set in motion an internal de- centralisation to separate our technology businesses (Systems and Inition) from our human resources businesses (Resources and Talent management) so that they could own the central functions and services they each need to carry out their business.. The former as our embryo digital division will in future be known as Parity Digital Solutions and the latter as Parity Professionals. We expect this new structure to be more efficient and to enable further cost savings, as well as allowing a clearer focused strategy for each division. Appointments to the Main Board I am pleased to announce today that Stephen Whyte has been appointed a director of Parity Group plc. As CEO of Parity Digital Solutions he will lead the Group’s digital media strategy. With over twenty five years management experience in marketing communications, including CEO at Acxiom Europe and McCann Erickson, he brings great experience and knowledge to our Board. On 1 February 2013 I was also pleased to report that Suzanne Chase, a qualified lawyer and a senior executive with extensive legal and commercial experience, joined our Board as our part-time general counsel. Suzanne had previously worked with us for twelve months and her skills are very relevant to the acquisitive nature of our digital strategy. Current Trading and Future Prospects The Group’s revenues have increased during 2012 and the Board is particularly encouraged by the steady improvements in profitability, which we expect to continue into 2013. In a quiet IT Services market our early moves away from slowing IT sectors and towards specific niche sectors have been successful; but we will continue to review our position in this competitive market carefully. This is a pivotal year for our Group as we press ahead with our digital media strategy; in relation to which the performance of Inition and positive market feedback received to date gives the Board increasing confidence. With the strong management put in place over the last two years the Group is now well positioned to move forward with its plans. Trading in the early weeks of the current year has been in line with expectations. The Board remains confident in its ability to significantly increase shareholder value through a combination of the growth of the current businesses and its new strategic initiative in digital media. Philip Swinstead OBE Chairman 6 March 2013 228174 PARITY pp01-22.indd 02 228174 PARITY pp01-22.indd 02 / / P f 26/04/2013 17:00 26/04/2013 17:00 Operating Review Paul Davies Overview Over the past two years Parity has created a solid base from which to execute its expansion plans including further development of its digital marketing strategy. All divisions now return healthy margins and the cost base has been reduced. As a result we have increased our contractor numbers by 14% to 880 at year end (2011: 772) and improved conversion rates to 30% (2011: 26%). We have also seen increased activity with permanent recruitment and have newly established teams to focus on the engineering and digital skills markets. Several new initiatives announced last year are progressing well including expansion of our Talent Management business, evolution of a Parity Technology Laboratory and our first acquisition for a number of years. We are also consolidating our businesses into two distinct divisions. The first is focused on developing and placing skilled people (getting professional people into work). The second is focused on addressing the exciting and emerging digital media market (using new technologies for marketing purposes) as identified in our corporate strategy two years ago. From the second quarter of 2013 these two divisions will report separately to the Board under the headings of ‘Parity Professionals’ and ‘Parity Digital Solutions’. Future reporting will be on this basis. Adjusted EBITDA at £1.27m (2011: £0.36m) from a £1.98m loss in 2010 demonstrates the continued turnaround and improved profitability of the Group. Group Operations Parity continued to operate during the year in the IT Services market and traded exclusively in the UK from offices in Wimbledon, Shoreditch, Camberley, Sale, Edinburgh and Belfast. In May 2012 we announced the acquisition of Inition Ltd, a specialist in 3D scanning and printing, advanced augmented reality systems and virtual reality installations operating in the UK from their offices in Shoreditch. Much of Parity’s work remains short term in nature although several contract relationships have extended over a number of years. No individual client accounts for more than 14% of Group turnover. Whilst the Group maintains a degree of exposure to Government spending, the breadth of our private sector portfolio continues to increase and it is expected that this trend will continue. Our entry into the GB graduate development market with our Talent Management business and into the digital marketing arena with our Inition acquisition has broadened our customer base and is moving us into new and exciting sectors. Parity Resources Our main objective for this division in 2012 was to reverse the decline in recent years of both revenues and contribution by extending services, increasing contractor numbers, improving conversion rates and maintaining overall margins. This was accomplished against a backcloth of a depressed employment market which responded to continued economic pressures by seeking to reduce headcount, margins and utilisation wherever possible. During the period we invested in additional sales and support staff, built upon our reputation as a value-add provider, sought new business opportunities and extended our services beyond our traditional IT base. The investment in staff to fuel our growth ambitions had a minor impact on second half contributions but was considered essential to reinforce team size, particularly in our London office which was established in 2011, became self funding during 2012 and is now making a positive contribution. In total, revenues in the year increased by 10% to £75.3m (2011: £68.7m) with divisional contribution increasing by 14% to £4.0m (2011: £3.5m). At the year end the ratio of Private/Government-Public Sector placings was 63/37 (end 2011: 48/52) reflecting our ambitions to develop a more balanced portfolio whilst continuing to recognise the importance of the Government and Public Sector markets to our overall business. A number of existing contracts were extended and 67 new clients were signed up during the year (2011: 60). Along with our investment in new staff and sectors, these will maintain our impetus for 2013 in what remains a competitive market. This business will sit within our new Parity Professionals division going forward. Parity Talent Management This business was originally established 16 years ago around the successful graduate development programme for the Northern Ireland Government. It was later extended to include the prestigious Faststream graduate recruitment programme run on behalf of HMRC. Both contracts were renewed in 2012 for a further 3 years and 1 year respectively although delays in the Northern Ireland contract resulted in deferrals of expected revenues to later years. During 2011 a strategic decision was taken to invest in this business so as to extend the portfolio and introduce a number of graduate development programmes across the UK, focussing initially on Higher Education establishments and industry. As a result we entered 2012 with an increased cost base, a unique and proven proposition, but only the two contracts referred to above. Our mission therefore was to address this new market and build upon our established capabilities and reputation. In the first quarter we won our first contract in the education sector with a range of graduate employability programmes for Sheffield Hallam University (SHU). This initial 18 month contract has led to a further partnership with SHU to win a graduate programme for the National Skills Academy Food Engineering Degree. On the back of this success the division has since won similar contracts with a further 3 English Universities together with a 3 year contract for the Welsh Assembly involving initially 4 Welsh Universities. O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp01-22.indd 03 228174 PARITY pp01-22.indd 03 / / P f 26/04/2013 17:00 26/04/2013 17:00 03 Operating Review continued As momentum built during the year operating margins improved from 21% in the first half to 33% in the second half, as our earlier investments began to pay off. During the year 14 new contracts were signed across GB from this standing start with £3.7m of new business achieved. Inition On 29 May the Group announced its first step in implementing the stated strategy to move into the expanding digital media market with the acquisition of London based Inition a leading 3D specialist. Inition’s founders have remained with the business and have achieved their first year profit based earn out 3 months early thereby demonstrating the commercial potential of this acquisition. The business can boast having worked on projects for a number of major corporations, including for example: Jaguar Land Rover, Gadget Show, Castrol, Guardian and Edrington Group. Project work during the period has included medical applications, augmented reality visualisation at a car launch, an immersive wing suit experience for a major manufacturer, holographic animation for advertising purposes and crowd gaming experiences for shows and exhibitions. The list goes on and on, but is specialised and addresses the emerging new digital marketing space. Revenues for the 7 months from May were £1.9m with a contribution of £0.26m. Inition has continued to run for earn out purposes with it’s separately defined overhead structure. It is anticipated that during 2013 some sharing of overheads with the remainder of the Group will occur with associated cost savings. The business will sit within our new Parity Digital Solutions division going forward. Group Cost Savings We continue to seek ways in which to improve operational efficiencies and in particular identified three areas for further savings: New Finance System The company has for some time utilised a custom built bespoke finance reporting system based on Microsoft AX. This system is expensive to maintain, difficult to modify and will increasingly become unsuitable as we extend our operations. For this reason the decision has been made to move onto a more flexible and cost effective finance platform with a roll out programme having commenced in December. Initially our Systems and Inition businesses will be migrated onto a SAP Business By Design Cloud based solution with our Resources and Talent Management business migrating off AX during the course of 2013. As a result of this we have written off £0.7m which relates to the net book value of the Micro soft AX system as at 31st December 2012. The effect of this write off will be to reduce the annual depreciation charge from the 2012 level by £0.2m. Having established a solid base in this market we are now seeking to invest further to extend our propositions and seek to address the equally attractive apprentice development market. Whilst investment and a contract delay resulted in a slow start to the year, subsequent successes resulted in revenues of £2.2m (2011: £2.3m) and contributions of £0.67m (2011: £0.46m). Overall divisional operating margins were also increased to 30.6% (2011: 20.25%). This business will sit within our new Parity Professionals division going forward. Parity Systems Over the past two years the division has been transformed from loss making to a stable operation with creditable operating margins. This has been achieved by the removal of loss making business (primarily associated with legacy fixed price contracts), reductions in operating costs and a focus on established clients. These actions, as anticipated, have resulted in revenue reductions whilst creating a stable and profitable platform with appropriate skill sets to operate within the new Digital Solutions division. Long standing contractual arrangements with our 3 major clients continue although we anticipate work with the Charity Commission to decline as they redirect their budgets. Our close relationship with BAT has resulted in them extending their contract with us for a further year. Similarly, we continue to provide services to the MOD and are currently introducing some potentially exciting 3D and augmented reality capabilities from our Inition Ltd acquisition to them. We have also had some success with our Business Intelligence initiative, announced last year, signing a consultancy and subsequent implementation contract with a major legal firm. During the year Parity maintained its Gold partner status with Microsoft and Oracle. The Parity R&D Technology Laboratory initiative (Tech Lab) announced in January its first contract with the Northern Ireland Government to research emerging digital technologies. More recently Tech Lab has agreed in principle a joint venture with Royal Holloway, University of London to develop their innovative social media search algorithm. We will continue to use Tech Lab to establish potential sources of IP and to develop digital technology partnerships. Our planned exit from loss making and largely fixed price systems integration work has resulted in a decline in revenues to £6.5m (2011: £9.2m). Margins, however, have been stabilised for 2 years at around 20% (2011: 20%) with a resultant contribution of £1.3m (2011: £1.9m). This business will sit within our new Parity Digital Solutions division going forward. 04 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 04 228174 PARITY pp01-22.indd 04 / / P f 26/04/2013 17:00 26/04/2013 17:00 Property In June 2010 Parity Training, which was sold in February 2009, was placed in administration. The Group remained guarantor on certain leases held by Parity Training and since had to bear significant costs on those leases. During 2012, the final lease was disposed of and we no longer hold any legacy property formerly owned by Parity Training. In our head office in Wimbledon we had just under 9,000 sq. ft. of unused office space which due to the economic climate and short lease term remaining we felt would be very difficult to obtain a tenant for and therefore in 2011 provided for in full the lease costs on the vacant space to the end of the term. We are pleased to report though that during 2012 we have managed to secure a sub-tenant for the remainder of the lease which will generate additional cash of £0.2m per year. Parity Professionals and Parity Digital Solutions As a result of the internal de-centralisation to separate out our technology businesses (Systems and Inition) from our human resources businesses (Resources and Talent Management), we expect that this new structure will be more efficient and enable further cost savings to be made. Investment in New Initiatives In accordance with statements made during our May 2011 placing we have continued to invest in certain aspects of the business. In particular we have established Talent Management across the UK, expanded our Resources portfolio, created Tech Lab, and achieved our first entry into the digital media market with the part cash acquisition of Inition. Additionally we have continued to invest in staff and advisors to research the digital technology arena and further enhance our corporate strategy in this respect. As a result some £0.46m has been spent in the year which brings to and end this investment programme. Management and Staff Once again our team has responded to the considerable challenges involved in positioning the company for profitable growth both in its existing markets and those identified in the Group strategy, particularly relating to the digital media market. They continue to be responsive and embrace the challenges brought by change. Without their skills and commitment we could not have set a solid base for future growth and this within a continued difficult economic climate. The Board is again proud and grateful to them and wishes to express its thanks for their on-going support and loyalty. Paul Davies Chief Executive Officer 6 March 2013 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp01-22.indd 05 228174 PARITY pp01-22.indd 05 / / P f 26/04/2013 17:00 26/04/2013 17:00 05 Financial Review Alastair Woolley Revenue Continuing operations Resources Systems Talent Management Inition 2012 £’000 75,289 6,504 2,202 1,892 2011 £’000 68,662 9,209 2,271 – 85,887 80,142 Revenue in total has increased by 7.2% to £85.9m (2011: £80.1m). The Resources division has continued to see good growth from 2011, increasing its revenues by £6.6m (9.6%) from £68.7m to £75.3m. Systems revenue has fallen by £2.7m since 2011 to £6.5m as the removal of loss making contracts (mainly associated with earlier fixed price contracts) has now been completed. In Talent Management, government spending was cut back in the second half of 2011 and this had a knock on affect into the first half of 2012. However, revenues during 2012 have steadily grown with revenue in the first half of £0.94m increasing to £1.27m in the second half. Revenue for Inition of £1.89m represented the first 7 months since acquisition and on an annualised basis based on its results to 31 March 2012, showed growth of 22.8%. Divisional contribution Continuing operations Resources Systems Talent Management Inition Divisional contribution before central costs, non-recurring items and investment costs 2012 £’000 4,000 1,288 674 258 6,220 2011 £’000 3,506 1,862 461 – 5,829 Divisional contribution has increased by £0.39m to £6.22m (2011: £5.83m). Divisional contribution has increased in Resources and Talent Management both in absolute terms and as a percentage of revenue. Divisional contribution in Resources has increased to 5.3% (2011: 5.1%) and in Talent Management to 30.6% (2011: 20.3%). In Systems, margins have been gradually improving from 16% in the first half to 23.5% in the second half. Note, however, that margins in the second half of 2011 were improved by a release of provisions on fixed price contracts, this not being the case in 2012. Inition, which was acquired on 29 May 2012 has made a divisional contribution in its first 7 months of £0.26m at a margin of 13.6% representing a significant improvement in profitability compared to the full year prior to acquisition, (Year to 31 March 2012) of £0.06m. Reconciliation of divisional contribution to operating loss from continuing operations Divisional contribution before central costs, non-recurring items and investment costs Central costs Depreciation and amortisation Share-based payment charges Investment costs Operating profit/(loss) before non-recurring items Non-recurring items (continuing operations) Operating (loss) from continuing operations 2012 £’000 6,220 (4,488) (497) (124) (461) 650 (1,350) (700) 2011 £’000 5,829 (4,785) (537) (177) (688) (358) (1,437) (1,795) Central costs continue to be a focus of management’s attention, as evidenced by the £0.30m reduction from £4.8m in 2011 to £4.5m in 2012. Investment costs refer to costs associated with new initiatives which were outlined in the Group’s prospectus, issued in respect of the Firm Placing, and Placing and Open Offer of new ordinary shares in May 2011. The investment programme has now been completed. The combination of improved divisional performance and further reduction in central costs has contributed to an improvement of £1m in operating profit turning the loss of £0.36m in 2011 into a profit of £0.65m in 2012. 06 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 06 228174 PARITY pp01-22.indd 06 / / P f 26/04/2013 17:00 26/04/2013 17:00 Non-recurring items Continuing operations Restructuring Transaction costs Property provisions 2012 £’000 961 840 (451) 1,350 2011 £’000 491 – 946 1,437 Non-recurring items in the year include the writing off of the remaining investment in our Microsoft Dynamics AX ERP system of £0.72m. The heavily customised system was installed 4 years ago and has shown itself to be inflexible, expensive to maintain, and will not provide the correct platform for the company as we extend our operations. Initially our Systems and Inition businesses will be migrated onto SAP by Design, with the Resources and Talent Management businesses migrating off of AX during the course of 2013. Transaction costs refer to the professional fees incurred in our acquisition programme and relate to the acquisition of Inition Limited, an aborted acquisition, and on-going acquisition activity. The Board believed last year that due to the economic climate and because such a short period of lease remained on the vacant offices at Wimbledon, a provision should be made against the remaining previously un-provided costs to the end of the lease. However, the Board is pleased to report that despite the difficulties, this unoccupied area has now been sublet and the release in provision reflects the contracted sub-let income to the end of the lease. Further details of the non-recurring costs are given in note 5. Earnings per share and dividend The basic loss per share from continuing operations was 2.00 pence (2011: 3.99 pence). The Board does not propose a dividend for 2012 (2011: nil), but will continue to review this policy each year. Statement of Financial Position The most significant movements in the balance sheet were in the recognition of goodwill on the acquisition of Inition, the increase in the defined benefit scheme liability as a result of an actuarial loss, the write off of the investment in Microsoft AX ERP and the increase in net debt caused by acquisition activity and legacy payments. The net impact of these movements was to reduce the Group’s net assets by £1.84m. Trade receivables and accrued income Trade receivables increased by £0.5m to £13.0m (2011: £12.5m) during the year, reflecting mainly the increase in group revenue and acquisition of Inition Limited. Due to continued focus on working capital management, debtor days at the end of the year, calculated on billings on a countback basis, improved to 26 (2011: 27). Trade and other payables Trade and other payables increased slightly during the year to £9.4m (2011: £8.8m). As with trade receivables this is mainly due to the increase in trading volumes and the acquisition of Inition Limited. Other financial liabilities Other financial liabilities represent the Group’s debt under the asset-based lending facility. This is a working capital facility and is consequently linked to the same cycle as the trade receivables. The increase in revenues and the improvements in working capital management had the impact of reducing borrowing requirements; however this was offset by the various acquisition and legacy payments made during the year. The asset-based lending facility provides for borrowing of up to £15.0m depending on the availability of appropriate assets as security. Interest on borrowings is charged at 2.5% over the prevailing base rate. Cash flow and net debt Before working capital movements, the Group generated cash during 2012 of £0.67m compared to an outflow in 2011 of £1.13m but once working capital movements are taken into consideration there was a net outflow in 2012 of £2.6m (2011: £1.46m). Cash and cash equivalents fells by £2.37m during the year and coupled with an increase in loans and borrowings of £1.78m, net debt increased during the year by £4.1m. This increase can be broken down into two types. Firstly, acquisition based activity. £1.2m represented the net acquisition costs of Inition Limited and £0.7m represented transaction costs on Inition and an aborted transaction. The second type can be described as legacy payments and include £1m paid in deficit reduction contributions to the retirement benefit fund; £0.5m paid for the cancellation of the Group’s outsourced contract for its internal IT system; and £0.43m in payments in respect of unused property. Provisions The net reduction in provisions of £1.18m includes the release of excess empty property provisions in respect of the vacant offices in the Wimbledon of £0.45m, and a cash outflow against existing provisions of £0.43m. 07 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp01-22.indd 07 228174 PARITY pp01-22.indd 07 / / P f 26/04/2013 17:00 26/04/2013 17:00 Financial Review continued Pension Fund During 2012 the Group paid deficit reduction payments of £1m into the defined benefit scheme but despite this and following the triennial valuation that took place in 2012, the liability increased by £0.58m to £3.05m (2011: £2.47m). At the year end an actuarial loss of £1.55m was recorded, mainly as a result of a reduction to the discount rate used in valuing the scheme liabilities. Principal risks and uncertainties Market The Group continues to reduce its exposure to the public sector with 2012 revenues from public sector clients falling from 63% to 54% of total revenue during the year. However, the Group remains exposed to potential further public sector budget cuts and recruitment freezes. The Group trades exclusively in the UK, and is very aware of the ongoing tough economic conditions that prevail. As a result there is a major emphasis on addressing growth technologies in order to diversify the Group’s offerings. People Our people are the most important part of our service and having appropriately trained and motivated staff helps us reduce the risk of poor service delivery. Share plans are used to incentivise and retain senior staff in the medium term. HR policies and procedures are reviewed regularly to ensure the business recruits and retains appropriately trained and experienced staff. Technology As an IT services provider the Group relies on its IT, telecommunications and infrastructure systems to perform and manage the services we provide to clients. The Group reviews its own disaster recovery systems regularly in order to minimise the risk of prolonged disruption to systems. Legal The Board recognises that non-compliance with relevant laws and regulations can result in substantial fines or penalties. Suitable controls are built into our service delivery processes to reduce the risk of non-compliance. Alastair Woolley Finance Director 6 March 2013 08 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 08 228174 PARITY pp01-22.indd 08 / / P f 26/04/2013 17:00 26/04/2013 17:00 Board of Directors Philip Swinstead OBE Chairman Philip Swinstead, 69, was appointed Non-executive Chairman in June 2010. Philip is a UK software industry founder. He started SD in 1969 and was Chairman for 20 years. SD became the first software house to obtain a full listing in the UK in 1982, it entered the FTSE 250, and was renamed SD-Scicon before being sold to EDS in 1991. Philip arranged the buyout and refinancing of French systems company, GFI, which then went public in Paris in 1998. Philip Swinstead was co-founder of Parity plc in 1993, and Parity joined the FTSE 250 within five years. More recently he has founded private companies in the software animation and mobile application sectors. Lord Freeman Non-Executive Deputy Chairman 1, 2, 3 Roger Freeman, 70, was appointed Non-executive Chairman in July 2007 and is Chairman of the remuneration and nominations committees. After qualifying as a Chartered Accountant in 1969 he joined Lehman Brothers, the US Investment Bank, and was a Partner in the London Office until 1983 when he entered the House of Commons. He served as a Minister between 1986 and 1997 including Cabinet Minister for Public Services. He became a Life Peer in 1997 and also became a Partner with PricewaterhouseCoopers for whom he now chairs their UK Advisory Board. He is Chairman or Non-executive Director of a number of listed and private companies including Chemring Group plc and ITM Power plc. David Courtley Non-executive Director 1, 2, 3 David Courtley, 55, was appointed to the Board as a non- executive Director on 8 June 2011. David has extensive experience within the IT services sector and has held senior executive positions within Fujitsu, EDS and SD-Scicon and Phoenix IT Group plc. He was Chief Executive of Fujitsu Services between 2001 and 2009 and was instrumental in the transformation of that business. David is also non-executive director of Sagentia Group plc and the French software company Axway. Mike Phillips Non-executive Director 1, 2, 3 Mike Phillips, 50, was appointed to the Board as a non- executive Director on 3 November 2011. Mike has more than 10 years’ experience as a public company director and is currently Chief Financial Officer of Micro Focus International plc. Prior to this Mike was Group Finance Director and then Chief Executive Officer of Morse plc until its successful sale to 2e2 in June 2010 and from 1998 to 2007 was Group Finance Director at Microgen plc. Earlier roles include seven years corporate finance work at Smith & Williamson, as well as two years at PricewaterhouseCoopers where he led the UK technology team. Paul Davies Chief Executive Officer Paul Davies, 64, was appointed as Chief Executive in June 2010. He was co-founder of Parity, together with Philip Swinstead, and Chief Executive until 1999. Previously Paul was MD of EASAMS, GEC’s systems company. Paul has been Deputy Chairman of Microgen plc since 1999 and for a period was Chairman of MSB International plc. More recently he joined the operations board of Fujitsu Services for 2 years tasked with improving the performance of their portfolio of large IT programmes. Alastair Woolley Finance Director Alastair Woolley, 51, was appointed in April 2011. Alastair trained with Deloitte and spent 11 years in various departments including audit and business services. Since leaving Deloitte, Alastair has worked during the last 16 years in a variety of companies, mainly technology based, as Finance Director and also for a period of time, as Managing Director. He has worked with Philip Swinstead previously as Finance Director and also lately with both Philip and Paul Davies as a consultant on a number of projects. Alastair has responsibility for Finance, Property and Facilities and IT. Directors appointed after the balance sheet date Suzanne Chase Executive Director and General Counsel Suzanne Chase, 50, was appointed on 1 February 2013. Suzanne is a qualified lawyer and a senior executive with extensive legal and commercial experience. Suzanne joined the business as General Counsel on 1 February 2012. Previously she has held the positions of Group General Counsel and Company Secretary for Morse plc, Compliance Partner at King Sturge LLP, Group General Counsel and Company Secretary of The Big Food Group plc and General Counsel of Wickes plc. Suzanne was also a solicitor at D J Freeman. Stephen Whyte CEO of Parity Digital Solutions Stephen Whyte, 49, was appointed to the Board on 7th March 2013. Stephen has extensive knowledge of and over 25 years’ experience in the marketing services, digital media and creative industry sectors, both in the UK and at an international level. Most recently, he was European CEO of Acxiom Corporation, a major interactive and marketing services company specialising in consumer data and analytics, data integration, multi-channel marketing and consultancy. Prior to that, he was Chief Executive at McCann Erickson and Leo Burnett, both top 10 UK agency groups. Stephen graduated from Oxford University with a degree in Chemistry and is a Fellow of the Institute of Practitioners in Advertising (IPA). As CEO of Parity Digital Solutions he will lead the Group’s digital media strategy. O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 1 Member of the nominations committee 2 Member of the remuneration committee 3 Member of the audit committee 09 228174 PARITY pp01-22.indd 09 228174 PARITY pp01-22.indd 09 / / P f 26/04/2013 17:00 26/04/2013 17:00 Directors’ Report The Directors present their report and the audited accounts for the year ended 31 December 2012. Principal activities The Group delivers a range of recruitment and business and technology solutions to clients across the public and private sectors. During the period under review the Group operated through three divisions; Resources, Systems and Talent Management, and a fourth division, Inition, for the last 7 months of the period. The principal activity of the Resources division is to provide recruitment, predominately interim recruitment, and consultancy services, to a diverse range of clients. In 2012 its clients’ market sectors included central and local government within the public sector and FMCG, Insurance, Oil, and Transport in the private sector. The principal activities of the Systems division comprise innovative information technology solutions and application support. Systems delivered its services during the year to central government departments in the public sector, and to Tobacco, IT and Telecommunications clients in the private sector. The principal activity of the Talent Management division is to provide graduate placement services. In 2012 it operated predominantly in the public sector, and geographically between Northern Ireland and England. The principal activity of the Inition division is to provide 3D technology solutions, in the form of consultancy, systems integration, and the resale of 3D equipment. In 2012 it operated predominately in the private sector delivering its offerings to clients in a wide range of sectors. Review of business and future developments A review of the business and its outlook , including commentary on the key performance indicators of turnover, gross margin, contribution, debtor days and net debt, and the principal risks and uncertainties facing the Group is included in the Chairman’s Statement, Operating Review and Financial Review on pages 2 to 8. The Group’s social, environmental and ethical policies are set out on page 1 2. A statement on the application of the going concern principle is set out below. Details of financial instruments are set out in note 23 to the financial statements. Each of the above is incorporated in this report by reference. Group results The Group loss from continuing operations before taxation for the year was £1,066,000 (2011: £2,149,000) after charging non-recurring items of £1,350,000 (2011: £1,437,000). After a tax expense of £349,000 (2011: expense of £92,000) and a profit after tax from discontinued operations of £26,000 (2011: loss after tax of £58,000), the retained loss of £1,389,000 (2011: £2,299,000) has been transferred from reserves. The results for the year are set out in the consolidated income statement on page 23. Dividends The Directors do not recommend a final dividend (2011: nil pence per ordinary share). The total dividends for the year were nil pence per ordinary share (2011 nil pence per ordinary share). Pension The Group operates a defined contribution pension scheme. There is also a defined benefit scheme which is closed both to new members and to future service accrual. Details of the defined benefit pension scheme are given in note 25. Purchase of own shares At the end of the year, the Company had authority, under the shareholders’ resolution of 29 May 2012, to purchase in the market 6,874,157 of the Company’s ordinary shares at prices ranging between two pence and an amount equal to 105% of the average of the middle market prices quoted in the five business days immediately preceding the day of purchase. No purchases were made during the year. The Directors intend to seek renewal of this authority at the forthcoming Annual General Meeting. Board of Directors Biographical information on each of the Directors as at 6 March 2013 is set out on page 9, together with details of membership of the Board committees. Suzanne Chase was appointed to the Board on 1 February 2013, and Stephen Whyte was appointed to the Board on 7 March 2013. In accordance with the Company’s Articles of Association, Suzanne Chase and Stephen Whyte, who were appointed after the announcement of the 2012 AGM, will retire and offer themselves for re-election at the 2013 Annual General Meeting. Directors’ interests The Directors’ beneficial interests in the ordinary share capital of the Company are set out within the remuneration report on page 2 1. Principal shareholders At the close of business on 5 March 2013 (being the latest practical date prior to the signing of the Directors’ Report) the Company had received notification of the following substantial interests representing over 3% of the issued share capital: Philip Swinstead Henderson Global Investors David Courtley Dominion Holdings Artemis Investment Management Slater Management Hargreave Hale 10 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY Number of Ordinary 2p shares 12,180,543 6,877,066 6,521,739 4,950,000 4,791,710 4,623,157 2,596,753 Percentage held 16.25 9.17 8.70 6.60 6.39 6.17 3.46 228174 PARITY pp01-22.indd 10 228174 PARITY pp01-22.indd 10 / / P f 26/04/2013 17:00 26/04/2013 17:00 Capital structure The Company has two classes of shares in issue, ordinary shares of 2p and deferred shares of 0.04p. The ordinary shares are listed on the London Stock Exchange and ordinary shareholders are entitled to vote at Company meetings, to receive dividends and to the return of their capital in the event of liquidation, with the exception of ordinary shares held by the Parity Group plc Employee Share Ownership Trust which are not entitled to receive dividends. The deferred shares are not listed, have no voting rights, no rights to dividends and the right only to a very limited return on capital in the event of liquidation. The Directors are not aware of any restrictions on transfers of shares in the Company or on voting rights or of any agreements between holders of the Company’s shares which may result in such restrictions. Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out above (Review of business and future developments). The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 6 to 8 and in note 23 to the financial statements. Note 23 also includes the Group’s objectives for managing capital. As outlined in note 23, the Group meets its day to day working capital requirements through an asset-based finance facility. The facility contains certain financial covenants which have been met throughout the period. The facility was recently extended to December 2014. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group will be able to operate within the level of its current facility for the foreseeable future. The bank has not drawn to the attention of the Group any matters to suggest that this facility will not be continued on acceptable terms. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. The Company is not party to any significant agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid. In the event of a change of control, the share options held by Mr Davies under the Senior Executive Option Plan would vest. There are no other agreements between the Company and its Directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. Payments to suppliers The Group seeks to abide by the payment terms agreed with suppliers when it is satisfied that the supplier has provided the goods or services in accordance with the agreed terms and conditions. In the United Kingdom and Ireland the Group agrees payment terms with its suppliers when it enters into binding purchase contracts. At 31 December 2012 unpaid creditors of the Group amounted to 32 days of purchases (2011: 39 days). Creditor days have not been calculated for the Company as it has no trade payables. Corporate social responsibility The Group recognises its corporate social responsibilities and reports on these in a separate statement of social, environmental and ethical policies on page 12. This statement covers the Group’s Employment Policies, Environmental Policy and Health and Safety Policy. Contributions for charitable and political purposes The Group made no charitable contributions during 2012 (2011: £nil). No payments were made for political purposes. Directors’ and officers’ liability insurance and indemnity The Company has purchased insurance to cover its Directors and officers against their costs in defending themselves in any legal proceedings taken against them in that capacity and in respect of damages resulting from the unsuccessful defence of any proceedings. Disclosure of information to auditor So far as the Directors are aware, there is no relevant audit information of which the auditor is unaware and each Director has taken all reasonable steps to make himself or herself aware of any relevant audit information and to establish that the auditor is aware of that information. Corporate Governance The Corporate Governance Report on pages 13 to 16 forms part of the Directors’ Report. Auditor Resolutions will be proposed at the Annual General Meeting to reappoint KPMG Audit Plc as auditor to the Company and to authorise the Directors to determine their remuneration. Post Balance Sheet Events Post balance sheet events are disclosed in note 32. Annual General Meeting The resolutions to be proposed at the Annual General Meeting, together with explanatory notes, will appear in the Notice of Annual General Meeting which will be circulated with the annual report when sent to all Shareholders. O u r P e r f o r m a n c e O u r G o v e r n a n c e By order of the Board Alastair Woolley Director 6 March 2013 i O u r F n a n c a s l i 228174 PARITY pp01-22.indd 11 228174 PARITY pp01-22.indd 11 / / P f 26/04/2013 17:00 26/04/2013 17:00 11 Social, Environmental and Ethical Policies Employment policies As a professional services business, Parity’s strength derives from the commitment, capability and cultural diversity of its employees. The Group aims to adopt a policy of diversity at all levels including selection, role assignment, teamwork and individual career development. The Group encourages the participation of all employees in the operation and development of the business by offering open access to senior management, including the Executive Directors, and adopting a policy of regular communications through road shows and the intranet. The Group also conducts an annual Employee Survey to measure the satisfaction and engagement of its employees and receive suggestions for improvement, which is used to formulate and further develop its people-related plans and activities. The Group incentivises employees through share- based incentives and the payment of bonuses and commissions linked to performance objectives. All employees have an element of remuneration linked to performance. Where appropriate these objectives are linked to profitability. The Group also has a structured approach to performance appraisal and career development and ensures that every employee has an annual performance review and has clear objectives and performance standards. Social responsibilities It is Group policy to be a good corporate citizen wherever it operates. As part of the Group’s social responsibility, employees are encouraged to become involved in their local communities and fund raising events for charity. Environmental policy While Parity Group’s operations by their very nature have minimal environmental impact, the Group recognises its responsibilities to protect and sustain the environment and its resources. The Group’s policy is to meet or exceed the statutory requirements in this area and it has adopted a code of good environmental practice, particularly in its main areas of environmental impact, namely energy efficiency, use and recycling of resources and transport. Transport Public transport is used whenever possible. Interest-free season ticket loans are made to staff as part of the benefits package. Teleconference facilities are extended to main office locations to minimise business travel and increase efficiency. PCs (portable or desktop) are made available to staff where needed to facilitate home working and minimise the need to travel to offices. Health & safety The health and safety of Parity’s employees is paramount. Group policy is to provide and maintain safe and healthy working conditions, equipment and systems of work for all employees and to provide such information, training and supervision as is needed for this purpose. Energy Only energy-efficient computers and peripherals are acquired and they are turned off at the end of each day. As a normal part of its operations the Group seeks to occupy offices which have efficient building management systems and, ideally, low energy lighting. Office lighting is turned off at the end of each day. Appropriate written health and safety information outlining the Group’s policy in each area is issued to all new employees. This includes: Whenever economically justifiable, the paper and other consumables used are made from environmentally-friendly or recycled material or from renewable resources. • First aid — Each office has a person qualified in first aid. First aid boxes are readily accessible and records kept of all accidents and injuries. • Fire safety — Each office has an evacuation marshal who will liaise with building management or local emergency authorities, as appropriate. Evacuation assembly points are agreed for every location and a full evacuation carried out every six months. Fire alarms are tested regularly. • Employees’ health — Any employee who believes he/she is suffering from an illness or condition related to their working environment is encouraged to report this to his/her manager for investigation. Annual Health and Safety audits are carried out at every Parity office to ensure high standards are maintained. As part of its benefits package Parity offers a number of benefits to support the health and well being of its staff, as well as an Employee Assistance helpline. Recycling The Group makes every effort to recycle office paper and envelopes. Appropriate containers are provided at all offices and all paper collected is sent to recycling plants. The Group also recycles as much other material, such as toner cartridges, as is economically viable. When replaced, computers and peripherals are offered to employees, local schools or charities or sent to recycling plants. Ethics Parity Group is committed to maintaining the highest standards of ethics, professionalism and business conduct as well as ensuring that we act in accordance with the law at all times. The Group supports and promotes the principles of equal opportunities in employment and promotes a culture where every employee is treated fairly. A culture of teamwork, openness, integrity and professionalism forms a key element of our company principles and values which sets out the standards of behaviour we expect from all our employees. 12 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 12 228174 PARITY pp01-22.indd 12 / / P f 26/04/2013 17:00 26/04/2013 17:00 Corporate Governance Report Introduction The maintenance of high standards of corporate governance remains a key priority for the Board. UK Listing Rules require listed companies to disclose how they have applied the principles of the UK Corporate Governance Code on Corporate Governance and whether they have complied with the provisions set out in section 1 of the UK Corporate Governance Code throughout the year. If there are instances of non- compliance, companies must state which provisions they have not complied with, what period the non-compliance covered during the year and provide an explanation for the non- compliance. This statement, together with the remuneration report on pages 17 to 2 1 describes how the Group has complied with the UK Corporate Governance Code during the year. Statement by the Directors of compliance with the provisions of the UK Corporate Governance Code The Board considers that, throughout the period under review, the Group has complied with the provisions of the June 2010 UK Corporate Governance Code. Going concern The Board confirms that after making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts. Further details are outlined in the Directors’ Report on page 1 1. The workings of the Board and its committees The Board During the period the Board consisted of the Chairman Philip Swinstead, the Deputy Chairman and Senior Independent Director Lord Freeman, the Chief Executive Officer Paul Davies, the Finance Director Alastair Woolley and Non-executive Directors David Courtley and Mike Phillips. On 1 February 2013 Suzanne Chase was appointed Executive Director and General Counsel. On 7 March 2013 Stephen Whyte was appointed Executive Director. The Directors’ biographies, which are set out on page 9, demonstrate a range of business backgrounds and experience. Chairman The Chairman, Philip Swinstead, is responsible for the leadership and efficient operation of the Board, on all aspects of its role. This entails ensuring that Board meetings are held in an open manner, and allow sufficient time for agenda points to be discussed. It also entails the regular appraisal of each director, providing feedback and reviewing any training or development needs. He is also responsible for effective communications with shareholders, and relaying any shareholder concerns to the Directors. Senior Independent Director Lord Freeman acts as the Senior Independent Director and his prime responsibility is to provide a communication channel between the Chairman and the Non-executive Directors and to ensure that the views of each Non-executive Director are given due consideration. He is also an additional contact point for shareholders if they have reason for concern, when contact through the normal channels of the Chairman, Chief Executive and other executive directors has failed to resolve their concerns, or where such contact is inappropriate. Re-election of Directors All Directors submit themselves for reappointment at the next Annual General Meeting following their appointment and retire by rotation, offering themselves for re-election. The names of the Directors submitted for reappointment are set out in the Directors’ report on page 1 0 and in the separate Notice of Annual General Meeting sent to all Shareholders. The Chairman, and in the case of the Chairman himself, the Deputy Chairman confirms that the performance of each Director submitting themselves for reappointment continues to be effective and the individuals continue to demonstrate commitment to the role. Company Secretary All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. There is an agreed procedure for Directors to obtain independent professional advice, if necessary, at the Company’s expense. The Board meets regularly throughout the year to set long term objectives and to monitor progress against those objectives. A table showing the number of meetings of the Board and its committees held during the year and attendance at those meetings by each Board member is set out on page 14. The Board maintains close dialogue by email and telephone between formal meetings. The Board has a formal schedule of matters reserved for its specific approval including review of Group strategic, operational and financial matters including proposed acquisitions and divestments. It approves the annual accounts and interim report, the annual budget, significant transactions and major capital expenditure and reviews the effectiveness of the system of internal control and the risks faced by the Group. The review covers all controls, including financial, operational and compliance controls and risk management. Authority is delegated to management through Group authorisation limits on a structured basis, ensuring that proper management oversight exists at the appropriate level. The Group authorisation levels were reviewed by the Board in December 2012. In October 2012 the Board reviewed the role and responsibilities between the Chairman, Chief Executive Officer, the Senior Independent Director and the Non-executive directors. All members of the Board are supplied in advance of meetings with appropriate information covering the matters which are to be considered. A procedure exists for the Directors, in the furtherance of their duties, to take independent professional advice if required. If a Director has any concerns about a particular issue, such concerns are recorded in the minutes of the relevant Board meeting. In the event that a Director resigned over a matter that was of concern to him, such concerns would be communicated to the other Directors. All Directors have the opportunity to undertake relevant training. 13 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp01-22.indd 13 228174 PARITY pp01-22.indd 13 / / P f 26/04/2013 17:00 26/04/2013 17:00 Corporate Governance Report continued The Managing Directors of each of the business units held regular meetings with the Chief Executive Officer and Group Finance Director during the year to discuss operating and financial performance and key issues arising from these meetings were reported to the Board. The Chief Executive officer also holds monthly Executive Committee meetings which are attended by the Finance Director, General Counsel, the HR Director and the business unit Managing Directors. Performance evaluation In the year the Board undertook an annual evaluation of its own performance and that of its committees and individual directors. The performance of the Chairman was reviewed by the Deputy Chairman. Board balance and independence The UK Corporate Governance Code requires a balance of Executive and Non-executive Directors such that no individual or small group of individuals can dominate the Board’s decision making. The number and quality of the Non-executive Directors Number held Number attended1 Philip Swinstead Lord Freeman Paul Davies Alastair Woolley David Courtley Mike Phillips on the Board, with their combination of diverse backgrounds and expertise, ensures that this principle is met. The importance of attaining an improved gender balance on the Board has been recognised by the current Board members. On 1 February 2013 Suzanne Chase was appointed to the Board as Executive Director and General Counsel. Gender diversity will continue to be a factor in any new appointments made. The Board considers that there are no relationships or circumstances which are likely to affect the independent judgement of the Non-executive Directors. Attendance at board meetings The Board had 12 scheduled Board meetings in 2012 and 7 ad hoc meetings (included below) were convened as necessary to deal with urgent matters. Detail of attendance at Board meetings is summarised below. Committee attendance is shown for Committee members only. Board Audit Nominations Remuneration 19 17 15 19 18 17 15 3 – 3 – – 2 3 2 – 2 – – 2 2 2 – 2 – – 2 2 1 All Directors who were members of the Board at the time attended the Group’s Annual General Meeting on 29 May 2012 Committees Each of the Board’s three Committees has formal written terms of reference, which were reviewed in April 2012. These terms of reference are made available for inspection by Shareholders at the Annual General Meeting or, on request to the Company Secretary, can be inspected at the Company’s head office and are also available in the Corporate Governance section of the Group’s website. Audit committee The audit committee which is chaired by Mike Phillips, meets three times a year. Lord Freeman and David Courtley are the other members of the audit committee. The audit committee reviews and, as appropriate, actively engages in the processes for financial reporting, internal control, risk assessment, audit and compliance assurance, the consideration of the independence of the Group’s external auditor and the effectiveness of the Group’s system of accounting, its internal financial controls and external audit function. The committee’s principal terms of reference include: • the oversight responsibilities described in the above paragraph; • reviewing compliance with laws, regulations and the Group’s code of conduct and policies; • monitoring the integrity of the Group’s financial statements and announcements relating to the Group’s financial performance and reviewing significant financial reporting judgements, changes in accounting policies and practices, significant adjustments resulting from the audit and the application of the going concern assumption; • reviewing the findings of the external audit with the external auditor; • making recommendations to the Board, for it to put to the shareholders for their approval, regarding the appointment, re-appointment and removal of the external auditor and approving the remuneration and terms of engagement of the external auditor; • monitoring and reviewing the external auditor’s independence and the effectiveness of the audit process; • developing and implementing policy on the engagement of the external auditors to supply non-audit services; • reviewing the Group’s arrangements for its employees to raise concerns, in confidence, about possible wrong doing in financial reporting or other matters; and • reviewing the adequacy and effectiveness of the Company’s internal financial controls, internal control, and risk management systems. 14 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 14 228174 PARITY pp01-22.indd 14 / / P f 26/04/2013 17:00 26/04/2013 17:00 In order to ensure an appropriate balance between cost effectiveness, objectivity and independence, the audit committee reviews the nature of all services, including non- audit work, provided by the external auditor each year. The Group normally expects to retain the external auditor to provide audit-related services, including work in relation to shareholder circulars and similar services. The external auditor provided audit-related services during 2012, details of which are set out in note 3 to the accounts. Audit committee meetings are attended by the external auditors and, by invitation of the committee, all of the Executive Directors. The external auditors meet separately with the audit committee on request, without the presence of the Executive Directors, to ensure open communication. Remuneration committee Details of the membership and responsibilities of The Remuneration Committee are set out in the remuneration report on pages 17 to 21. Nominations committee The Nominations Committee comprises the non-executive Directors and is chaired by Lord Freeman. It is responsible for proposing candidates for appointment to the Board, having regard to the balance and structure of the Board, and succession planning. Where necessary, recruitment consultants are used to assist the process. Investor relations The Company engages where possible in regular dialogue with its major Shareholders through presentations and meetings after the announcement of the Group’s full year and interim results. Private and institutional shareholders are given an opportunity to communicate directly with the Board at the Annual General Meeting. Shareholders’ queries received via the Company Secretary’s email address at cosec@parity.net or by telephone to the Group’s head office are responded to in person by the Company Secretary or by another appropriate employee. All members of the Board usually attend the Annual General Meeting. The chairmen of the audit, remuneration and nominations committees will normally be available to answer Shareholders’ questions at that meeting. Notice of the Meeting is posted to Shareholders with the report and accounts no fewer than 21 working days prior to the date of the Annual General Meeting. The information sent to Shareholders includes a summary of the business to be covered at the Annual General Meeting, where a separate resolution is proposed for each substantive matter. The Group’s annual report and accounts, interim report and other stock exchange announcements are published on the Group’s website at www.parity.net. Annual Report The Annual Report is designed to present a fair, balanced and understandable view of the Group’s activities and prospects. The Operating & Financial Review provides an assessment of the Group’s affairs and position. The Annual Report and Interim Report are sent to all Shareholders on the Register. Directors’ responsibilities The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. Website publication The directors are responsible for ensuring the annual report and the financial statements are made available on the Parity Group website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the on-going integrity of the financial statements contained therein. O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp01-22.indd 15 228174 PARITY pp01-22.indd 15 / / P f 26/04/2013 17:00 26/04/2013 17:00 15 Corporate Governance Report continued Internal control The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness and is assisted in this respect by the audit committee. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The Group’s system of internal control, which complies with the Turnbull Guidance, has been in place throughout the year and up to the date of this report. The Directors confirm that they have reviewed the effectiveness of the Group’s system of internal controls during the year. The Group did not consider it necessary to have a separate internal audit function, but will continue to keep the need under review. Risk management The Group is exposed through its operations to the following financial risks: • Interest rate risk; • Foreign currency risk; • Liquidity risk; and • Credit risk. The policies for managing these risks are set by the Board following recommendations from the Finance Director. Certain risks are managed centrally, while others are managed locally following guidelines communicated from the centre. The policies for each of the above risks, and the nature and extent of those risks, are described in detail in note 23 to the financial statements. Other risks and uncertainties are discussed in the Financial Review on page 6. Directors’ responsibilities pursuant to DTR4 The Directors confirm to the best of their knowledge: • the Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group. • the annual report includes a fair review of the development and performance of the business and the financial position of the Group and the parent Company, together with a description of the principal risks and uncertainties that they face. Alastair Woolley Director 6 March 2013 16 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 16 228174 PARITY pp01-22.indd 16 / / P f 26/04/2013 17:00 26/04/2013 17:00 Remuneration Report Remuneration committee The remuneration committee comprises Lord Freeman as Chairman, David Courtley and Mike Phillips. Directors are excluded from discussions about their personal remuneration. salary review was for increases to be given only where an individual’s role had changed or where there was a pay anomaly. No changes in Directors’ remuneration arose as a result of this review. The committee is responsible for reviewing the Group’s remuneration policy, the emoluments of the Executive Directors and other senior management and the Group’s pension arrangements and for making recommendations thereon to the Board. The committee also makes recommendations to the Board in respect of awards of options under the Senior Executive Share Option Plan, Executive Share Option and Sharesave Schemes and in respect of employees who should be invited to participate in the Co-investment Scheme. It also reviews the terms of service contracts with senior employees and Executive Directors and any compensation arrangements resulting from the termination by the Company of such contracts. The committee has access to external advisors to assist it with ensuring that salary and benefit packages are competitive and appropriate. In addition, committee members keep themselves fully informed of all relevant developments and best practice by reading the circulars on remuneration and related matters that the Company receives from its advisers and, if appropriate, by attending seminars. Pension advice is provided by Cartwright Group Limited. Advice on share options and Co-investment Plans is provided by Pinsent Masons, who also provide other legal services to the Group. The Board determines the remuneration of all Non-executive Directors within the limits set out in the Company’s Articles of Association. Non-executive Directors are not involved in any decisions about their own remuneration. Details of Directors’ remuneration for the year ended 31 December 2012 are set out in the table on page 20. Remuneration policy Parity aims to recruit, motivate and retain high calibre executives capable of achieving the objectives of the Group and to encourage and reward appropriately superior performance in a manner which enhances shareholder value. Accordingly, the Group operates a remuneration policy which ensures that there is a clear link to business strategy and a close alignment with shareholder interests and current best practice, and aims to ensure that senior executives are rewarded fairly for their respective individual contributions to the Group’s performance. The four key elements of the remuneration package of senior executives, including Executive Directors, in the Group in 2012 were basic annual salary and benefits in kind; performance bonus payments; long term incentives including share options; and pension arrangements. Salaries and benefits are reviewed annually. In order to assess the competitiveness of the pay and benefits packages offered by the Group, comparisons are made to those offered by similar companies. These are chosen with regard to the size of the company (turnover, profits and employee numbers); the diversity and complexity of their businesses; the geographical spread of their businesses; and their growth, expansion and change profile. In light of the economic conditions prevailing at the start of 2012 the policy applied as a result of the annual Performance bonus The terms of the incentive bonus for Executive Directors are agreed annually. For 2012 a target for the full year was set. No performance bonuses were earned by, or paid to, Executive Directors in 2012. Long-term incentive arrangements The long-term incentive arrangements operated by the Company for Executive Directors comprise Share Option Schemes including a Co-investment Scheme. Share option schemes During 2012 the Group operated three types of share option scheme: an Executive Share Option Plan, a Savings Related Share Option Scheme (Sharesave Scheme), and a Senior Executive Share Option Plan. Executive share option plans The Group operates both an HMRC Approved Share Option Plan and an Unapproved Share Option Plan for options awarded to UK employees in excess of the HMRC limit of £30,000. Share options are granted to Executive Directors and other senior employees over a period of time and according to performance. The rules of the Executive Share Option Plans allow for annual grants to be awarded equivalent to a value of up to one times salary or up to two times salary in exceptional circumstances. A limit of 15% of the issued share capital of the Company in a ten year period, on a rolling basis, is applicable to the headroom available to award options over the life of the Schemes. Rules of the current Plans expire in May 2019. The terms and conditions of existing share options have not been varied in the year. Executive Share Options granted after 2004 are exercisable in normal circumstances between three and ten years after the date of grant. The exercise of the options is conditional upon the share price either outperforming the average Total Shareholder Return performance of a comparator group comprising a basket of companies in the IT services sector, or outperforming a target price. Options granted in 2003 and 2004 have a performance criterion of growth in EPS exceeding RPI plus an average of 3% per annum. The year 2004 has been taken as the base year against which EPS growth is measured. The exercise of share options is satisfied either through shares issued by the Company or through purchases in the market via the Employee Benefit Trust. In the event that an employee resigns, the options that they hold will lapse. Options are granted at nil cost. The option exercise price is set at the closing mid-market share price on date of grant without any discount. On 7 June 2011 300,000 share options were awarded under this scheme to Alastair Woolley. The exercise price of the options is 28 pence, and the options are subject to a performance condition being that the share price must be 17 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp01-22.indd 17 228174 PARITY pp01-22.indd 17 / / P f 26/04/2013 17:00 26/04/2013 17:00 Remuneration Report continued greater than or equal to 35 pence. The options will vest in 3 years and lapse in 10 years if not exercised. None of the Directors have awards outstanding under the Co-investment Scheme. Total shareholder return The graph below shows Parity’s total shareholder return performance over the past five years compared to a comparator group which includes Parity and by reference to the FTSE All Share Index. The comparator group was chosen to provide a benchmark against other companies in the same sector reflecting Group’s two main lines of business; Resources and Systems. Until February 2009 the Group also operated a Training business. At 31 December 2012 the comparator group comprised: • Anite • Charteris • Harvey Nash • Hays • ILX • Interquest • Kellan • Nakama Group • Phoenix IT • Sci Sys • SQS • SThree • The Rethink Group 5 Year Total Shareholder Return graph — quarterly (rebased to 100) 140 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 Parity (cid:2)Group (cid:2)PLC FTSE(cid:2) All Share Peer (cid:2)(simple average (cid:2)not (cid:2)weighted) Share price The Parity Group plc mid market share price on 31 December 2012 was 18.5p. During the period 1 January to 31 December 2012 shares traded at market prices between 18.5p and 27.35p. Directors’ pension information Paul Davies is entitled to a non-contributory company pension contribution of 11% of basic salary. Alastair Woolley is entitled to a contributory company pension contribution of 5% of basic salary. On 4 April 2012 a further 60,000 share options were awarded under this scheme to Alastair Woolley. The exercise price of the options is 26.25 pence, and the options are subject to a performance condition being that the share price must be greater than or equal to 50 pence. The options will vest in 3 years and lapse in 10 years if not exercised. Senior Executive Share Option Plan The Senior Executive Share Option Plan was approved by shareholders on 19 February 2009 and renewed at an EGM on 25 October 2010. The maximum number of shares over which options may be granted under the Senior Executive Share Option Plan is 10% of the company’s issued share capital. Following his appointment as CEO, Paul Davies was granted 2,851,633 options under the Senior Executive Share Option Plan in October 2010. The exercise price is 10 pence per share and there are no performance conditions. The options had all vested by the balance sheet date. There are no other live options under the Senior Executive Share Option Plan. Sharesave schemes All UK employees, including the Executive Directors, are eligible to participate in the Group’s savings related option scheme (Sharesave Scheme) which enables them to subscribe for ordinary shares in the Company. Options granted under the Sharesave Scheme do not have performance related conditions attached to them. In April 2012, the Group made a grant of options under the Sharesave scheme. Options were granted in conjunction with a three year savings contract, up to a monthly limit of £250.00. Options were granted at a discount of 10% to the market price. None of the directors held options under the Sharesave scheme on 31 December 2012. Co-investment scheme The Co-investment Scheme was approved by shareholders in 2004. Members are invited to join by the Board, having regard to the recommendations of the remuneration committee. At present the scheme is open to the Chief Executive Officer, Group Finance Director and the Managing Directors of the business units and one other senior executive. Under the rules of the scheme, members are entitled to invest up to 50% of the bonus that they earn under the Annual Performance Bonus Scheme in Parity shares. The shares are held on behalf of the employee and, providing the employee remains in Parity’s employment, any bonuses invested will be matched in number by the Company on a sliding scale of up to 1.5 for 1 at the end of a defined period of up to three years following the date of purchase. The award of matching shares is subject to the share price outperforming the average Total Shareholder Return performance of a comparator group comprising a basket of companies in the IT services sector and the period during which the employee has to hold shares before they are matched by the Company increases from one year to three years. Depending on the Group’s performance over those three years, the shares purchased by the employee will be matched on a sliding scale up to a maximum of 1.5-to-1 for outstanding performance. 18 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 18 228174 PARITY pp01-22.indd 18 / / P f 26/04/2013 17:00 26/04/2013 17:00 Non-executive Directors’ remuneration The Board determines the remuneration of the Non-executive Directors with the benefit of independent advice when required. The fees are set at a level which will attract individuals with the necessary experience and ability to make a significant contribution to the Group and are benchmarked against those fees paid by other UK listed companies. The Non-executive Directors do not receive bonuses or pension contributions and are not eligible for grants under any of the Group’s share incentive schemes. They are entitled to be reimbursed for reasonable expenses incurred by them in carrying out their duties as Directors of the Company. Service contracts and letters of appointment The Group’s policy is that no Director has a service contract with a notice period of greater than one year or has provision for pre-determined compensation on termination which exceeds one year’s salary, bonus and benefits in kind. Non- executive Directors have letters of appointment which set out the terms of their appointments. All Board appointments are subject to the Company’s articles of association. Contractual arrangements for current Directors are summarised below: Director Philip Swinstead1 Lord Freeman1 Paul Davies2 Alastair Woolley David Courtley1 Mike Phillips Suzanne Chase Stephen Whyte3 Contract date Notice period Contractual termination payment 1 June 2010 1 July 2007 1 June 2010 1 April 2011 8 June 2011 3 November 2011 1 February 2013 7 March 2013 n/a n/a n/a n/a 12 months 12 months rolling 6 months n/a 3 months 3 months 6 months 6 months rolling n/a 3 months rolling 3 months rolling 6 months rolling 1 The appointment of Non-executive Directors, other than Mike Phillips, is terminable at the will of the parties. 2 The Company is required to give 12 months notice of termination of the service agreement to the Chief Executive Officer who is required to give 6 months notice to the Company. 3 As from 18 August 2013, Stephen Whyte’s notice period to be given by either party will be increased to 12 months. Other non-executive posts Subject to the approval of the Board, the Executive Directors may hold external non-executive appointments. The Group believes that such appointments provide a valuable opportunity in terms of personal and professional development. Fees derived from such appointments may be retained by the Executive Director concerned. O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp01-22.indd 19 228174 PARITY pp01-22.indd 19 / / P f 26/04/2013 17:00 26/04/2013 17:00 19 Remuneration Report continued Directors’ remuneration (audited) The remuneration of the Directors who served during the year is set out below. Salary/ fees 2012 £’000 220 120 200 40 40 40 660 Salary/ fees 2011 £’000 220 90 38 200 30 23 6 27 633 Executive Directors P Davies1 A Woolley Non-executive Directors P Swinstead 2 Lord Freeman D Courtley M Phillips Total emoluments Executive Directors P Davies A Woolley3 I Ketchin4 Non-executive Directors P Swinstead2 Lord Freeman D Courtley5 M Phillips6 N Tose7 Total emoluments Notes Benefi ts 2012 £’000 Compensation for loss of offi ce 2012 £’000 Total emoluments 2012 £’000 18 10 – – – – 28 – – – – – – – 238 130 200 40 40 40 688 Company pension contributions1 2012 £’000 174 6 – – – – 180 Share Based Payment 2012 £’000 11 18 – – – – 29 Benefi ts 2011 £’000 Compensation for loss of offi ce 2011 £’000 Total emoluments 2011 £’000 Company pension contributions1 2011 £’000 Share Based Payment 2011 £’000 19 8 3 – – – – – – – 113 – – – – – 29 113 239 98 153 200 30 23 6 27 775 24 4 2 – – – – – 30 81 9 – – – – – – 90 1 Company pension contributions disclosed in the table above represent the contractual pension entitlements due to the Directors of the company, with the exception of a contribution of £150,000 made to Paul Davies’ pension, which was agreed by The Remuneration Committee. 2 During 2012 and 2011 The Remuneration Committee elected to pay Philip Swinstead an additional fee of £150,000 for discharging services as Chairman. As at 31 December 2012, £37,500 worth of these services remain accrued but unpaid. 3 Appointed 1 April 2011. 4 Resigned 31 March 2011. 5 Appointed 8 June 2011. 6 Appointed 3 November 2011. 7 Resigned 22 November 2011. 20 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 20 228174 PARITY pp01-22.indd 20 / / P f 26/04/2013 17:00 26/04/2013 17:00 Executive Directors’ share options (audited) As at 31 December 2011 Lapsed/ Surrendered in the year  Exercised in the year  Awarded in the year  As at 31 December 2012  Exercise period Exercise price per share Paul Davies Senior Executive share option plan 2010 Alastair Woolley Executive share option plan 2011 2012 Sub-total Total 2,851,633 300,000 – 300,000 3,151,633 – – – – – – – – – – – 2,851,633 2011-2017 £0.10 – 300,000 2014-2021 £0.28 60,000 60,000 60,000 60,000 2015-2022 £0.2625 360,000 3,211,633 Directors’ interests in shares The beneficial interests of the Directors who served during the year and their families in the ordinary share capital of the Company are shown below. At 31 December 2011 (or date of appointment If later) % issued share capital Shareholding as at 31 December 2012 (or date of resignation) % issued share capital 12,180,543 6,250 720,000 56 6,521,739 – 17.72 12,180,543 0.01 1.05 – 9.49 – 6,250 720,000 56 6,521,739 – 16.25 0.01 0.96 – 8.70 – Philip Swinstead Lord Freeman Paul Davies Alastair Woolley David Courtley Mike Phillips For and on behalf of the Board Lord Freeman Chairman of the remuneration committee 6 March 2013 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp01-22.indd 21 228174 PARITY pp01-22.indd 21 / / P f 26/04/2013 17:00 26/04/2013 17:00 21   Independent Auditor’s Report to the Members of Parity Group Plc • information given in the Corporate Governance Statement set out on pages 13 to 16 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit; or • a Corporate Governance Statement has not been prepared by the company. Under the Listing Rules we are required to review: • the directors’ statement, set out on page 1 1, in relation to going concern; • the part of the Corporate Governance Statement on pages 13 to 16 relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and • certain elements of the report to shareholders by the Board on directors’ remuneration. Andy Turner (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, statutory auditor Chartered Accountants 8 Salisbury Square EC4Y 8BB London United Kingdom 6 March 2013 We have audited the financial statements of Parity Group Plc for the year ended 31 December 2012 set out on pages 23 to 60. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 15, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2012 and of the group’s loss for the year then ended; • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and 22 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp01-22.indd 22 228174 PARITY pp01-22.indd 22 / / P f 26/04/2013 17:00 26/04/2013 17:00 Consolidated Income Statement for the year ended 31 December 2012 Continuing operations Revenue Employee benefit costs Depreciation & amortisation All other operating expenses Total operating expenses Operating profi t/(loss) Finance income Finance costs Profi t/(loss) before tax Taxation Loss for the year from continuing operations Discontinued operations Profit/(loss) for the year from discontinued operations Loss for the year attributable to owners of the parent Basic and diluted loss per share Before non- recurring items 2012 £’000 Notes Non-recurring items 2012 (note 5) £’000 Total 2012 £’000 Before non- recurring items 2011 £’000 Non-recurring items 2011 (note 5) £’000 2 3 3 3 7 7 11 85,887 (8,032) (497) (76,708) (85,237) 650 695 (1,061) 284 (497) – (226) – (1,124) (1,350) (1,350) – – (1,350) 148 85,887 (8,258) (497) (77,832) (86,587) (700) 695 (1,061) (1,066) (349) 80,142 (7,989) (537) (71,974) (80,500) (358) 770 (1,124) (712) (208) – – – (1,437) (1,437) (1,437) – – (1,437) 116 Total 2011 £’000 80,142 (7,989) (537) (73,411) (81,937) (1,795) 770 (1,124) (2,149) (92) (213) (1,202) (1,415) (920) (1,321) (2,241) 8 45 (19) 26 (22) (36) (58) (168) (1,221) (1,389) (942) (1,357) (2,299) 12 (2.00p) (3.99p) The notes on pages 28 to 60 form part of the financial statements. O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp23-27.indd 23 228174 PARITY pp23-27.indd 23 / / P f 26/04/2013 17:00 26/04/2013 17:00 23 Statements of Comprehensive Income for the year ended 31 December 2012 Loss for the year Other comprehensive income: Exchange differences on translation of foreign operations Actuarial (loss)/gain on defined benefit pension scheme Deferred taxation on actuarial losses/gains on pension scheme taken directly to equity Other comprehensive income for the year net of tax Total comprehensive income for the year attributable to equity holders of the parent The notes on pages 28 to 60 form part of the financial statements. Notes 25 17 11 Consolidated 2012 £’000 2011 £’000 (1,389) (2,299) (64) (1,554) 287 (1,331) 24 81 (22) 83 (2,720) (2,216) 24 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp23-27.indd 24 228174 PARITY pp23-27.indd 24 / / P f 26/04/2013 17:00 26/04/2013 17:00 Statements of Changes in Equity for the year ended 31 December 2012 Consolidated At 1 January 2012 Loss for the year Exchange differences on translation of foreign operations Actuarial loss on defined benefit pension scheme Deferred taxation on actuarial loss on pension scheme taken directly to equity Issue of new ordinary shares Share options – value of employee services Share capital £’000 1,375 Deferred shares £’000 14,319 Share premium reserve £’000 25,944 Other reserves £’000 44,160 – – – – 62 – – – – – – – – – – – 693 – – – – – – – Retained earnings £’000 (80,079) (1,389) Total £’000 5,719 (1,389) (64) (64) (1,554) (1,554) 287 – 124 287 755 124 At 31 December 2012 1,437 14,319 26,637 44,160 (82,675) 3,878 Consolidated At 1 January 2011 Loss for the year Exchange differences on translation of foreign operations Actuarial loss on defined benefit pension scheme Deferred taxation on actuarial loss on pension scheme taken directly to equity Issue of new ordinary shares Share options – value of employee services Share capital £’000 760 – – – – 615 – Deferred shares £’000 14,319 – – – – – – Share premium reserve £’000 20,134 – – – – 5,810 – Other reserves £’000 44,160 – – – – – – Retained earnings £’000 (78,040) (2,299) 24 81 (22) – 177 At 31 December 2011 1,375 14,319 25,944 44,160 (80,079) Company At 1 January 2012 Loss for the year Issue of new ordinary shares Share options – value of employee services Share capital £’000 1,375 – 62 – Deferred shares £’000 14,319 – – – Share premium reserve £’000 25,944 – 693 – Other reserves £’000 22,729 – – – Retained earnings £’000 (45,381) (2,409) – 32 Total £’000 1,333 (2,299) 24 81 (22) 6,425 177 5,719 Total £’000 18,986 (2,409) 755 32 At 31 December 2012 1,437 14,319 26,637 22,729 (47,758) 17,364 Company At 1 January 2011 Loss for the year Issue of new ordinary shares Share options – value of employee services Share capital £’000 760 – 615 – Deferred shares £’000 14,319 – – – Share premium reserve £’000 20,134 – 5,810 – Other reserves £’000 22,729 – – – Retained earnings £’000 (42,488) (2,985) – 92 Total £’000 15,454 (2,985) 6,425 92 At 31 December 2011 1,375 14,319 25,944 22,729 (45,381) 18,986 The notes on pages 28 to 60 form part of the financial statements. 25 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp23-27.indd 25 228174 PARITY pp23-27.indd 25 / / P f 26/04/2013 17:00 26/04/2013 17:00 Statements of Financial Position As at 31 December 2012 Company number 3539413 Assets Non-current assets Intangible assets Property, plant and equipment Trade and other receivables Investment in subsidiaries Deferred tax assets Current assets Stocks and work in progress Trade and other receivables Cash and cash equivalents Total assets Liabilities Current liabilities Loans and borrowings Trade and other payables Provisions Non-current liabilities Loans and borrowings Trade and other payables Provisions Retirement benefit liability Total liabilities Net assets Shareholders’ equity Called up share capital Share premium account Other reserves Retained earnings Total shareholders’ equity Notes 13, 14 15 19 31 17 18 19 20 21 22 20 21 22 25 26 24 24 24 Consolidated Company 2012 £’000 7,756 415 – – 1,318 9,489 20 13,044 2,871 15,935 25,424 2011 £’000 5,547 593 – – 1,384 7,524 116 12,539 5,241 17,896 25,420 2012 £’000 2011 £’000 – – 69,763 20,527 – – – 77,241 20,527 – 90,290 97,768 – 2,619 2,362 4,981 – 2,915 5,107 8,022 95,271 105,790 (8,283) (8,938) (308) (6,504) (8,783) (881) (17,529) (16,168) – (2,491) (305) (2,796) (8) (500) – – – (74,656) (462) (1,066) (3,047) (4,017) (2,467) (3,533) (21,546) (19,701) 3,878 5,719 15,756 26,637 44,160 15,694 25,944 44,160 (455) – (75,111) (77,907) 17,364 15,756 26,637 22,729 (82,675) (80,079) (47,758) 3,878 5,719 17,364 – (1,681) (737) (2,418) – (83,328) (1,058) – (84,386) (86,804) 18,986 15,694 25,944 22,729 (45,381) 18,986 Approved by the Directors and authorised for issue on 6 March 2013. The notes on pages 28 to 60 form part of the financial statements. Paul Davies Chief Executive Officer Alastair Woolley Finance Director 26 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp23-27.indd 26 228174 PARITY pp23-27.indd 26 / / P f 26/04/2013 17:00 26/04/2013 17:00 Statements of Cash Flows for the year ended 31 December 2012 Cash flows from operating activities (1,389) (2,299) (2,409) (2,985) Consolidated Company Notes 2012 £’000 2011 £’000 2012 £’000 2011 £’000 Loss for year: Adjustments for: Finance income Finance expense Share-based payment expense Income tax expense/(credit) Amortisation of intangible fixed assets Depreciation of property plant and equipment Impairment of intangible assets Change in fair value of available-for-sale investment Working Capital Decrease in work in progress (Increase)/decrease in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in provisions Payments to retirement benefit plan Cash absorbed by operations Income taxes paid Net cash flows from operating activities Investing activities Acquisitions (net of cash received) Purchase of property, plant and equipment Purchase of intangible assets Proceeds from disposal of available for sale assets Net cash used in investing activities Financing activities Issue of ordinary shares Proceeds from finance facility Net movement on intercompany funding Interest paid Net cash (used in)/ from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes on pages 28 to 60 form part of the financial statements. 7 7 10 11 13 15 13 16 25 9 15 13 16 26 7 (695) 1,061 124 349 233 264 721 – 668 117 (229) (925) (1,178) (1,090) (2,637) – (770) 1,124 177 95 249 288 – 7 (394) 1,044 32 (641) – – – – (386) 1,210 91 (363) – – – (1,129) (2,368) (2,433) 121 2,260 (2,570) (139) – – 8,496 (9,651) (1,035) – – (2,400) 3,334 314 – (1,457) (4,558) (1,185) (3) – – (2,637) (1,460) (4,558) (1,185) (1,138) (113) (3) – (1,254) 5 1,766 – (250) 1,521 (2,370) 5,241 2,871 – (11) – 123 112 6,425 150 – (231) 6,344 4,996 245 5,241 – – – – – 5 – 2,057 (249) 1,813 (2,745) 5,107 2,362 – – – – – 6,425 – (229) – 6,196 5,011 96 5,107 27 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp23-27.indd 27 228174 PARITY pp23-27.indd 27 / / P f 26/04/2013 17:00 26/04/2013 17:00 Notes to the Accounts 1 Accounting policies Basis of preparation Parity Group plc (the “Company”) is a company incorporated and domiciled in the UK. Both the parent company financial statements and the group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“Adopted IFRSs”). On publishing the parent company financial statements here together with the group financial statements, the Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements. The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the years presented unless otherwise stated. The financial statements have been prepared on a going concern basis. The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Directors’ Report (Review of business and future developments). The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 6 to 8 and in note 23 to the financial statements. Note 23 also includes the Group’s objectives for managing capital. As outlined in note 23, the Group meets its day to day working capital requirements through an asset-based finance facility. The facility contains certain financial covenants which have been met throughout the period. The facility has recently been extended to December 2014. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group will be able to operate within the level of its current facility for the foreseeable future. The bank has not drawn to the attention of the Group any matters to suggest that this facility will not be continued on acceptable terms. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2012. Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. In accordance with Section 408 of the Companies Act 2006, the Company has not presented its own Income Statement or Statement of Comprehensive Income. The loss for the year dealt with in the accounts of the Company was £2,409,000 (2011: £2,985,000). Business Combinations The acquisition of subsidiaries is accounted for using the purchase method. The related costs of acquisition other than those associated with the issue of debt or equity securities, are recognised in the profit and loss as incurred. The acquiree’s identifiable assets and liabilities and contingent liabilities that meet the conditions for recognition under IFRS3 (2008) “Business combinations” are recognised at their fair value at the acquisition date. Changes in accounting policies: new standards, interpretations and amendments effective in 2012 adopted by the Group and published standards not yet effective No new standards, amendments to published standards or interpretations of existing standards effective in 2012 had a material impact on the Group’s 2012 financial statements. No published standards that are not yet effective are expected to have a material impact on the Group’s financial statements. Measurement convention The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments and financial instruments classified as fair value through the profit or loss or as available-for-sale. Non-current assets are stated at the lower of previous carrying amount and fair value less costs to sell. Revenue recognition The Group generates revenue principally through the provision of recruitment and technology services, and to a lesser extent, through the resale of 3D equipment. 28 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp28-42.indd 28 228174 PARITY pp28-42.indd 28 / / P f 26/04/2013 17:00 26/04/2013 17:00 1 Accounting policies continued Revenue recognition continued The Group recognises revenue when certain criteria are met: there is clear evidence that a contract exists, the amount of revenue can be measured reliably, it is probable that future economic benefits will flow to the Group, the stage of completion can be measured reliably where services are delivered, and the significant risks and rewards of ownership, including effective control, are transferred to clients where equipment is sold. Revenue is measured at the fair value of the consideration received or receivable, net of discounts, volume rebates and value added tax. Revenue on contracts for the supply of professional services at pre-determined rates is recognised as and when the work is performed, irrespective of the duration of the contract. Permanent placement staffing revenue is recognised when candidates commence employment. Rebates may be applicable on a sliding scale where the candidate’s employment is terminated within 9 weeks. Rebate provisions are not created based on the limited incidence of claims. Revenue is recognised on fixed price contracts while the contract is in progress, using the percentage of completion method, having regard to the proportion of the total contract costs which have been incurred at the reporting date. Provision is made for all foreseeable future losses. Revenue from systems integration and consulting services under time and material arrangements is recognised as the services are rendered. Revenue for equipment sales is recognised at the point of delivery, which is the point when the significant risks and rewards of ownership of the equipment have passed to the buyer. Non-recurring items Items which are both material and non-recurring are presented as non-recurring items within the relevant Income Statement category. The separate reporting of non-recurring items helps provide a better indication of the Group’s underlying business performance. Events which may give rise to the classification of items as non-recurring, if of a significantly material value, include gains or losses on the disposal of a business, restructuring of a business, transaction costs, litigation and similar settlements, asset impairments, and onerous contracts. Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Financing income and expenses Financing expenses comprise interest payable, finance charges on shares classified as liabilities and finance leases recognised in profit or loss using the effective interest method, unwinding of the discount on the retirement benefit scheme liabilities, and net foreign exchange losses that are recognised in the income statement (see foreign currency accounting policy). Financing income comprises the expected return on the retirement benefit scheme assets, interest receivable on funds invested, dividend income, and net foreign exchange gains. Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established. Foreign currency gains and losses are reported on a net basis. Dividends Final dividends proposed by the Board of Directors and unpaid at the year end are not recognised in the financial statements until they have been approved by the shareholders at the Annual General Meeting. Interim dividends, which do not require shareholder approval, are recognised when paid. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. 29 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp28-42.indd 29 228174 PARITY pp28-42.indd 29 / / P f 26/04/2013 17:00 26/04/2013 17:00 Notes to the Accounts continued 1 Accounting policies continued Foreign currencies Company Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the Income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are retranslated to the functional currency at foreign exchange rates ruling at the dates the fair value was determined. Group On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in Other Comprehensive Income. On disposal of a foreign operation, the cumulative exchange differences recognised in other comprehensive income relating to that operation up to the date of disposal are transferred to the consolidated Income Statement as part of the profit or loss on disposal. Discontinued operations A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations or its subsidiary acquired exclusively with a view to resale, that has been disposed of, has been abandoned or that meets the criteria to be classified as held for sale. Discontinued operations are presented in the Income Statement (including in the comparative period) as a single line which comprises the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognised on the re- measurement to fair value less costs to sell or on disposal of the assets or disposal groups constituting discontinued operations. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker is the Operations Board comprising the Chief Executive, the Finance Director, the Business Unit Managing Directors and the HR Director. Intangible assets Goodwill Goodwill represents the excess of the cost of acquisition of a business combination over the Group’s share of the fair value of identifiable net assets of the business acquired. After initial recognition, goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash- generating units and is not amortised but is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee. Gains and losses on disposal of a business include the carrying amount of goodwill relating to the business sold in determining the gain or loss on disposal, except for goodwill arising on business combinations on or before 31 December 1997 which has been deducted from Shareholders’ equity and remains indefinitely in Shareholders’ equity. Software The carrying amount of an intangible asset is its cost less any accumulated amortisation and any provision for impairment. Software is amortised on a straight line basis over its expected useful economic life of three to seven years. Property, plant and equipment Property, plant and equipment are stated at cost, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost less estimated residual value of each asset on a straight line basis over its expected useful economic life, as follows: Leasehold improvements Office equipment The lesser of the asset life and the remaining length of the lease Between 3 and 5 years The carrying value of property, plant and equipment is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. Impairment of non-financial assets (excluding deferred tax assets) An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount, the latter being the higher of the fair value less costs to sell associated with the CGU and its value in use. Value in use calculations are performed using cash flow projections for the CGU to which the goodwill relates, discounted at a pre-tax rate which reflects the asset specific risks and the time value of money. 30 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp28-42.indd 30 228174 PARITY pp28-42.indd 30 / / P f 26/04/2013 17:00 26/04/2013 17:00 1 Accounting policies continued Impairment of non-financial assets (excluding deferred tax assets) continued Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. Goodwill is tested for impairment at each reporting date. The carrying value of other intangible assets and property, plant and equipment is reviewed for impairment if events or changes in circumstances indicate the carrying value many not be recoverable. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or (“CGU”). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Financial assets The Group’s financial assets fall into the categories discussed below, with the allocation depending to an extent on the purpose for which the asset was acquired. Unless otherwise indicated, the carrying amounts of the Group’s financial assets are a reasonable approximation of their fair values. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables: these assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (e.g. trade receivables). They are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition or issue, less provision for impairment. The effect of discounting on these financial instruments is not considered to be material. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, such provisions are recorded in a separate allowance account with the loss being recognised within other operating expenses in the Income Statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. Available-for-sale: non-derivative financial assets not included in the above categories are classified as available-for-sale and comprised the Group’s investment in shares listed on the US stock exchange. They are carried at fair value with changes in fair value recognised directly in Other Comprehensive Income. Where there is a significant or prolonged decline in the fair value of an available for sale financial asset (which constitutes objective evidence of impairment), the full amount of the impairment, including any amount previously charged to equity, is recognised in the Income Statement. Purchases and sales of available-for-sale financial assets are recognised on settlement date with any change in fair value between trade date and settlement date being recognised in Other Comprehensive Income. On sale, the amount held in Other Comprehensive Income associated with that asset is removed from equity and recognised in the Income Statement. Income from shares classified as available-for-sale is recognised in finance income in the Income Statement. Investments: investments in subsidiary undertakings are recorded at cost. The carrying values of investments are reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. Cash and cash equivalents: cash and cash equivalents in the Statement of Financial Position comprise cash at bank and in hand, short term deposits and other short-term liquid investments. In the Cash Flow Statement, cash and cash equivalents comprise cash and cash equivalents as defined above, net of bank overdrafts. O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp28-42.indd 31 228174 PARITY pp28-42.indd 31 / / P f 26/04/2013 17:00 26/04/2013 17:00 31 Notes to the Accounts continued 1 Accounting policies continued Stocks and work in progress Stocks are stated at the lower of cost and net realisable value. Cost comprises equipment for resale. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Costs recoverable on contracts which are expected to benefit performance and be recoverable over the life of the contracts are recognised in the Statement of Financial Position as work in progress and charged to the Income Statement over the life of the contract so as to match costs with revenues. Work in progress is stated at the lower of cost and net realisable amount and represents that element of start up costs which, at the reporting date, has not been charged to the Income Statement. Cost includes materials, direct labour and an attributable portion of overheads based on normal levels of activity. Net realisable amount is based on estimated selling price less further costs expected to be incurred to completion and disposal including provision for contingencies and anticipated future losses. Amounts recoverable on contracts and payments in advance Amounts recoverable on contracts are stated at the net sales value of work done less amounts received as progress payments on account. Where progress payments exceed the sales value of work done, they are included in payables as payments in advance. Financial liabilities All of the Group’s financial liabilities are classified as financial liabilities carried at amortised cost. The Group does not use derivative financial instruments or hedge account for any transactions. Unless otherwise indicated, the carrying amounts of the Group’s financial liabilities are a reasonable approximation of their fair values. Financial liabilities include the following items: • • • Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. Finance leases which are initially measured at fair value and subsequently carried at amortised cost using the effective interest method. Bank borrowings, which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated Statement of Financial Position. Interest expense in this context includes initial transaction costs and premia payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Operating Leases Rentals paid under operating leases are charged to income on a straight line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability. From time to time the Group faces the potential of legal action in respect of employment or other contracts. In such situations, where it is probable that a payment will be required to settle the action, provision is made for the Group’s best estimate of the outcome. Where leasehold properties are surplus to requirements, provisions are made for the best estimates of the unavoidable net future costs. Provisions for dilapidation charges that will crystallise at the end of the period of occupancy are provided for in full on non-serviced properties. 32 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp28-42.indd 32 228174 PARITY pp28-42.indd 32 / / P f 26/04/2013 17:00 26/04/2013 17:00 1 Accounting policies continued Pensions The Group operates a number of retirement benefit schemes. With the exception of the ‘Parity Retirement Benefit Plan’, all of the schemes are defined contribution plans and the assets are held in separate, independently administered funds. The Group’s contributions to defined contribution plans are charged to the Income Statement in the period to which the services are rendered by the employees, and the Group has no further obligation to pay further amounts. The ‘Parity Retirement Benefit Plan’ is a defined benefit pension fund with assets held separately from the Group. This fund has been closed to new members since 1995 and with effect from 1 January 2005 was also closed to future service accrual. A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets (at bid price) and any unrecognised past service costs are deducted. The liability discount rate is the yield at the balance sheet date on AA credit rated bonds denominated in the currency of, and having maturity dates approximating to, the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to (the total of any unrecognised past service costs and ) the present value of benefits available in the form of any future refunds from the plan, reductions in future contributions to the plan or on settlement of the plan and takes into account the adverse effect of any minimum funding requirements. Share capital Following the adoption of IAS 32, financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions: (a) (b) they include no contractual obligations upon the company (or group as the case may be) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the company (or group); and where the instrument will or may be settled in the company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the company’s own equity instruments or is a derivative that will be settled by the company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. For the purposes of the disclosures given in note 23, the Group considers its capital to comprise its cash and cash equivalents, its asset-based bank borrowings, and its equity attributable to equity holders, comprising issued capital, reserves and retained earnings, as disclosed in the statement of changes in equity. Financial guarantee contracts Where Group companies enter into financial guarantee contracts and guarantee the indebtedness of other companies within the Group, the company considers these to be insurance arrangements and accounts for them as such. In this respect, the company treats the guarantee contract as a contingent liability until such time that it becomes probable that any Group company will be required to make a payment under the guarantee. Employee Share Ownership Plan (ESOP) As the Company is deemed to have control of its ESOP trust, it is treated as an agent and consolidated for the purposes of the consolidated financial statements. The ESOP’s assets (other than investments in the Company’s shares), liabilities, income and expenses are included on a line-by-line basis in the consolidated financial statements. The ESOP’s investment in the Company’s shares is deducted from shareholders’ equity in the Consolidated Statement of Financial Position as if they were treasury shares. Share based payments transactions Share-based payment arrangements in which the Group and Company receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group and Company. The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. 33 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp28-42.indd 33 228174 PARITY pp28-42.indd 33 / / P f 26/04/2013 17:00 26/04/2013 17:00 Notes to the Accounts continued 1 Accounting policies continued Share based payments transactions continued Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the Income Statement over the remaining vesting period. Where equity instruments are granted to persons other than employees, the fair value of goods and services received is charged against Other Comprehensive Income. Significant accounting estimates and judgements The preparation of financial statements under IFRS requires the Group to make estimates and assumptions regarding the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below. Property provisions. Provisions for onerous lease costs are based on the future contractual lease obligations of the Group less future contractual sub-let income. The estimated future sub-let income is based upon existing sub-lease contracts and it is assumed the contractual commitments will be fulfilled. Dilapidations provisions are based on contractual lease obligations and management estimates and assumptions regarding the future costs of meeting those obligations. The estimates are based upon the size and condition of each property, and past experience of dilapidation costs. Changes in assumptions are not anticipated to have a material impact in the current year. Retirement benefit liability. The costs, assets and liabilities of the defined benefit scheme operated by the Group are determined using methods relying on actuarial estimates and assumptions. Details of the key assumptions are set out in note 25. The Group takes advice from independent actuaries relating to the appropriateness of the assumptions. Changes in the assumptions used may have a significant effect on the Income Statement and the Statement of Financial Position. Recoverability of deferred tax assets. The deferred tax assets are reviewed for recoverability and recognised to the extent that it is probable that taxable profits will be available against which deductible temporary difference can be utilised. This is determined based on management estimates and assumptions as to the future profitability of the related business units. The forecasts for the business used in this review were the same as those used in the review of impairment of goodwill (see note 14). If forecast future profitability for Parity Solutions Limited was 10% lower, a deferred tax asset write down of £35,000 would be considered necessary. The deferred tax asset would not require writing down if the forecast future profitability of Parity Resouces limited was 10% lower. Impairment of goodwill. The Group is required to test whether goodwill has suffered any impairment. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. The use of this method requires the estimation of future cash flows expected to arise from the continuing operation of the cash generating unit and the choice of a suitable discount rate in order to calculate the present value (see note 14). If forecast future profitability were 10% lower, the goodwill would still not be impaired. Investments in subsidiaries. The Company reviews its investment in subsidiaries to test whether any impairment has been suffered. The recoverable amounts are determined using discounted future cash flows. If forecast future cash generation were 10% lower the investment would still not be impaired. Intercompany receivables. The Company reviews receivables due from subsidiary undertakings to test whether they are recoverable. Provision is made for where there is uncertainty as to full recovery. 2 Segmental information Factors that management used to identify the Group’s reporting segments In accordance with IFRS 8 ‘Operating Segments’ the Group’s management structure, and the reporting of financial information to the Chief Operating Decision Maker (the Executive Committee), have been used as the basis to define reporting segments. Each reporting segment is headed up by a dedicated managing director, with direct responsibility for delivering the segmental contribution budget. The internal financial information prepared for the Executive Committee includes contribution at a segmental level, and the Executive Committee allocates resources on the basis of this information. Adjusted EBITDA as defined in note 4, profit before tax, and assets and liabilities are internally reported at a Group level. 34 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp28-42.indd 34 228174 PARITY pp28-42.indd 34 / / P f 26/04/2013 17:00 26/04/2013 17:00 2 Segmental information continued Description of the types of services from which each reportable segment derives its revenues The Group has four segments: • • • • Resources – this segment provides contract, interim and permanent IT recruitment services across all markets. Resources provides 88% (2011: 86%) of the continuing Group’s revenues. Systems – this segment delivers innovative technology solutions designed around client problems, including Cloud solutions, database solutions and collaborative information management. Systems provides 8% (2011: 11%) of the continuing Group’s revenues. Talent Management – this segment works with clients to recruit, develop and grow their talent through improving skills and capability early in employees’ careers. Talent Management provides 3% (2011: 3%) of the continuing Group’s revenues. Inition - this segment was acquired by the Group on 29 May 2012. Inition specialises in leading-edge 3D technology consultancy, systems integration and equipment. Inition provided 3% (2011: nil%) of the continuing Group’s revenues, for the 7 months that it was part of the Group. Central costs include Corporate, Finance, HR, IT and Property costs, and are all managed centrally, and are not allocated to reporting segments for internal reporting purposes. Measurement of operating segment contribution The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Group evaluates performance on the basis of contribution from operations before tax not including non-recurring items, such as restructuring costs. Inter-segment sales are priced on the same basis as sales to external customers, with a discount applied to encourage the use of group resources at a rate acceptable to the tax authorities. Resources 2012 £’000 Systems 2012 £’000 TMS 2012 £’000 Inition 2012 £’000 Total 2012 £’000 75,492 (203) 75,289 (71,289) 4,000 6,517 (13) 6,504 (5,216) 1,288 2,202 – 2,202 (1,528) 674 Revenue Total revenue Inter-segment revenue Revenue from external customers Attributable costs Segmental Contribution Central costs Adjusted EBITDA before investment costs Investment costs* Adjusted EBITDA Depreciation and amortisation Share based charges Non-recurring items Finance income Finance costs Loss before tax (continuing activities) 1,892 86,103 – (216) 1,892 85,887 (1,634) (79,667) 258 6,220 (4,488) 1,732 (461) 1,271 (497) (124) (1,350) 695 (1,061) (1,066) 35 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp28-42.indd 35 228174 PARITY pp28-42.indd 35 / / P f 26/04/2013 17:00 26/04/2013 17:00 Notes to the Accounts continued 2 Segmental information continued Revenue Total revenue Inter-segment revenue Revenue from external customers Attributable costs Segmental contribution Central costs Adjusted EBITDA before investment costs Investment costs* Adjusted EBITDA Depreciation and amortisation Share based charges Non-recurring items Finance income Finance costs Loss before tax (continuing activities) Resources 2011 £’000 Systems 2011 £’000 68,959 (297) 68,662 (65,156) 3,506 9,222 (13) 9,209 (7,347) 1,862 TMS 2011 £’000 2,271 – 2,271 (1,810) 461 Inition 2011 £’000 Total 2011 £’000 – – – – – 80,452 (310) 80,142 (74,313) 5,829 (4,785) 1,044 (688) 356 (537) (177) (1,437) 770 (1,124) (2,149) * Investment costs refer to costs associated with new initiatives which were outlined in the Group’s prospectus, issued in respect of the Firm Placing, and Placing and Open Offer of new ordinary shares (see note 23, “Capital disclosures”). The continuing Group operates exclusively in the UK. All revenues are generated and all segment assets are located in those countries. 51% (2011: 62%) or £38.5m (2011: £42.5m) of the Resources revenue was generated in the Public Sector. 52% (2011: 63%) or £3.4m (2011: £5.8m) of the Systems revenue was generated in the Public Sector. 76% (2011: 86%) or £1.7m (2011: £2.0m) of the Talent Management revenue was generated in the Public Sector. Inition’s revenues are exclusively generated in the Private Sector. The largest single customer in Resources contributed revenue of £11.7m or 16% and was in the private sector (2011: of £9.9m or 14% and in the private sector). The largest single customer in Systems contributed revenue of £2.7m or 41% and was in the public sector (2011: £3.3m or 36% a in the public sector). The largest single customer in TMS contributed revenue of £0.9m or 40% and was in the public sector (2011: £1.2m or 51% in the public sector). The largest single customer in Inition contributed revenue of £0.2m or 11% and was in the private sector (2011: Inition not part of the Group). 36 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp28-42.indd 36 228174 PARITY pp28-42.indd 36 / / P f 26/04/2013 17:00 26/04/2013 17:00 3 Operating costs Continuing operations Employee benefi t costs – wages and salaries – social security costs – other pension costs Depreciation and amortisation Amortisation of intangible assets – software Depreciation of tangible assets All other operating expenses Contractor costs Sub-contracted direct costs Operating lease rentals – plant and machinery – land and buildings Sub-let income – land and buildings Other occupancy costs IT costs Net exchange loss Equity settled share based payment charge Other operating costs Total operating expenses Consolidated 2012 £’000 2011 £’000 7,124 768 366 8,258 233 264 497 71,917 990 52 1,245 (452) 495 514 5 124 2,942 77,832 86,587 6,972 787 230 7,989 249 288 537 66,295 1,983 44 1,154 (304) 591 1,047 4 177 2,420 73,411 81,937 O u r P e r f o r m a n c e O u r G o v e r n a n c e Disclosures relating to the remuneration of Directors are set out on page 17 to 21. During the year the Group obtained the following services for the Group’s auditor, KPMG Audit plc: Audit services: Statutory audit of the Company and Group fi nancial statements Statutory audit of the Company’s subsidiaries pursuant to legislation Amounts paid to previous auditor under legislation Non-audit services: Tax compliance Other services Consolidated 2012 £’000 2011 £’000 10 68 – 78 23 289 312 390 10 59 20 89 21 – 21 110 All non-audit services have been performed in the United Kingdom. On 25 October 2011, the previous auditor resigned as auditor to the Group. Remuneration amounts in 2011 relate to the new auditor, unless otherwise stated. Other advice received in 2012 relates to services provided in relation to acquisition activity. i O u r F n a n c a s i l 228174 PARITY pp28-42.indd 37 228174 PARITY pp28-42.indd 37 / / P f 26/04/2013 17:00 26/04/2013 17:00 37 Notes to the Accounts continued 4 Reconciliation of operating loss to adjusted EBITDA Operating loss from continuing operations Non-recurring items Share-based payment charges Depreciation and amortisation Adjusted EBITDA 2012 £’000 (700) 1,350 124 497 1,271 2011 £’000 (1,795) 1,437 177 537 356 5 3 3 The directors use EBITDA before non-recurring items and share-based payment charges (‘Adjusted EBITDA’) as a key performance measure of the business. 5 Non-recurring items Continuing Operations Transaction costs Restructuring – Employee benefi t costs – Other operating costs Property provisions (other operating costs) Discontinued Operations Property provisions 2012 £’000 840 226 735 (451) 1,350 19 19 2011 £’000 – – 491 946 1,437 36 36 The continuing operations non-recurring charge for 2012 includes transaction costs, restructuring costs and a credit relating to surplus property. Transaction costs refer to the professional services rendered in the Group’s acquisition programme, and mainly relate to the acquisition of Inition Limited and an aborted acquisition. Restructuring costs refer to the employee costs incurred in relation to the re-organisation of Parity Systems. Other operating costs refers to the write off of the net book value of the Group’s financial system (£721,000), and professional fees of £14,000 in relation to employees affected by the reorganisation. New financial systems will be implemented across the Group, commencing with the Systems division, which plans to go-live in Q1 2013. The credit for surplus properties relates to the sublet of an unoccupied area of the Wimbledon head office, for which the lease costs had been previously provided for, and reflects the contracted sub-let income to the end of the sub-lease. The discontinued operations non-recurring charge relates to the costs payable for an ex-Parity Training Limited office, and the unwind of the provision discount in respect of discontinued properties. In 2011 the IT outsource contract was terminated early, with the IT infrastructure support service now being provided in-house. The early termination payment incurred was £0.44m. Secondly, it was decided that the Belfast office would relocate to a more suitable location, incurring costs of £0.12m. Both of these decisions have resulted in cost savings to the Group. In addition, the directors took the prudent view that the vacant office of the Wimbledon property was unlikely to be sub-let before the head lease expired, and therefore the previously unprovided costs to the end of the lease in 2014 of £0.95m were provided for. Discontinued operations in 2011 relates to the unwinding of the provision discount, and a small top-up of the provision for an ex Parity Training building. 38 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp28-42.indd 38 228174 PARITY pp28-42.indd 38 / / P f 26/04/2013 17:00 26/04/2013 17:00 6 Average staff numbers Continuing operations Resources – United Kingdom1 Systems – United Kingdom, including corporate offi ce2 Talent Management – United Kingdom Inition – United Kingdom 1 Includes 29 (2011: 27) employees providing shared services across the Group. 2 Includes 7 (2011: 7) employees of the Company. At 31 December 2012, the Group had 156 continuing employees (2011: 161). 7 Finance income and costs Finance income Expected return on pension scheme assets Finance costs Interest expense on fi nancial liabilities Notional interest on post retirement benefi ts 2012 number 2011 number 74 47 29 12 162 2012 £’000 695 695 250 811 1,061 75 60 34 – 169 2011 £’000 770 770 231 893 1,124 The interest expense on financial liabilities represents interest paid on the Group’s asset-based financing facilities. A 1% increase in the base rate would increase annual borrowing costs by approximately £83,000. 8 Discontinued operations The results of discontinued operations include the results of other statutory entities still owned by the Group which sold their businesses in 2005 and 2006. These entities are not held for sale. Their assets and liabilities will be reversed and eliminated in due course. The post-tax result of discontinued operations was determined as follows: Income/(expenses) other than fi nance costs Non-recurring costs (note 5) Pre-tax profi t (loss) Taxation Profi t/(loss) for the year 2012 £’000 45 (19) 26 – 26 2011 £’000 (19) (36) (55) (3) (58) For 2012 the pre-tax profit represents the write back of various accruals where the directors consider there to be no liability, offset by company secretarial and accounting fees. For 2011 the pre-tax loss relates to legacy overseas subsidiaries of the Group, and comprises company secretarial and accounting fees. The Statement of Cash Flows includes a £274,000 (2011: £67,000) cash outflow from operating activities in respect of discontinued operations. O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp28-42.indd 39 228174 PARITY pp28-42.indd 39 / / P f 26/04/2013 17:00 26/04/2013 17:00 39 Notes to the Accounts continued 9 Acquisition of subsidiary On 29 May 2012, Parity Digital Solutions Limited, a wholly owned subsidiary of the Group, acquired 100% of the issued share capital of Inition Limited. Inition is a UK based operator, specialising in 3D solutions. The fair values of the assets and liabilities acquired are set out in the table below. Inition Limited Note Book value £’000 Fair value adjustments £’000 Fair value £’000 Property, plant and equipment Trade and other receivables Stock and other assets Current tax asset Cash and cash equivalents Less cash repaid to vendors Net cash and cash equivalents Trade and other payables Deferred income Deferred tax liability Net assets acquired Consideration paid: Cash paid Shares issued Contingent consideration Total Goodwill arising 107 143 137 8 561 (200) 361 (330) (331) (4) 91 – – – – – – – – – – – 11 107 143 137 8 561 (200) 361 (330) (331) (4) 91 1,500 750 1,000 3,250 3,159 The Sale and Purchase Agreement allowed for the repayment of surplus cash in excess of £250,000, up to a maximum surplus of £200,000. Since the acquired cash balance was £561,000, an amount of £200,000 became due to the vendors of Inition. This liability was paid to the vendors during 2012. The directors have assessed the potential intangible assets of Inition, and concluded that none exist. The directors have also assessed the fair value of the assets and liabilities acquired and concluded that they are not materially different from their book values. Inition contributed revenue of £1,892,000, a contribution of £258,000 and a profit before tax of £214,000 to the Group results for the year. These results are included in the segmental analysis in Note 2. If Inition’s results had been consolidated from 1 January 2012, then it would have contributed revenue of £3,099,000 and a profit before tax of £333,000. Contingent consideration The Group agreed to pay the vendors additional cash consideration subject to the on-going performance of Inition up to 31 March 2014 (an earn-out of £0.5 million is payable to the vendors if Inition makes at least £0.3m profit before interest and tax in the year to 31 March 2013, and a further £0.5m is payable if Inition makes a profit before interest and tax of at least £0.5m in the following year). At 31 December 2012 Inition had already met the first earn-out profit target. 40 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp28-42.indd 40 228174 PARITY pp28-42.indd 40 / / P f 26/04/2013 17:00 26/04/2013 17:00 10 Share based payments The Group operates several share based reward schemes for employees: • A United Kingdom tax authority approved scheme for executive directors and senior staff; • An unapproved scheme for executive directors and senior staff; • A Co-Investment Scheme for senior management; • A Save As You Earn Scheme for all employees; and • A Senior Executive Share Option Plan for Executive Directors. Under the approved and unapproved schemes and the Co-Investment Scheme, options vest if the Total Shareholder Return (“TSR”) of the Group outperforms the average TSR of a peer group over a three year period from the date of grant. Options lapse if the individual leaves the Group, except under certain circumstances such as leaving by reason of redundancy, when the options lapse 12 months after the leaving date. Save As You Earn options lapse if not exercised within six months after the vesting date. They are also subject to continued employment within the Group. Options under the Senior Executive Share Option Plan have no performance conditions other than continued employment within the Group and must be exercised within five years of the date of grant. All employee options other than those issued under the Senior Executive Share Option Plan have a maximum term of ten years from the date of grant. The total share-based remuneration recognised in the Income Statement was £124,000 (2011: £177,000). Outstanding at beginning of the year Granted during the year Exercised during the year Lapsed during the year Outstanding at the end of the year 2012 Weighted average exercise price (p) 12 22 9 24 14 2012 Number 6,368,668 1,542,329 (62,500) (441,910) 7,406,587 2011 Weighted average exercise price (p) 11 24 12 22 12 2011 Number 6,458,568 1,255,100 (285,000) (1,060,000) 6,368,668 The exercise price of options outstanding at the end of the year and their weighted average contractual life fell within the following ranges: Exercise price (p) 7.5 – 10 19 – 28 165 – 209 2012 Weighted average contractual life (years) 5 6 1 Number 5,039,133 2,357,429 10,025 7,406,587 Exercise price (p) 7.5 – 10 21 – 28 165 – 209 2011 Weighted average contractual life (years) 6 7 2 Number 5,101,633 1,255,100 11,935 6,368,668 Of the total number of options outstanding at the end of the year, 297,525 (2011: 11,935) had vested and were exercisable at the end of the year. The weighted average exercise price of those options was £0.15 (2011: £1.92). The weighted average fair value of each option granted during the year was 22 pence (2011: 17 pence). O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp28-42.indd 41 228174 PARITY pp28-42.indd 41 / / P f 26/04/2013 17:00 26/04/2013 17:00 41 Notes to the Accounts continued 10 Share based payments continued The following information is relevant in determining the fair value of options granted during the year under equity–settled share-based remuneration schemes operated by the Group. There are no cash-settled schemes. Option pricing model Weighted average share price at grant date (p) Weighted average exercise price (p) Weighted average contractual life (years) Weighted average expected life (years) Expected volatility Weighted average risk free rate Expected dividend growth rate 2012 Stochastic 2011 Stochastic 25 22 7 4 28 24 7 4 57-70% 64 – 77% 1.18% 0% 1.26% 0% The volatility assumption is calculated as the historic volatility of the share price over a 3 and 5 year period prior to grant date. The TSR performance condition was modelled by considering the volatility of the comparator companies and the correlation of this with the Group. Share options issued to defined benefit pension scheme In December 2010 the Group issued 1,000,000 share options in Parity Group plc to the pension scheme at an exercise price of 9 pence per share. These options may be exercised at the discretion of the Trustees; they vested on grant and have no expiry date. Any gain on exercise is to be used to reduce the scheme deficit. These options were valued using the stochastic method. The share price on the grant date was 15.75 pence. The expected life of the options is 8 years. The expected volatility is 64.2% and the average risk free rate assumed was 3.4%. 11 Taxation Current tax expense Current tax on loss for the year Total current tax Deferred tax expense/(credit) Accelerated capital allowances Origination and reversal of other temporary differences Change in corporation tax rate Retirement benefi t liability Trading losses Adjustments in respect of prior periods Total tax expense/(credit) Income tax expense from continuing operations Income tax expense from discontinued operations 2012 £’000 2011 £’000 – – (33) 1 118 245 18 – 349 349 – 349 – – – (5) 137 (33) – (7) 92 92 3 95 The 2012 Budget on 21 March 2012 announced that the UK corporation tax rate will reduce to 22% by 2014. A reduction in the rate from 26% to 25% (effective from 1 April 2011) was substantively enacted on 5 July 2011, and further reductions to 24% (effective from 1 April 2012) and 23% (effective from 1 April 2013) were substantively enacted on 26 March 2012 and 3 July 2012 respectively. This will reduce the company’s future current tax charge accordingly. It has not yet been possible to quantify the full anticipated effect of the announced further 1% rate reduction, although this will further reduce the company’s future current tax charge and reduce the company’s deferred tax asset accordingly. The 2012 tax expense is after a tax credit of £148,000 (2011: £116,000) in respect of exceptional items. 42 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp28-42.indd 42 228174 PARITY pp28-42.indd 42 / / P f 26/04/2013 17:00 26/04/2013 17:00 11 Taxation continued The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to losses for the year are as follows: Loss for the year Income tax expense/(credit) (including discontinued operations) Loss before income tax Expected tax credit based on the standard rate of United Kingdom corporation tax of 24.5% (2011 26.5%) Expenses not allowable for tax purposes Adjustment for under/(over) provision in prior years Reduction in deferred tax asset due to change in enacted rate Tax losses not recognised Tax on each component of other comprehensive income is as follows: Exchange differences on translation of foreign operations Actuarial gain on defi ned benefi t pension scheme Before tax £’000 (64) (1,554) (1,618) 2012 Tax £’000 – 287 287 After tax £’000 Before tax £’000 (64) (1,267) (1,331) 24 81 105 2012 £’000 2011 £’000 (1,389) (2,299) 349 95 (1,040) (2,204) (256) 264 3 118 220 349 2011 Tax £’000 – (22) (22) (584) 105 8 137 429 95 After tax £’000 24 59 83 12 Earnings per ordinary share Basic earnings per share is calculated by dividing the basic earnings from continuing operations for the year by the weighted average number of fully paid ordinary shares in issue during the year. Diluted earnings per share is calculated on the same basis as the basic earnings per share with a further adjustment to the weighted average number of fully paid ordinary shares to reflect the effect of all dilutive potential ordinary shares. None of the potential ordinary shares are dilutive, as the Group made a loss on continuing activities during the year. Basic loss per share Effect of dilutive options Diluted loss per share Weighted average number of shares 2012 £’000 Earnings 2012 £’000 Earnings per share 2012 Pence Weighted avergae number of shares 2011 £’000 Earnings 2011 £’000 (1,415) 70,578 (2.00) (2,241) 56,155 – – – (1,415) 70,578 (2.00) (2,241) 56,155 Earnings per share 2011 Pence (3.99) – (3.99) As at 31 December 2012 the number of ordinary shares in issue was 71,835,594 (2011: 68,741,567). Basic and diluted earnings per share from discontinued operations was 0.04p (2011: basic and diluted loss 0.10p). O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp43-57.indd 43 228174 PARITY pp43-57.indd 43 / / P f 26/04/2013 17:00 26/04/2013 17:00 43 Notes to the Accounts continued 13 Intangible assets Cost At 1 January Additions Impairment Disposals At 31 December Accumulated amortisation At 1 January Charge for the year Impairment Disposals At 31 December Net book amount Software Goodwill Total 2012 £’000 2011 £’000 1,555 3 (1,555) – 3 602 233 (835) – – 3 1,705 – – (150) 1,555 503 249 – (150) 602 953 2012 £’000 4,594 3,159 – – 2011 £’000 4,594 – – – 7,753 4,594 – – – – – – – – – – 2012 £’000 6,149 3,162 (1,555) – 7,756 602 233 (835) – – 2011 £’000 6,299 – – (150) 6,149 503 249 – (150) 602 7,753 4,594 7,756 5,547 During the year the directors decided that the Group’s financial system was no longer appropriate for the Group’s needs. The system will be replaced in 2013, using a phased approach to implement new systems for each business unit. The impairment of the incumbent finance system was £721,000. As at 31 December 2012, the Group had signed contracts for a new financial system for its System’s division at a cost of £16,000. Neither the Group nor the Company had any additional capital commitments for the purchase of intangible assets as at the balance sheet date. 14 Goodwill The carrying amount of goodwill is allocated to the cash generating units (CGU’s) as follows: Resources Solutions Digital Solutions Goodwill carrying amount 2012 £’000 1,470 3,124 3,159 7,753 2011 £’000 1,470 3,124 – 4,594 The Goodwill arising on the acquisition of Inition (see note 9) is allocated to the Group’s embryonic Digital Solutions division. As at the balance sheet date this CGU is comprised solely of the Inition business, and the recoverable amount is based purely on Inition’s projected pre-tax cash flows. The Digital Solutions division is discussed in the Chairman’s statement on strategy on page 2. Goodwill was tested for impairment in accordance with IAS 36. No impairment was recognised during the year. The recoverable amounts of the CGU’s are based on value in use calculations using the pre-tax cash flows based on budgets approved by management for 2012. Years from 2013 onward are based on the budget for 2012 projected forward at expected growth rates. This is considered prudent based on current expectations of the long-term growth rate. 44 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp43-57.indd 44 228174 PARITY pp43-57.indd 44 / / P f 26/04/2013 17:00 26/04/2013 17:00 14 Goodwill continued Major assumptions are as follows: 2012 Discount rate Forecast revenue growth Operating margin 2013 Operating margin 2014 onward 2011 Discount rate Forecast revenue growth Operating margin 2012 Operating margin 2013 onward Resources % Systems % Digital Solutions % 7.7 9.2 2.8 3.2 7.2 8.4 3.4 3.6 6.1 17.7 4.7 5.1 7.2 20.7 4.7 11.3 6.1 37.4 10.6 9.5 – – – – Discount rates are based on the Group’s weighted average cost of capital adjusted for the specific risks of each cash generating unit. Forecast revenue growth is expressed as the compound growth rate over the next 4 years, and is based on the workings used for impairment testing. For Resources the rates are based on past experience of growth in revenues and future expectations of economic conditions. For Solutions and Inition, the growth rates also incorporate the expected return on planned investment. Operating margins are based on past experience adjusted for investments, and cost action taken in 2012. A 10% change in any of the underlying assumptions used in the discounted cash flow forecasts would not lead to the carrying value of goodwill being in excess of its recoverable amount. 15 Property, plant and equipment Consolidated At cost Balance at 1 January 2011 Additions Disposals Balance at 31 December 2011 Balance at 1 January 2012 Additions Acquisitions through business combinations Disposals Balance at 31 December 2012 Accumulated depreciation Balance at 1 January 2011 Depreciation charge for the year Disposals Balance at 31 December 2011 Balance at 1 January 2012 Depreciation charge for the year Acquisitions through business combinations Disposals Balance at 31 December 2012 Net book value At 1 January 2011 At 31 December 2011 At 31 December 2012 Leasehold improvements £’000 Offi ce equipment £’000 Total £’000 1,147 2,864 4,011 – – 1,147 1,147 17 – (234) 930 440 158 – 598 598 148 – (120) 626 707 549 304 11 (30) 2,845 2,845 96 250 (41) 3,150 11 (30) 3,992 3,992 113 250 (275) 4,080 2,701 3,141 130 (30) 2,801 2,801 116 143 (21) 3,039 163 44 111 288 (30) 3,399 3,399 264 143 (141) 3,665 870 593 415 45 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp43-57.indd 45 228174 PARITY pp43-57.indd 45 / / P f 26/04/2013 17:00 26/04/2013 17:00 Notes to the Accounts continued 15 Property, plant and equipment continued As at 31 December 2012, neither the Group nor the Company had any capital commitments contracted for but not provided, for the purchase of tangible assets (2011: £nil). Leased plant and equipment As a result of the acquisition of Inition, the Group acquired a 3D camera which is leased under a finance lease agreement. The Group does not lease any other plant or equipment under finance lease agreements. At 31 December 2012 the net carrying value of the leased equipment was £18,842 (2011: £nil). 16 Available for sale financial assets At 1 January Revaluation Exchange loss Disposals At 31 December Consolidated 2012 £’000 – – – – – 2011 £’000 134 (7) (4) (123) – These assets comprise equity securities quoted in the US, which were sold on the open market during 2011. 17 Deferred tax At 1 January Acquired in business combinations Depreciation in excess of capital allowances Trading Losses Recognised in other comprehensive income Actuarial gain on defi ned benefi t pension scheme Recognised in the income statement Change in enacted tax rate Adjustments in relation to prior periods Depreciation in excess of capital allowances Retirement benefi t liability Trading Losses Other short term timing differences At 31 December The deferred tax asset of £1,318,000 (2011: £1,384,000) comprises: Depreciation in excess of capital allowances Retirement benefi t liability Short term and other timing differences Consolidated 2012 £’000 1,384 (22) 18 2011 £’000 1,498 – 287 ( 22) (118) (137) 1 33 (245) (18) (2) 7 – 33 5 1,318 1,384 Consolidated 2012 £’000 893 314 111 2011 £’000 959 303 122 1,318 1,384 A deferred tax asset on tax losses brought forward is not recognised unless it is more likely than not that there will be taxable profits in the foreseeable future against which the deferred tax asset can be offset. The Directors believe that the deferred tax asset recognised is recoverable based on the future earning potential of the Group. The forecasts for the business used in this review were the same as those used in the review of the impairment of goodwill (see note 14). Commentary on the Group’s profitability and its future prospects is given in the Operating and Financial Review on pages 3 to 8. The commentary outlines the significant progress the current management team have made towards returning the Group to profitability, through a refocused sales strategy and actions taken to restructure its cost base. The forecasts for the Group, based on current run rate and reasonable growth assumptions, show the Group returning sufficient probable profits to support the unwinding of the deferred tax asset. 46 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp43-57.indd 46 228174 PARITY pp43-57.indd 46 / / P f 26/04/2013 17:00 26/04/2013 17:00 17 Deferred tax continued The 2012 Budget on 21 March 2012 announced that the UK corporation tax rate will reduce to 22% by 2014. A reduction in the rate from 26% to 25% (effective from 1 April 2011) was substantively enacted on 5 July 2011, and further reductions to 24% (effective from 1 April 2012) and 23% (effective from 1 April 2013) were substantively enacted on 26 March 2012 and 3 July 2012 respectively. The deferred tax asset at 31 December 2012 has been calculated based on the rate of 23% substantively enacted at the balance sheet date. It has not yet been possible to quantify the full anticipated effect of the announced further 1% rate reduction, although this will further reduce the company’s future current tax charge and reduce the company’s deferred tax asset accordingly. The movements in deferred tax assets during the period are shown below: Asset 2012 £’000 893 111 314 – 1,318 Depreciation in excess of capital allowances Other short-term timing differences Retirement benefi t plan liability Trading Losses Depreciation in excess of capital allowances Other short-term timing differences Retirement benefi t plan liability Acquired in business combinations 2012 £’000 Charged/ (credited) to Charged/ (credited) to other income comprehensive income 2012 £’000 statement 2012 £’000 (22) – – 18 (4) Asset 2011 £’000 959 122 303 1,384 (44) (11) (276) (18) (349) – – 287 – 287 Charged/ (credited) to income statement 2011 £’000 Charged/ (credited) to other comprehensive income 2011 £’000 75 26 (9) 92 – – 22 22 The Group has unrecognised carried forward tax losses of £23,649,000 (2011: £26,143,000). The Company has unrecognised carried forward tax losses of £17,216,000 (2011: £19,794,000). The Group has unrecognised capital losses carried forward of £281,875,386 (2011: £281,875,386). These losses may be carried forward indefinitely. 18 Stocks and work in progress Stocks Work in progress - net costs less foreseeable losses Net costs less foreseeable losses Consolidated 2012 £’000 20 – 20 2011 £’000 – 116 116 Stocks refers to 3D equipment purchased for resale, and are stated at the lower of cost and net realisable value. Work in progress represents the value of costs recoverable on contracts which are expected to benefit performance and be recoverable over the life of the contracts. O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp43-57.indd 47 228174 PARITY pp43-57.indd 47 / / P f 26/04/2013 17:00 26/04/2013 17:00 47 Notes to the Accounts continued 19 Trade and other receivables Amounts falling due within one year: Trade receivables Accrued income Amounts recoverable on contracts Amounts owed by subsidiar y undertakings Corporation tax due to be refunded Other receivables Prepayments Amounts falling due after one year: Amounts owed by subsidiar y undertakings Total Consolidated Company 2012 £’000 7,626 4,351 510 – 8 57 492 2011 £’000 5,824 5,351 637 – – 299 428 2012 £’000 2011 £’000 – – – – – – 2,613 2,913 – – 6 – – 2 13,044 12,539 2,619 2,915 – – 13,044 12,539 69,763 72,382 77,241 80,156 The fair values of trade and other receivables are not considered to differ from the values set out above. The Group’s trade receivables of 7,626,000 (2011: £5,824,000) and £4,176,000 (2011: £4,739,000) of the Group’s accrued income are pledged as collateral for the asset-based borrowings. These borrowings fluctuate daily and at the year end totalled £8,270,000 (2011: £6,504,000). The Group records impairment losses on its trade receivables separately from gross receivables. Factors considered in making provisions for receivables include the ability of the customer to settle the debt, the age of the debt and any other circumstance particular to the transaction that may impact recoverability. The movements on the allowance account during the year are included within operating costs in the consolidated income statement and are summarised below: Opening balance (Decreases)/increases in provisions Written off against provisions Recovered amounts reversed Closing balance Consolidated 2012 £’000 87 (36) (18) – 33 2011 £’000 111 12 (36) – 87 All balances provided at 31 December 2012 and 31 December 2011 were greater than 60 days old. The allowance account represents full provision against specific gross debts. As at 31 December 2012 trade receivables of £902,000 (2011: £1,301,000) were past due, but not impaired. These relate to customers where there is no evidence of unwillingness or of an inability to settle the debt. The ageing of Group trade receivables is as follows: Not past due 31-60 days, and past due 61-90 days >90 days Total Gross £’000 6,724 605 211 119 7,659 Impaired £’000 – – – (33) (33) 2012 Total £’000 6,724 605 211 86 Gross £’000 4,523 1,120 207 61 7,626 5,911 Impaired £’000 – – (26) (61) (87) 2011 Total £’000 4,523 1,120 181 – 5,824 The Company had no provisions for trade receivables, as it has no trade receivables. Other receivables in the Group and the Company were not past due and not impaired. 48 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp43-57.indd 48 228174 PARITY pp43-57.indd 48 / / P f 26/04/2013 17:00 26/04/2013 17:00 20 Loans & Borrowings Non-current Finance lease liabilities Current Bank and other borrowings due within one year or on demand: Asset-based fi nancing facility Current portion of fi nance lease liabilities Finance lease liabilities Less than one year Between one and two years Future minimum lease payments 2012 £’000 13 8 21 Present value of minimum lease payments 2012 £’000 12 8 20 Future minimum lease payments 2011 £’000 – – – Interest 2012 £’000 1 – 1 Further details of the Group’s banking facilities are given in note 23. 21 Trade and other payables Consolidated 2012 £’000 2011 £’000 8 8 – – 8,270 13 8,283 6,504 – 6,504 Present value of minimum lease payments 2011 £’000 – – – Interest 2011 £’000 – – – Amounts falling due within one year: Payments in advance Trade payables Amounts due to subsidiary undertakings Other tax and social security payables Other payables and accruals Amounts falling due after one year: Amounts due to subsidiary undertakings Other payables and accruals Total Consolidated Company 2012 £’000 165 5,365 – 1,412 1,996 8,938 – 500 2011 £’000 185 5,946 2012 £’000 – – - 2,209 986 1,666 8,783 23 259 2,491 2011 £’000 - 5 1,391 72 213 1,681 – – 74,656 83,328 – – 9,438 8,783 77,147 85,009 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp43-57.indd 49 228174 PARITY pp43-57.indd 49 / / P f 26/04/2013 17:00 26/04/2013 17:00 49 Notes to the Accounts continued 22 Provisions Consolidated At 1 January 2012 Created in year Utilised in year Released in year Unwind of discount At 31 December 2012 Due within one year or less Due after more than one year Total Company At 1 January 2012 Created in year Utilised in year Released in year Unwind/(creation) of discount At 31 December 2012 Due within one year or less Due after more than one year Total Leasehold dilapidations Onerous leases £’000 248 30 (109) (35) 7 141 – 141 141 214 23 (95) (15) 6 133 – 133 133 £’000 1,699 40 (548) (606) 44 629 308 321 629 Total £’000 1,947 70 (657) (641) 51 770 308 462 770 1,581 1,795 40 (550) (486) 42 627 305 322 627 63 (645) (501) 48 760 305 455 760 Leasehold dilapidations Leasehold dilapidations relate to the estimated cost of returning a leasehold property to its original state at the end of the lease in accordance with the lease terms. Dilapidation charges that will crystallise at the end of the period of occupancy are provided for in full on all non-serviced properties. Based on current lease expiry dates it is estimated these provisions will be settled over a period of two to three years. The main uncertainty relates to the estimation of the costs that will be incurred at the end of the lease. Onerous leases This provision relates to office space no longer occupied by the Group, and represents the excess of rents payable over rents receivable on sub-let office space. Of the non-current amounts provided, approximately £248,000 is expected to fall within 2014. 50 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp43-57.indd 50 228174 PARITY pp43-57.indd 50 / / P f 26/04/2013 17:00 26/04/2013 17:00 23 Financial instruments – risk management The Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Group’s exposure to financial instrument risks and the methods used to measure them from previous periods unless otherwise stated in this note. Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises, are trade receivables, cash and cash equivalents, quoted investments, trade and other payables and bank borrowings. A summary by category of the financial instruments held by the Group is provided below: Consolidated As at 31 December 2012 Financial assets Net cash and cash equivalents Trade and other short term receivables Financial liabilities Asset-based fi nancing facility Finance Lease liabilities Trade and other short term payables As at 31 December 2011 Financial assets Net cash and cash equivalents Trade and other short term receivables Financial liabilities Asset-based fi nancing facility Finance Lease liabilities Trade and other short term payables Amortised cost £’000 Loans and receivables £’000 – – – 2,871 12,544 15,415 8,270 21 8,773 17,064 – – – – – – – 5,241 12,111 17,352 6,504 – 8,598 15,102 – – – – Total £’000 2,871 12,544 15,415 8,270 21 8,773 17,064 5,241 12,111 17,352 6,504 – 8,598 15,102 51 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp43-57.indd 51 228174 PARITY pp43-57.indd 51 / / P f 26/04/2013 17:00 26/04/2013 17:00 Notes to the Accounts continued 23 Financial instruments – risk management continued A summary by category of the financial instruments held by the Company is provided below: Company As at 31 December 2012 Financial assets Non-current trade and other receivables Net cash and cash equivalents Trade and other short term receivables Financial liabilities Trade and other short term payables Non-current trade and other payables As at 31 De cember 2011 Financial assets Non-current trade and other rec eivables Net cash and cash equivalents Trade and other short term receivables Financial liab ilities Trade and other short term paya bles Non-current trade and other pay ables Amortised cost £’000 Loans and receivables £’000 Total £’000 – – – – 69,763 69,763 2,362 2,613 2,362 2,613 74,738 74,738 2,492 74,656 77,148 – – – 2,492 74,656 77,148 – – – – 77,241 77,241 5,107 2,913 5,107 2,913 85,261 85,261 1,681 83,328 85,009 – – – 1,681 83,328 85,009 General objectives, policies and processes – risk management The Group is exposed through its operations to the following financial instrument risks: credit risk; liquidity risk; interest rate risk; and foreign currency risk. The policy for managing these risks is set by the Board following recommendations from the Finance Director. Certain risks are managed centrally, while others are managed locally following guidelines communicated from the centre. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. The policy for each of the above risks is described in more detail below. Credit risk Credit risk arises from the Group’s trade receivables. It is the risk that the counterparty fails to discharge their obligation in respect of the instrument. The Group is mainly exposed to credit risk from credit sales. It is Group policy to assess the credit risk of new customers before entering contracts. Such credit ratings are then factored into the credit assessment process to determine the appropriate credit limit for each customer. The Group does not collect collateral to mitigate credit risk. The Group operates exclusively in the UK. Approximately 54% (2011: 63%) of the Group’s turnover is derived from the public sector. The largest customer balance represents 20% (2011:19%) of the trade receivable balance. Quantitative disclosures of the credit risk exposure in relation to financial assets are set out below. Further disclosures regarding trade and other receivables, which are neither past due nor impaired, are provided in note 19. 2012 Carrying value £’000 2,871 12,544 15,415 Maximum exposure £’000 2,871 12,544 15,415 2011 Carrying value £’000 5,241 12,111 17,352 Maximum exposure £’000 5,241 12,111 17,352 Financial assets Cash and cash equivalents Trade and other receivables Total fi nancial assets 52 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp43-57.indd 52 228174 PARITY pp43-57.indd 52 / / P f 26/04/2013 17:00 26/04/2013 17:00 23 Financial instruments – risk management continued Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates. It is Group policy that all external Group borrowings are drawn down on the asset-based financing facilities arranged with our bankers which bear a floating rate of interest based on the PNC base rate. Borrowings against the asset-based financing facilities are typically drawn or repaid on a daily basis in order to minimise borrowings and interest costs and transaction charges. Although the Board accepts that this policy neither protects the Group entirely from the risk of paying rates in excess of current market rates, nor eliminates the cash flow risk associated with interest payments, it considers that it achieves an appropriate balance of these risks. Throughout 2012 and 2011 the Group’s variable rate borrowings were denominated in Sterling. If interest rates on borrowings had been 1% higher/lower throughout the year with all other variables held constant, the loss after tax for the year would have been approximately £83,000 higher/lower and net assets £83,000 lower/higher. The Directors consider a 1% change in base rates is the maximum likely change over the next year, being the period to the next point at which these disclosures are expected to be made. Foreign exchange risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group no longer has any active overseas operations, but does retain certain overseas subsidiaries that are not trading and are in the process of being closed down. The Group’s net assets arising from overseas operations are exposed to currency risk resulting in gains or losses on retranslation into sterling. The asset exposure is mainly in respect of intercompany balances. The Group does not hedge its net investment in overseas operations as it does not consider that the potential financial impact of such hedging techniques warrants the reduction in volatility in consolidated net assets. The continuing business has few transactions in foreign currency. The hedging of individual contracts is considered on a case by case basis. Owing to the small value and volume of such contracts no hedging transactions were entered in 2012 or 2011. The currency profile of the Group’s net financial assets was as follows: Sterling Functional currency of individual entity Euro US Dollar Net foreign currency 2012 fi nancial assets £’000 2011 £’000 2012 £’000 2011 £’000 Sterling Euro US Dollar Total net exposure – 1 23 24 – – 4 4 23,931 23,449 – 1,225 25,156 – 1,247 24,696 2012 £’000 966 – – 966 The profile of the Company’s net financial assets was as follows: 2011 £’000 966 – – 966 Total 2012 £’000 2011 £’000 24,897 24,415 1 1,248 26,14 6 – 1,251 25,666 O u r P e r f o r m a n c e O u r G o v e r n a n c e Net foreign currency fi nancial assets Sterling Euro US Dollar Total net exposure Functional currency: Sterling 2011 2012 £’000 £’000 – – 23 23 – – 4 4 Liquidity risk Liquidity risk arises from the Group’s management of working capital and the finance charges on its borrowings under its asset- based financing arrangements. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The liquidity of each Group entity is managed centrally, with daily transfers to operating entities to maintain a pre-determined cash balance. Normal supplier terms range from 2 weeks to 30 days. The level of the Group facility is approved periodically by the Board and negotiated with the Group’s current bankers. At the reporting date, cash flow projections were considered by the Board and the Group is forecast to have sufficient funds and available funding facilities to meet its obligations as they fall due. i O u r F n a n c a s l i 228174 PARITY pp43-57.indd 53 228174 PARITY pp43-57.indd 53 / / P f 26/04/2013 17:00 26/04/2013 17:00 53 Notes to the Accounts continued 23 Financial instruments – risk management continued The following table sets out the contractual maturities (representing undiscounted contractual cash flows) of financial liabilities: Consolidated At 31 December 2012 Trade and other payables Borrowings Total Consolidated At 31 December 2011 Trade and other payables Borrowings Total Company At 31 December 2012 Trade and other payables Borrowings Total Company At 31 December 2011 Trade and other payables Borrowings Total Up to 1 month £’000 8,938 8,270 17,208 Up to 1 month £’000 8,783 6,504 15,287 Between 1 and 12 months £’000 Over 1 month £’000 500 21 521 Over 1 month £’000 – – – Over 1 year £’000 Total £’000 9,438 8,291 17,729 Total £’000 8,783 6,504 15,287 Total £’000 – – – 74,656 77,147 – – 74,656 77,147 Between 1 and 12 months £’000 Over 1 year £’000 Total £’000 – – – 83,328 85,009 – – 83,328 85,009 Up to 1 month £’000 2,491 – 2,491 Up to 1 month £’000 1,681 – 1,681 More detail on trade and other payables is given in note 21. Capital disclosures The capital structure of the Group consists of cash and cash equivalents, equity attributable to equity holders, and asset-based finance. There is no long-term external debt, except for a finance lease which the Group acquired through its purchase of Inition. The lease represents a liability of £21,000 and is repayable within two years. The Company is funded through equity and intercompany loans. The Group uses an asset-based finance facility with PNC Business Credit, a member of The PNC Financial Services Group, Inc. The facility, which enables the Group to borrow against both trade debt and accrued income and provides for borrowing of up to £15.0m depending on the availability of appropriate assets as security. On 11 May 2011 the Group published a prospectus in respect of a Firm Placing of 20,873,087 New Ordinary Shares and a Placing and Open Offer of 9,561,696 New Ordinary Shares at the Issue Price of 23 pence per New Ordinary Share. Qualifying shareholders were able to subscribe for Open Offer shares on the basis of one Open Offer Share for every four Existing Ordinary Shares held. Shareholder approval for the issue was sought and received at an extraordinary general meeting held on 27 May 2011. Net proceeds from this Firm Placing and Placing and Open Offer amounted to £6,389,514. The proceeds have been used by management to provide additional working capital, invest in new initiatives, and take advantage of opportunities to reduce the cost base. The Group’s and Company’s objectives when maintaining capital are: ● to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and ● to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. 54 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp43-57.indd 54 228174 PARITY pp43-57.indd 54 / / P f 26/04/2013 17:00 26/04/2013 17:00 23 Financial instruments – risk management continued Cash and cash equivalents Asset-based borrowings Net debt 2012 £’000 2,871 (8,270) (5,399) 2011 £’000 5,241 (6,504) (1,263) The Board regularly reviews the adequacy of resources available and considers the options available to increase them. The asset- based borrowing facility contains certain externally imposed financial covenants which have been met throughout the period. The Company does not have distributable reserves available for dividend payments. A capital reconstruction would be necessary to create reserves available for distribution. On the 10 January 2013, the Group issued 3,125,000 new ordinary shares raising approximately £600,000 (net of expenses). See note 32. 24 Reserves The Board is not proposing a dividend for the year (2011: nil pence per share). The following describes the nature and purpose of each reserve within owners’ equity: Share capital is the amount subscribed for ordinary share capital at nominal value. On 29 May 2012, the Group issued 3,031,527 New Ordinary Shares as partial consideration for the acquisition of Inition Limited (see note 10). Following the issue of the shares, and also the exercising of 62,500 share options, the share capital increased from £15,693,948 to £15,755,829. Deferred share capital is the nominal value assigned to the deferred share capital. Share premium is the amount subscribed for share capital in excess of nominal value. Following the shares issued as partial consideration for the acquisition of Inition Limited at a price of 24.74 pence in May 2012, the share premium increased from £25,944,124 to £26,637,869. Other reserves of the Group of £44,160,000 comprise £30,440,000 created in the Group’s shareholders’ equity as a result of the merger accounting applied for the Scheme of Arrangement in July 1999. The remaining balance in Other reserves relates principally to share premium on shares issued to vendors and option holders together with the reversal of an £8,706,000 goodwill write off which arose in 2003 on the termination of a business unit. The difference between the Other Reserves of the Group (£44,160,000) and the Company (£22,729,000) relates to provisions for the impairment of investments. Retained earnings represent the cumulative net gains and losses recognised in the Income Statement. Consolidated retained earnings are stated after adjustment for the ESOP’s investment in the Company’s shares of £351,000 (2011: £351,000). 25 Pension commitments The Group operates a number of pension schemes. With the exception of the Parity Group Retirement Benefit Plan, all of the schemes are defined contribution plans and the assets are held in separately administered funds. Contributions to defined contribution schemes were £216,000 (2011: £206,000). Defined benefit plan In March 1995, the Group established the Parity Retirement Benefit Plan, renamed as the Parity Group Retirement Benefit Plan, following a Scheme of Arrangement in 1999, in order to facilitate the continuance of pension entitlements for staff transferring from other schemes following acquisitions in 1994. This is a funded defined benefit scheme and has been closed to new members since 1995. With effect from 1 January 2005 this scheme was also closed to future service accrual and future contributions paid into money purchase arrangements. 2012 2011 Principal actuarial assumptions Rate of increase of pensions in payment Discount rate Retail price infl ation Consumer price infl ation Expected return on plan assets % 3.6 4.3 3.0 2.2 4.5 Note: the rate of increase in pensionable salaries is no longer applicable as the scheme is closed for future service. % 3.6 4.7 3.0 2.0 4.6 55 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp43-57.indd 55 228174 PARITY pp43-57.indd 55 / / P f 26/04/2013 17:00 26/04/2013 17:00 Notes to the Accounts continued 25 Pension commitments continued The expected return on plan assets is equal to the weighted average return appropriate to each class of asset within the scheme. The return attributed to each class has been reached following discussions with the Group’s actuaries. At 31 December 2012, yields on gilts were approximately 2.5% and on corporate bonds were 4.3%. Equities are assumed to carry a risk premium over gilt returns of 6.5%. The bank base rate of 0.5% has been used as the yield on cash. The scheme’s assets are invested in equities, gilts and bonds in approximately equal proportions. The underlying mortality assumption used for 2012 is in accordance with the standard table known as S1PA Light using the CMI 2011 projection based on year of birth with a long term rate of improvement of 1.5% p.a. The 2011 assumption is based upon the standard table known as PCA00 on a year of birth usage with long cohort future improvement factors, subject to a minimum annual rate of future improvement equal to 0.5% per annum. Contribution holiday In November 2010 the Group agreed a contribution holiday. Until November 2010 deficit reduction contributions were £900,000 per annum. Contributions resumed in January 2012, at the rate of £1,090,020 per annum. In addition to the increase in deficit reduction contributions on resumption in January 2012, the principal terms of the contribution holiday were the issue to the Plan of 1,000,000 share options in Parity Group plc at an exercise price of 9 pence per share to be exercised at the discretion of the Trustees and any gain to be used for the benefit of the Plan. These options vested on grant and have no expiry date. Reconciliation to consolidated statement of financial position Fair value of plan assets Present value of funded obligations At the end of the year Reconciliation of plan assets At beginning of year Expected return Contributions by Group Benefi ts paid Actuarial gain At end of year Composition of plan assets Equities Gilts Bonds Options in Parity Group plc Cash Total Reconciliation of plan liabilities At beginning of year Interest cost Benefi ts paid Actuarial loss At end of year 2012 £’000 16,620 (19,667) (3,047) 2011 £’000 15,206 (17,673) (2,467) 2012 £’000 2011 £’000 15,206 14,550 695 1,090 (833) 462 770 – (869) 755 16,620 15,206 2012 £’000 5,938 5,168 5,287 96 131 2011 £’000 5,214 5,008 4,770 96 118 16,620 15,206 2012 £’000 2011 £’000 17,673 16,975 811 (833) 2,016 19,667 893 (869) 674 17,673 The actuarial loss for the year of £2,016,000 (2011: £674,000) in respect of plan liabilities is mainly as a result of the change in the discount rate over the period, which has increased the value of the scheme liabilities. 56 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp43-57.indd 56 228174 PARITY pp43-57.indd 56 / / P f 26/04/2013 17:00 26/04/2013 17:00 25 Pension commitments continued The cumulative amount of actuarial losses recognised since 1 January 2002 in other comprehensive income is £6,389,000 (2011: £4,835,000). The Group is unable to disclose how much of the pension scheme deficit recognised on 1 January 2002 and taken directly to equity is attributable to actuarial gains and losses since inception of the pension scheme because that information is not available. Amounts recognised in the consolidated income statement Included in Finance Income Expected return on plan assets Included in Finance Costs Unwinding of discount on plan liabilities (interest cost) 2012 £’000 695 811 2011 £’000 770 893 The actual return on plan assets was £1,157,000 (2011: £1,525,000). This represents the sum of the expected return on assets and the actuarial gain. 2012 £’000 2011 £’000 16,620 15,206 (19,667) (17,673) (3,047) (2,467) 462 2.9% 2,016 11.4% 755 5.2% 674 4.0% 2010 £’000 14,550 (16,975) (2,425) 529 3.7% 321 1.9% 2009 £’000 2008 £’000 13,261 11,973 (16,587) (13,919) (3,326) (1,946) 206 1.6% (169) (1.0%) Defined benefit obligation trends Plan assets Plan liabilities Deficit Experience adjustments on assets Experience adjustments on liabilities 2 6 Share capital Authorised share capital Authorised at 1 January Authorised at 31 December Issued share capital Ordinary shares 2p each Deferred shares of 0.04p each 2012 number 409,044,603 409,044,603 2012 £000 8,181 8,181 2012 number 35,797,769,808 35,797,769,808 2012 £000 14,319 14,319 Ordinary shares 2p each Deferred shares of 0.04p each 2012 £000 2012 number 2012 £000 Issued and fully paid at 1 January New Issue (fully paid) Share options exercised 2012 number 68,741,567 3,031,527 62,500 1,375 35,797,769,808 14,319 15,694 61 1 – – – – 61 1 Issued and fully paid at 31 December 71,835,594 1,437 35,797,769,808 14,319 15,756 On 29 May 2012, the Group issued 3,031,527 New Ordinary Shares as partial consideration for the acquisition of Inition Limited (see note 9). The deemed cash value of the issue was £0.75m representing an issue price per ordinary share of 24.74 pence, being the average of closing mid-market share prices of the Group over the 30 previous trading days before completion. In May 2011, the Group published a prospectus in respect of a firm placing of 20,873,087 New Ordinary Shares and a Placing and Open Offer of 9,561,696 New Ordinary Shares at the Issue Price of 23 pence per New Ordinary Share. Shareholder approval for the placing was received at an EGM, and 30,434,783 new ordinary shares were issued at 23 pence each. The deferred shares are not listed on the London Stock Exchange, have no voting rights, no rights to dividends and the right only to a very limited return on capital in the event of liquidation. Shares held by ESOP/Treasury Shares Ordinary shares held by the ESOP The shares held by the ESOP are expected to be issued under share option contracts. 2012 Number 43,143 2011 Number 43,143 57 (876) (7.3%) (193) (1.4%) Total 2012 £000 22,500 22,500 Total 2012 £000 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s l i 228174 PARITY pp43-57.indd 57 228174 PARITY pp43-57.indd 57 / / P f 26/04/2013 17:00 26/04/2013 17:00 Notes to the Accounts continued 2 7 Operating lease commitments Operating leases – lessee The total future minimum rents payable under non-cancellable operating leases are as follows: Continuing operations Amounts payable: Within one year Between two and five years Discontinued operations Amounts payable: Within one year Between two and five years Operating leases – lessor Land and buildings 2012 £’000 Plant and machinery 2012 £’000 Land and buildings 2011 £’000 Plant and machinery 2011 £’000 1,248 1,062 2,310 – – – 51 71 122 – – – 1,133 2,073 3,206 355 – 355 52 76 128 – – – Certain properties may have been vacated by the Group prior to the end of the lease term. Where possible the Group always endeavours to sublet such vacant space. An onerous provision is recognised where the rents receivable over the lease term are less than the obligation to the head lessor. The total future minimum rents receivable under non-cancellable operating leases on sublet properties are as follows: Continuing operations Amounts receivable: Within one year Between two and fi ve years Discontinued operations Amounts receivable: Within one year Between two and fi ve years Land and buildings 2012 £’000 Land and buildings 2011 £’000 522 484 1,006 – – – 305 644 949 215 – 215 28 Contingencies In the normal course of business, the Group is exposed to the risk of claims in respect of contracts where the customer or supplier is dissatisfied with the performance, pricing and/or completion of the contracted service or product. Such claims are normally resolved by a combination of negotiation, further work by Parity or the supplier, and/or monetary settlement without formal legal process being necessary. Occasionally, such claims progress into legal action. At the present time, Group management believes the resolution of any known claims or legal proceedings will not have a material further impact on the financial position of the Group. 58 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp58-end.indd 58 228174 PARITY pp58-end.indd 58 / / P f 26/04/2013 17:01 26/04/2013 17:01 29 Key management remuneration Key management comprises the Board of Directors. The total remuneration received by key management for 2012 was £896,000 (2011: £895,000). This comprises emoluments received, pension contributions, compensation for loss of office and share based payment charges. Key management remuneration is disclosed in detail within the remuneration report. Salary and fees Other short term benefi ts Post employments benefi ts Termination benefi ts Share-based payments 30 Related party transactions Company 2012 £’000 660 28 180 – 28 896 2011 £’000 633 29 30 113 90 895 Details of the Company’s holding in Group undertakings are given in note 31. The Company entered into transactions with other Group undertakings as shown in the table below. Operating costs 2012 £’000 Amounts incurred from Group subsidiaries (719) Amounts charged to Group subsidiaries – Finance income 2012 £’000 – 394 Finance expense 2012 £’000 Operating costs 2011 £’000 (795) (1,324) – – Finance income 2011 £’000 – 386 Finance expense 2011 £’000 (979) – At 31 December, the Company had the following amounts payable to/recoverable from Group undertakings. Amounts owed by subsidiary undertakings Falling due within one year (note 19) Falling due after one year (note 19) Amounts due to subsidiary undertakings Falling due within one year (note 21) Falling due after one year (note 21) During the year, other related party transactions were as follows: Related party relationship Type of transaction Directors Purchase of Group shares 2012 £’000 2011 £’000 2,613 69,763 2,913 77,241 (2,209) (1,391) (74,656) (83,328) Transaction Amount 2012 £’000 Transaction Amount 2011 £’000 – 556 59 O u r P e r f o r m a n c e O u r G o v e r n a n c e i O u r F n a n c a s i l 228174 PARITY pp58-end.indd 59 228174 PARITY pp58-end.indd 59 / / P f 26/04/2013 17:01 26/04/2013 17:01 Notes to the Accounts continued 31 Subsidiaries The principal subsidiaries of Parity Group plc, which have been included in these consolidated financial statements, are Parity Resources Limited, Parity Solutions Limited and Inition Limited. Parity Resources Limited and Parity Solutions Limited are wholly owned by Parity Holdings Limited and incorporated in the United Kingdom. Inition Limited is wholly owned by Parity Digital Solutions Limited and is incorporated in the United Kingdom. Parity Digital Solutions Limited is a direct subsidiary of Parity Holdings Limited, and Parity Holdings Limited is a direct subsidiary of Parity Group plc. Parity Resources Limited is a specialist IT recruitment company. Parity Solutions Limited delivers technology solutions and talent management services. Inition Limited specialises in 3D solutions and equipment. The Company’s investment in subsidiary was reviewed for impairment at the year end owing to the performance during 2012. A discounted future cash flow method was employed for the review. As a result of this review, no provision was deemed necessary, leaving a carrying value of 20,527,000 (2011: £20,527,000). The assessment was performed on a value in use basis using discount rates of between 6.1% and 7.7% (2011: 7.2%) and the other parameters used in the goodwill impairment review, as outlined in note 14. A full list of the Group’s subsidiaries can be obtained at the address below: Company Secretary Parity Group plc Wimbledon Bridge House 1 Hartfield Road Wimbledon London SW19 3RU 32 Post Balance Sheet Events On the 10 January 2013, the Group announced the issue of 3,125,000 new ordinary shares of 2p each at 20 pence per share to raise approximately £600,000 (net of expenses). The issue price represents a discount of 7.0% to the closing middle market price on 9 January 2013 (being the last dealing day prior to the announcement). The proceeds will be used to fund the first earn-out in relation to the acquisition of Inition as announced on 29 May 2012 and potential future transaction costs. Inition has performed beyond expectations, earning the founders their first year earn-out in only seven months, reinforcing the Board’s confidence in its digital media strategy. The Company has already funded the upfront £1.5 million cash cost of the Inition acquisition. 60 Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY 228174 PARITY pp58-end.indd 60 228174 PARITY pp58-end.indd 60 / / P f 26/04/2013 17:01 26/04/2013 17:01 About Parity The Parity Group operates in two distinct fi elds: PARITY PROFESSIONALS Parity Resources provides skilled IT professionals, consultants and project managers to a wide range of leading UK companies on a temporary and permanent basis. Parity Talent Management provides graduate selection, training, placement and career development services. PARITY DIGITAL SOLUTIONS Building on its core expertise, Parity is creating a unique, Creative Technology, marketing services business through acquisition. This division currently comprises: Inition is a leading 3D technology specialist that creates leading edge marketing installations. Systems provides business intelligence development and consulting to both the private and public sectors. IT Professional Services Digital Media & Marketing Services Contents 01 Headlines 02 Chairman’s Statement 03 Operating Review 06 Financial Review 09 Board of Directors 10 Directors’ Report 12 Social, Environmental and Ethical Policies 13 Corporate Governance Report 17 Remuneration Report 22 Independent Auditor’s Report 23 Consolidated Income Statement 24 Statement of Comprehensive Income 25 Statements of Changes in Equity 26 Statements of Financial Position 27 Statements of Cash Flows 28 Notes to the Accounts IBC Corporate Information IBC Advisors Parity Group plc Report and Accounts 2012 www.parity.net stock code: PTY Corporate information Registered office Wimbledon Bridge House 1 Hartfi eld Road, Wimbledon London, SW19 3RU Tel: 0845 873 0790 Fax: 020 8545 6355 Registered in England & Wales No. 3539413 Registrars Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA Tel: 0870 600 3964 Fax: 0870 600 3980 Advisors Auditors KPMG Audit Plc 8 Salisbury Square London EC4Y 8BB Bankers RBS Group 9th Floor 280 Bishopsgate London EC2M 4RB PNC Business Credit 8-14 The Broadway Hayward’s Heath West Sussex RH16 3AP Equiniti offer a range of information on-line. You can access information on your shareholding, indicative share prices and dividend details and fi nd practical help on transferring shares or updating your details at www.shareview.co.uk Financial advisors & stockbrokers N+1 Singer One Bartholomew Lane London EC2N 2AN Solicitors Pinsent Masons 30 Crown Place London EC2A 4ES Enquiries concerning shareholdings in Parity Group plc should be directed, in the fi rst instance, to the Registrars, Equiniti, as above. Investor relations MHP Communications 60 Great Portland Street London W1W 7RT Tel: 020 3128 8100 Further information for shareholders including copies of the Annual and Interim Reports can be obtained from the company secretary’s offi ce at the registered offi ce address below or from the Parity Group website at www.parity.net The Company Secretary Parity Group plc Wimbledon Bridge House 1 Hartfi eld Road, Wimbledon, London, SW19 3RU Or by email to: cosec@parity.net Parity has offices in: London Wimbledon Edinburgh Camberley Sale Belfast For all general enquires call 0845 873 0790 228174 PARITY COVER.indd 2 228174 PARITY COVER.indd 2 26/04/2013 16:50 26/04/2013 16:50 Parity Group plc Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London, SW19 3RU Tel: 0845 873 0790 Fax: 020 8545 6355 www.parity.net stock code: PTY Perivan Financial Print 228174 Parity Group plc Report and Accounts Year ended 31 December 2012 228174 PARITY COVER.indd 1 228174 PARITY COVER.indd 1 26/04/2013 16:50 26/04/2013 16:50 

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