Parity Group plc
Annual Report 2013

Plain-text annual report

PARITY GROUP PLC 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 231526 Parity Group plc Report and Accounts Year ended 31 December 2013 231526 PARITY COVER.indd 1 231526 PARITY COVER.indd 1 22/04/2014 18:52 22/04/2014 18:52 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 . 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 Strategic Report 02 Chairman’s Statement 04 Operating Review 07 Financial Review Governance 10 Board of Directors 11 Directors’ Report 13 Social, Environmental & Ethical Policies 14 Corporate Governance Report 18 Remuneration Report 23 Independent Auditor’s Report to the Members of Parity Group Plc Financials 24 Consolidated Income Statement 25 Statement of Comprehensive Income and Statement of Changes in Equity 27 Statements of Financial Position 28 Statements of Cash Flows 29 Notes to the Accounts 60 Corporate Information 60 Advisors Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY COVER.indd 2 231526 PARITY COVER.indd 2 22/04/2014 18:52 22/04/2014 18:52 Headlines Parity Group plc reports another good year of growth, increased profi tability and investment for the future ❚ Revenues up 7.1% at £91.95m (2012: £85.89m) ❚ Adjusted EBITDA1 of £2.53m (2012: £1.39m) ❚ Operating profi t before non-recurring items £1.06m (2012: £0.65m) ❚ Group profi t before non-recurring items and tax £0.65m (2012: £0.28m) ❚ Cash and cash equivalents £7.38m (2012: £2.87m) ❚ Net debt £2.53m (2012: £5.41m) ❚ New divisional structure established during the year o Parity Professionals – Specialising in the sourcing, development and placing of professional staff • Revenue £83.7m (2012: £77.5m) • Divisional contribution2 £4.2m (2012: £4.7m) • Contractor numbers up 12.8% to 993 at year end (2012: 880) • Alan Rommel promoted to divisional CEO o Parity Digital Solutions – Leading edge IT and digital marketing system development services • Revenue £8.2m (2012: £8.4m) • Margins improved to 23.4% (2012: 18.4%) • Divisional contribution2 £1.93m (2012: £1.55m) • Andy Law appointed as divisional Chairman in March 2014 • Mark Andrews appointed as divisional CEO in March 2014 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s l i 1 In assessing the performance of the business, the directors use a non-GAAP measure “Adjusted EBITDA” being the measure of EBITDA, prior to non-recurring items, share based compensation and strategic initiative costs. Non-recurring items, share based compensation and strategic initiative costs 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 231526 PARITY.indd 01 231526 PARITY.indd 01 / / P f 22/04/2014 18:53 22/04/2014 18:53 Chairman’s Statement Philip Swinstead 2013 Results I am pleased to report further progress in 2013 with an increase in both Group revenue, and profit before tax and non-recurring items. Revenues were up 7.1% at £91.95m (2012: £85.89m) and adjusted EBITDA increased to £2.53m (2012: £1.39m). Operating profit before non-recurring items was £1.06m (2012: £0.65m). Move to AIM, Placing and Change of NOMAD On 5th July 2013 the Group’s shares commenced trading on the AIM market and their Official Listing was cancelled. The Board believes the AIM market is more suitable for the Company’s current stage of development. At that time a Placing of 25,925,926 new Ordinary Shares was completed at a price of 27 pence raising £6.5m net. Central costs reduced to £4.68m (2012: £4.95m). In 2014 a large proportion of central costs will be delegated to the divisions which will be held directly accountable for those costs. As a result, it is anticipated that further operational efficiencies will be forthcoming. We have completed the re-structuring of the Group into two independent divisions, Parity Professionals and Parity Digital Solutions, which we for the first time report separately in these accounts. We have invested substantially in people, systems and hardware to support our plans for growth under the new divisional structure. Parity Professionals increased its revenues in an improving market in the second half of 2013; with margins starting to move upward in the past few months. The Talent Management business grew slowly in the second half due to delays in educational spending; but also with some encouraging signs late in the year. Revenues in Parity Digital Solutions were stable. Good growth at Inition, the 3D experiential specialist business, was balanced by Systems revenues which reduced in an over-supplied market. Both, however, produced improved operating profits. Before non-recurring items and tax the Group returned a profit of £0.65m (2012: £0.28m). Non-recurring items were £1.18m (2012: £1.22m) representing property provisions, restructuring and transaction costs. We expect a significant reduction in this area in 2014. Group loss for the year was £1.65m (2012: £1.39m) and was after non-recurring costs of £1.6m, strategic initiative costs of £1.1m, and a deferred tax charge of £0.7m all of which will significantly reduce in 2014. Cash, Dividend and Pension Cash at year end increased to £7.38m (2012: £2.87m). There was a share Placing to the net value of £6.5m at the time of the Group’s move to AIM in July. Banking arrangements with PNC have been in place since 2010, and the asset backed lending facility of up to £15m has been extended until December 2016. Due to the continuing financial improvement of the Group, it has been possible to re-negotiate with the trustees of the Parity Group Retirement Plan, improvements to the assumptions underlying the valuation of pension scheme liabilities.  The outcome of these negotiations was a significant fall in the deficit on a technical provisions basis and as a consequence, a substantial reduction in future annual payments.  On an annualised basis these payments have now fallen from £1.09m to £0.68m but will be subject to a 5% per annum increase each August. No dividend is payable for this year but the Board will keep the policy under review. On 23rd September the Group announced the appointment of Investec as its new Nominated Adviser and Broker. Group Structure The Group has implemented a new divisional structure in 2013 to better reflect, internally and externally, the different interests of the two parts of its business. This is now the reporting structure of the Group. Parity Professionals, the largest division, contains the Parity Resources and Talent Management businesses. Parity Digital Solutions contains the Group’s systems integration business and its first acquisition, Inition, which has now earned its first year earn-out payment of £0.5m based on operating profit to 31 March 2013. Performance has continued to improve towards the likely achievement of its second year earn-out target. Divisional results and current trading are discussed in the Operational Review. Changes to the Main Board On 26th September the Group announced a number of Board changes – • Philip Swinstead became Executive Chairman from 1st October to drive the Group’s digital strategy, now that the base business has achieved financial stability. Paul Davies remains as Group CEO and Alastair Woolley as Group FD. • Mike Phillips, a non-executive director since 3rd November 2011 and Chairman of the Audit Committee since 22nd November 2011 has, as a result of other commitments, stepped down from the Board. The Board thanks him for his contribution and wishes him every success. • Neal Ransome, MA FCA CF, aged 53, joined the Board as a Non-Executive Director and took over from Mike Phillips as Chairman of the Audit Committee. Neal had recently retired from PwC, where he was a Corporate Finance Partner and Chief Operating Officer of PwC’s Advisory line of service. • Due to the evolution of our strategic thinking, Stephen Whyte resigned as a director and executive in September 2013. • Sir Peter Luff MP, FCIPR, aged 58, joined the Board as a Non-Executive Director. Peter was previously the Managing Director of a leading public affairs company, is currently a Member of Parliament and was Minister for Defence Equipment, Support and Technology from 2010-12. • Suzanne Chase continued as our General Counsel but stepped down as a Director and took over the role of Company Secretary from Alastair Woolley. 02 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 02 231526 PARITY.indd 02 / / P f 22/04/2014 18:53 22/04/2014 18:53 Strategy The Group has two distinct business divisions; with separate missions and strategies to achieve them. Parity Professionals’ mission is to be a premium supplier working closely with clients to source and develop talent, building capacity and capability to improve individual and organizational performance. • The IT staffing business has broken down its offering into segments which are offered on a unique Resources as a Service basis. • The Group has invested in expanding the training and career development offering of the Talent Management business across the UK from its traditional Northern Irish market. Parity Digital Solutions is the base for the Group’s technology systems offering, which has been retargeted to the digital marketing world. The IT services market is mature and one in which it is difficult for a small systems business to grow. However, the Board identified an opportunity to transfer the Group’s experience of project management and business process to a marketing context as digital technology claims an increasing share of market spend. • The Group has indicated since 2011 that it is looking to re-focus its systems integration capabilities into this new market by both acquisition of key skills and market position, and organic growth. • With the successful acquisition and profit improvement of the 3D specialist Inition, the Group has demonstrated the relevance of its management skills to the new market. • In a change of tactics the Board has decided that shareholder value can be best increased by further smaller acquisitions to create the skill base needed to grow a significant new style of technology services business in the digital marketing field; neither an advertising agency nor a digital agency. The division has also been seeking to increase its own top management capabilities from the advertising and marketing world. • Given his highly successful top level background in international marketing, the Board is pleased to announce the appointment of Andy Law as Chairman of the division on a three days a week basis. Andy has held senior positions at many of the top advertising agencies including Board Director at CDP and led the buyout from Omnicom of Chiat/ Day creating the groundbreaking agency, St Lukes, which became one of London’s leading agencies. He is also a successful writer and international speaker – including chairing sessions at Davos. • I am also pleased to report today the appointment of Mark Andrews as CEO of this division. Mark is a highly experienced MD in the TV commercial and video production world. He started as a graphics designer and then commercial producer, becoming main board Head of TV at major award winning agency, CDP, and then MD at the world’s largest video/ commercial production company, Propaganda Films. In 1997 he founded Tsunami Films and then left in 2003 to become founder and proprietor of the MADE group. The Group’s TechLab joint venture with Royal Holloway and Bedford New College has now entered the commercialization phase. The Groupseer next-generation, patented, social media search engine now has a joint team working on ensuring that it has all the necessary functions, is fully tested and has a fluid interface. In parallel, early market feedback will be sought from selected potential users in a few target areas. Current Trading and Future Prospects The Group continues to trade in line with management expectations. Parity Professionals is seeing the early signs of improvement in its market and margins, as hiring levels begin to rise. The Board is looking to this division to grow revenues and profits in future years, under the leadership of CEO, Alan Rommel, who along with other senior management, has experience of leading the business through a similar stage of the recovery cycle. Parity Digital Solutions will be renamed in 2014 to reflect its new strategic direction. Inition is now operating with good margins and is investing in its marketing capabilities to build on the increased recognition of its augmented and virtual reality solutions. Under its strong management team, the division will seek to further extend its services into Digital Content Management and Content Production. We expect to make further small acquisitions this year to put the necessary skills in place and allow the expanded management team to grow the business offerings in a rapidly developing market. 2014 will see the end of nearly all of our unused property leases and the significant cash burden they impose. This together with reduced pension deficit payments, will significantly reduce our cash outflow and contribute towards the Group becoming cash generative. After three tough years turning round the business, the good health, management and forecast market growth for both our divisions allows the Board to be confident about further improvement in shareholder value in 2014 and future years. i S t r a t e g c R e p o r t G o v e r n a n c e Philip Swinstead Chairman 12 March 2014 i F n a n c a s i l 231526 PARITY.indd 03 231526 PARITY.indd 03 / / P f 22/04/2014 18:53 22/04/2014 18:53 03 Operating Review Paul Davies Overview The three year turnaround programme set out by the new management team in 2010 has now been completed. This has seen the establishment of two separate, profitable and growing businesses in Parity Professionals (specialising in the sourcing, development and placing of professional staff) and Parity Digital Solutions (currently comprising Systems and Inition) forming a small but profitable platform focussed on the fast growing demand for technology solutions in digital marketing. After an initial period of cost cutting and market realignment the Company has returned to solid revenue and Adjusted EBITDA growth of over 7% and 82% respectively. The initiative to consolidate our operations into two separate divisions will allow us to report them on a separate basis going forward enabling clearer analysis of each as ‘independent’ businesses with only Group costs being shared. To facilitate this, two Divisional Boards have been established under separate CEO’s with detailed Terms of Reference and Authority Levels and reporting to the Group Board on a monthly basis. Group Operations Much of Parity’s work remains short term in nature although several client and 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 and Public Sector spending the breadth of our private sector portfolio and growing business in the Digital Marketing arena continues to increase and it is expected that this trend will continue. New Finance and CRM Systems In order to improve reporting and operating efficiencies the custom built, expensive and difficult to modify older finance system based on Microsoft AX has now been replaced. The Parity Digital Solutions business has been successfully migrated onto a SAP By Design cloud based solution and we are in the final stages of migrating the Parity Professionals business onto a SAFE finance system specifically designed for a Resources style business. In parallel we are replacing our existing outdated CRM systems with a package by Bullhorn that has dedicated applications for staff resourcing which is expected to improve efficiency and data sharing between Parity Resources and Talent Management. Parity Professionals Reporting separately to the Board this newly formed division comprising Parity Resources and Talent Management was launched under the Parity Professionals banner earlier in the year and now has it s own staff, infrastructure, offices, web presence and senior management team under CEO Alan Rommel. Whilst the two component divisions currently address different market sectors (staff recruitment and graduate placement/talent development respectively) they have a common theme of sourcing, recruitment and development of professional staff at all stages of their career, providing consultancy skills to improve individual and organisational performance. 04 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY A number of opportunities have been identified as a result of combining these two business units, including cross selling to existing clients, collaboration of databases, and an enhanced overall proposition to the market. Parity Resources’ continued focus on increasing contractor numbers, improving conversion rates and seeking out opportunities to increase margin (against a continued market pressure for rate reduction) has sustained the return to growth established in 2012. This has required the further investment in sales and support staff, expansion of our offerings and improved systems. We have launched our unique Resources as a Service (RaaS), a segmented, menu driven procurement methodology proposition and are seeking to expand our limited presence in the permanent recruitment market. As a result, we have increased our contractor numbers by 13% to 993 (2012: 880) and improved conversion rates to 33% (2012: 30%). In addition a number of existing contracts were extended and 70 new clients were signed up during the year (2012: 67) with improved average margins of 8.39% (2012: 7.95%). In total, revenues in the year increased by 8.1% to £81.4m (2012: £75.3m) with a slightly reduced divisional contribution of £3.7m (2012: £4m) due to the continued investment in staff, training and offices. Whilst the UK market remains challenging, with continued pressures on recruitment levels and margins, the last few months of the year saw a slight upturn in demand which we anticipate continuing into the first part of 2014. The Talent Management business which has almost 20 years success in the sourcing, development and placing of graduates in Northern Ireland led to a strategic decision to invest in the business to extend the service across the UK. Addressing this new market by building upon our established capabilities and reputation has resulted in a number of successes and the business is committed to establishing its foothold in Great Britain from which to grow. A traditional seasonal slow first half to the year was followed by an anticipated upturn resulting from the higher levels of graduate development and recruitment post mid year graduation. We continued our success in the ongoing prestigious Faststream graduate recruitment programme which we run on behalf of HMRC. This has again been renewed for a further year and won the Association of Graduate Recruiters annual award for Graduate Selection and Assessment. Continued success in Northern Ireland resulted in the number of graduates sponsored by the Department of Employment and Learning for the Intro programme increasing to 160 (2012: 100) and the Management and Leadership Development Programme numbers increasing to 196 (2012: 24). The number of new corporate clients across the UK also increased to 19 (2012: 16). 231526 PARITY.indd 04 231526 PARITY.indd 04 / / P f 22/04/2014 18:53 22/04/2014 18:53 Despite market conditions in Higher Education remaining a challenge, we have maintained the foothold established in Great Britain during 2011 with revenues of £2.3m (2012: £2.2m) and contributions of £0.54m (2012: £0.67m). During this period we have further invested in sales and marketing, extended our offerings in order to build upon the platform established in our first two years in the GB higher education marketplace. Having established a solid UK presence over the past two years the priority for 2014 is to take advantage of the sales opportunities identified and grow both revenue and profit within higher education and corporate clients. Parity Digital Solutions Reporting separately to the Board, this division currently comprises Parity Systems and Inition. The division has its own staff, infrastructure, offices, web presence and senior management team under CEO, Mark Andrews. Parity Systems is a small systems integration business with all the functions necessary to deliver custom IT systems at a profit. It has been difficult for all such small systems businesses to win new customers in a recession. However, the business processes and SI systems have been invaluable in allowing the Inition experiential systems business to make good profits from the excellent business it has been doing for some years. As has been said before, the Board believe that the future for new growth in technology services is in the marketing arena; not in automating business systems. Therefore, the systems integration base that exists is the perfect platform for such an initiative as has been proved by the much improved performance of Inition. In the year we further extended our long term relationship with BAT to include a framework for applications support, development and consultancy services and have also benefited from the return of previous clients purchasing this type of service. Our similarly long term relationship with the UK’s Ministry of Defence continues with the provision of specialist technical support despite defence spending constraints, and our business with a large international legal firm started two years ago has led to further project work. Together with Parity Resources, Parity Systems was successful in securing a place on the G-Cloud 3 UK Government procurement framework. This was followed up later in the year with further success on G-Cloud 4. Parity Systems’ exit from loss-making fixed price contracts, which was completed in 2012, has allowed the business to enhance margins and consolidate long term client relationships whilst focussing skill sets particularly aligned to the emerging digital market (web portals, business intelligence, and project management) in expectation of future business from the Group’s strategic initiative in this area. Our planned exit from these bad projects resulted in a decline in revenues but an increase in margins and contribution, as overheads were reduced. Focus on our traditional client base, together with some new business intelligence clients, has driven further margin improvement to 24% (2012: 20%) thereby stabilising contribution at £1.3m (2012: £1.3m) on a reduced revenue of £5.38m (2012: £6.5m). The previously announced Parity R&D Technology Laboratory initiative with Royal Holloway and Bedford College of the University of London, to develop their innovative social media search algorithm, has resulted in a formal joint venture in which Parity has a 60% stake. A team is being assembled in Parity offices to complete the production of the software to market standards in parallel with further market research to define the most suitable applications for this patented technology. Inition, which was acquired in May 2012, continues to be run for earn-out purposes with its separate overhead structure. It has benefitted during the year from the new reporting system referred to above and improved operational and project management assistance from Parity Systems. The second and final earn -out period completes in March 2014 and it seems likely at this time that the full earn -out amount will again become payable. This follows an excellent performance by the founding management, helped by our experience in delivering custom technology systems. Revenues for the first full year were £2.85m (7 months 2012: £1.9m) with a contribution of £588k (7 months 2012: £260k). Following the acquisition and integration into Parity Digital Solutions in 2012, Inition is a successful first move into project based professional services in marketing technology services. The performance would not have been possible without the Group’s extensive experience in project based services in information technology. It was a successful test of management’s belief that IT systems experience and processes are very pertinent in the digital marketing world. Inition is now increasing its account management function to take its exciting capabilities to new market sectors and to extend its business in areas where it has already proved successful (e.g. automotive, property, retail and higher education sectors). A number of high profile installations have been launched in major London stores including Selfridge s, John Lewis and Topshop. We are also introducing these new technologies to existing Parity clients such as the MOD, which includes working with Defence Science and Technology Laboratory (via a partnership with QinetiQ) to utilise emerging technologies for armed forces training. Property We have relocated the Parity Professionals finance and support team from Wimbledon to our existing sales office in Bath Place, Shoreditch. This had the duel effect of improving communications and increasing efficiency between the two teams. As a result only our Parity Digital Systems division currently has a presence in Wimbledon. The Wimbledon office’s lease expires in the second half of 2014. In the near future we expect further improvements in efficiency as the Group HQ and Systems divisions move into a further floor in Curtain Road, (where Inition are based) thus vacating the Wimbledon and Chancery Lane facilities. To accommodate additional sales staff necessary to fuel further growth within Parity Professionals we have also in the year expanded both our Sale and Edinburgh offices. As a result, with the exception of shared offices in Belfast the two divisions operate from separate offices; Parity Professionals in Camberley, Shoreditch (Bath Place), Sale, Edinburgh and Parity Digital in Wimbledon, Shoreditch (Curtain Road). 05 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 05 231526 PARITY.indd 05 / / P f 22/04/2014 18:53 22/04/2014 18:53 Operating Review continued Management and Staff 2013 was another period of positive development for Parity. During the year we made the necessary organisation changes to establish two distinct divisions both positioned to take advantage of the growth opportunities which now present themselves. In what continued to be challenging end markets we have returned the company to stable growth whilst absorbing the inevitable disruption of implementing the new business systems which will provide us with improved operating efficiencies in future. We have additionally invested in training, increased our sales capacity and relocated a number of offices to accommodate increased headcount and continue the programme of vacating unsuitable legacy offices. None of this could have been accomplished without the support of management and staff who repeatedly go the extra mile to ensure objectives are achieved. On behalf of the Board I wish to offer them all our sincere thanks for their continued loyalty and commitment to Parity. Paul Davies Chief Executive Officer 12 March 2014 06 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 06 231526 PARITY.indd 06 / / P f 22/04/2014 18:53 22/04/2014 18:53 Financial Review Alastair Woolley Revenue Continuing operations Parity Professionals Parity Digital Group 2013 £’000 83,711 8,238 91,949 2012 £’000 77,491 8,396 85,887 Revenue for the group has increased by 7.1% to £91.95m (2012: £85.89m). The Parity Professional division has continued to see good growth particularly in its Resources business unit with divisional revenue increasing by £6.2m (8.0%) from £77.5m to £83.7m. Parity Digital revenue has fallen by £0.16m to £8.24m (2012: £8.40m). The Systems business has experienced pressure from the spending constraints within the MOD, but has concentrated on consolidating its position with existing clients and maintaining margins. The objective in 2013 within the Inition business unit, the first full year post acquisition, was to improve internal systems and processes and further improve margins. This objective has been successfully achieved. Divisional contribution Continuing operations Parity Professional Parity Digital Divisional contribution before central costs, non-recurring items and strategic initiative & acquisition costs 2013 £’000 4,206 1,930 2012 £’000 4,674 1,546 6,136 6,220 Divisional contribution has decreased slightly by £0.1m to £6.1m (2012: £6.2m). In Parity Professional emphasis has been placed within the Resources business unit on gaining contractor numbers and seeking out opportunities to increase margin. However, this has required investment during the year in sales and support staff and improved systems which has diluted the year end contribution. In Parity Digital, margins grew strongly, improving from 18.4% in 2012 to 23.4% in 2013. The Systems business continues to maintain good margins and the focus at Inition, of improving internal processes as a result of experience from the Systems business unit has resulted in significantly improved margins. Reconciliation of divisional contribution to operating loss from continuing operations Divisional contribution before central costs, non-recurring items and strategic initiative and acquisition costs Central costs Strategic initiative costs Investment costs Total central costs Depreciation and amortisation Share-based payment charges Operating profit/(loss) before non-recurring items Non-recurring items (continuing operations) Operating (loss) from continuing operations 2013 £’000 6,136 (3,607) (1,076) – (4,683) (271) (120) 1,062 (1,600) (538) 2012 £’000 6,220 (4,364) (124) (461) (4,949) (497) (124) 650 (1,350) (700) Total central costs have continued the trend from previous years and have decreased £0.2m to £4.7m (2012: £4.9m) despite the significant spend on strategic initiative costs. It is anticipated that in 2014, strategic initiative costs will be significantly lower. Depreciation has fallen by £0.2m in 2013 mainly due to the fact that the costs associated with the Microsoft Dynamic AX ERP system (discussed later under intangible fixed assets) are no longer having to be written off. The result of this is that operating profit has increased by £0.41m to £1.06m (2012: £0.65m). i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 07 231526 PARITY.indd 07 / / P f 22/04/2014 18:53 22/04/2014 18:53 07 Financial Review continued Non-recurring items Continuing operations Restructuring Strategic initiative costs Property provisions 2013 £’000 173 695 732 1,600 2012 £’000 961 840 (451) 1,350 Strategic Initiative costs refer to the professional fees incurred in the Group’s acquisition programme. The main element of the property provision charge is in relation to Wimbledon Bridge House. The lease on the property comes to an end in September 2014. In preparation for this and as part of the process of creating the two divisions of Parity Professional and Parity Digital, support and finance staff have been moved out of Wimbledon Bridge House and transferred to locations where sales and client service staff already operate from. This has further improved communications between the teams and will also lead to reduced occupancy costs. As a result of the termination of the Wimbledon office lease in September 2014, a further provision has been made for dilapidation costs. The total charge this year therefore comprises a mixture of onerous lease costs and an increase to the dilapidations provision. 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 1.88 pence (2012: 2.00 pence). The Board does not propose a dividend for 2013 (2012: nil), but will continue to review this policy each year. Statement of Financial Position The balance sheet has strengthened since last year with net assets increasing to £9.7m (2012: £3.9m). This improvement was mainly as a result of the Placing that took place in July 2013 which raised net proceeds of £6.5m but also due to the reduction in the retirement benefit liability of £0.9m. These improvements to the net assets position have, however, been partially offset by the required increase in working capital to fund the continued growth of the group. Intangible fixed assets As reported last year, the Board decided to write off the remaining cost of the Microsoft Dynamics AX ERP system. This was a heavily customised system which had been installed 5 years ago at cost of over £1.7m and was inflexible, expensive to maintain and would not provide the correct platform for the company as we extended operations and split into the two distinct divisions. During the course of 2013 the Company has invested in new systems for both of its divisions. The systems have been selected to specifically address the business needs of each division rather than applying one generic solution that falls short of the operational benefits we are striving to achieve. Parity Digital successfully migrated its business units onto SAP by Design and the Inition business unit has been developing intellectual property for their augmented reality product lines. Parity Professional has selected and is in the process of implementing fully integrated solutions to replace its back, middle and front of office systems and these are due to go live early in 2014. It has also launched in the year a sophisticated and dedicated Parity Professionals website. At a group level, a new HR system has also been implemented which will improve efficiency and allow for the administration of the new auto enrolment requirements due to impact the company in 2014. The cost of these investments was £0.7m. Trade receivables and accrued income Trade receivables increased by £3.4m to £16.4m (2012: £13.0m) during the year, reflecting the increase in group revenue and to some extent the change in public/private sector mix. However, due to continued focus on working capital management, debtor days at the end of the year, calculated on billings on a countback basis, has only increased by 1 day to 27 (2012: 26). Trade and other payables Trade and other payables increased during the year to £10.4m (2012: £8.9m). As with trade receivables this is mainly due to the increase in trading volumes. 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 asset-based lending facility provides for borrowing of up to £15m depending on the availability of appropriate assets as security. Interest on borrowings is charged at 2.5% over the prevailing base rate. The company has recently extended its facility until December 2016. Cash flow and net debt Cash generated from operations improved slightly compared to 2012 although there was still an outflow of £2.61m (2012: £2.64m). However, a substantial part of the outflow of funds in 2013 was as a result of the increased investment in working capital required to fund the continuing growth of the company and the payments to the retirement benefit plan. 08 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 08 231526 PARITY.indd 08 / / P f 22/04/2014 18:53 22/04/2014 18:53 Cash used in investing activities in 2013 was £1.39m. £0.5m of this was the first of the earnout payments following the acquisition of Inition. The terms of the acquisition included an earnout target of generating £0.3m operating profit for the year ended 31 March 2013. This was achieved and triggered the £0.5m payment. Investment of £0.7m has been made in substantially improving the systems in both Parity Professionals and Parity Digital. A programme was also undertaken during 2013 to replace most of the ageing PC’s and laptops used by the company’s staff. Provisions The net increase in provisions of £0.2m includes an increase to the empty property provision of £0.53m which mainly related to the Wimbledon office and an increase to the dilapidations provision of £0.19m also in respect of the Wimbledon office. Utilised in the year were £0.5m of empty property provisions in respect of the Wimbledon and Fleet offices. Pension Fund During 2013 the Group paid deficit reduction payments of £0.83m compared to £1.09m in 2012. As a result of the improving financial position, the Company was able to negotiate with the Trustees a revised actuarial position of the Plan.  As a consequence the deficit on a technical provisions basis has been reduced by £2.33m to £6.33m and on-going payments to the Plan will reduce from an annualised basis of £1.09m to £0.68m and then only increasing as from 1 August 2013 at the rate of 5% per annum. Principal risks and uncertainties Market The Group continues to monitor its exposure to the public sector and while the Group’s exposure has reduced over recent years, it still 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. Financial The Group actively monitors it liquidity position to ensure it has sufficient available funds and working capital in order to operate and meet its planned commitments and has a credit risk policy that requires appropriate status checks and or references as necessary. 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 12 March 2014 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 09 231526 PARITY.indd 09 / / P f 22/04/2014 18:53 22/04/2014 18:53 09  Neal Ransome Non-executive Director 1, 2, 3 Neal Ransome, MA FCA CF, 53, was appointed to the Board as a Non-Executive Director on 26th September 2013 and has taken over from Mike Phillips as Chairman of the Audit Committee. Neal has recently retired from PwC, where he was a Corporate Finance Partner and Chief Operating Officer of PwC’s Advisory line of service. In addition to his direct managerial experience in a large services organisation, Neal has over twenty years’ experience of advising clients on their M&A activities. Paul Davies Chief Executive Officer Paul Davies, 65, re-joined Parity in June 2010 and was appointed as Chief Executive. 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 was Deputy Chairman of Microgen plc from 1999 until April 2012 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, 52, joined Parity in late 2010 and was appointed Finance Director in April 2011. Alastair trained with Deloitte and spent 11 years in various departments including audit and business services. After leaving Deloitte in 1996, Alastair has worked in a variety of companies, mainly technology based, as Finance Director and also for a period of time, as Managing Director. Alastair has responsibility for Finance, Property and Facilities and IT. Board of Directors Philip Swinstead OBE Executive Chairman Philip Swinstead, 70, re-joined Parity in June 2010 and was appointed Non-executive Chairman, and appointed Executive Chairman on 1 October 2013. 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, 71, 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 Service. 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 Thales SA, Chemring Group plc and Savile Group plc. David Courtley Non-executive Director 1, 2, 3 David Courtley, 56, 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. Sir Peter Luff Non-executive Director 1, 2, 3 Peter Luff MP, FCIPR, 58, was appointed to the Board as a Non-Executive Director on 26th September 2013. Peter has more than 30 years’ experience of working with and for the public sector and has been the Managing Director of a leading public affairs company. He is currently Member of Parliament for Mid Worcestershire and was Minister for Defence Equipment, Support and Technology from 2010-12. Previously (2005-10) Peter had been chairman of the Business, Innovation and Skills Committee of the House of Commons. He is also a non-executive director of Marlin Group Holdings plc, a manufacturer of advanced manufacturing systems, and an Honorary Fellow of the Chartered Institute of Public Relations. 1 Member of the nominations committee 2 Member of the remuneration committee 3 Member of the audit committee 10 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 10 231526 PARITY.indd 10 / / P f 22/04/2014 18:53 22/04/2014 18:53 Directors’ Report The Directors present their report and the audited accounts for the year ended 31 December 2013. 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 two divisions; Professionals and Digital. The principal activity of the Professionals division is to provide recruitment, predominately interim recruitment, and graduate placement services, to a diverse range of clients. In 2013 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 Digital division comprise creative technology solutions, business intelligence solutions, and the resale of 3D equipment. Digital delivered its services during the year to central government departments in the public sector, and to Tobacco, Retail, IT, Telecommunications and Automotive clients in the private sector. 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 9. The Group’s social, environmental and ethical policies are set out on page 12. A statement on the application of the going concern principle is set out below. Details of financial instruments are set out in note 22 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 £949,000 (2012: £1,066,000) after charging non-recurring items of £1,600,000 (2012: £1,350,000). After a tax expense of £743,000 (2012: expense of £349,000) and a profit after tax from discontinued operations of £41,000 (2012: profit after tax of £26,000), the retained loss of £1,651,000 (2012: £1,389,000) has been transferred from reserves. The results for the year are set out in the consolidated income statement on page 24 . Hargreave Hale Limited Philip Swinstead Killik & Co David Courtley Slater Investments Limited Dominion Holdings Barclays Stockbrokers TD Waterhouse RBC Jersey Client Artemis Investment Management Henderson Global Investors Dividends The Directors do not recommend a final dividend (2012: nil pence per ordinary share). The total dividends for the year were nil pence per ordinary share (2012 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 24. Purchase of own shares At the end of the year, the Company had authority, under the shareholders’ resolution of 30 May 2013, to purchase in the market 7,509,809 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 12 March 2014 is set out on page 10, together with details of membership of the Board committees. In accordance with the Company’s Articles of Association, Peter Luff and Neal Ransome, who were appointed after the announcement of the 2013 AGM, will retire and offer themselves for re-election at the 2014 Annual General Meeting. The Company’s articles of association also requires that each Director retire from office and seek reappointment at the third annual general meeting after the general meeting at which he was last appointed or re-appointed. Accordingly Mr P E Swinstead, Lord Freeman, Mr P Davies and Mr A Woolley each retire and offer themselves for re-election as a Director. Directors’ interests The Directors’ beneficial interests in the ordinary share capital of the Company are set out within the remuneration report on page 22. Principal shareholders At the close of business on 8 March 2014 (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: Number of Ordinary 2p shares Percentage held i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 15,000,000 13,186,470 7, 173,505 6,521,739 5, 110,657 4,950,000 4, 022,964 3, 966,068 3,823,766 3, 305,000 3, 284,501 14.76 12.97 7. 06 6.42 5. 03 4.87 3.96 3.90 3.76 3. 25 3.23 11 231526 PARITY.indd 11 231526 PARITY.indd 11 / / P f 22/04/2014 18:53 22/04/2014 18:53 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 13. 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 2013 (2012: £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 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 14 to 17 forms part of the Directors’ Report. Auditor Our auditor, KPMG Audit Plc is currently in the process of transferring to KPMG LLP. The Board has therefore decided to put KPMG LLP forward to be appointed as auditors and a resolution concerning their appointment will be put to the forthcoming AGM of the Company. Post Balance Sheet Events There were no material post balance sheet events. Annual General Meeting The resolutions to be proposed at the Annual General Meeting, together with the explanatory notes, will appear in the Notice of the Annual General Meeting which will be circulated with the annual report when sent to all Shareholders. By order of the Board Alastair Woolley Director 12 March 2014 Directors’ Report continued 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 7 to 9 and in note 22 to the financial statements. Note 22 also includes the Group’s objectives for managing capital. As outlined in note 22, 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 2016. 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 2013 unpaid creditors of the Group amounted to 36 days of purchases (2012: 32 days). Creditor days have not been calculated for the Company as it has no trade payables. 12 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 12 231526 PARITY.indd 12 / / P f 22/04/2014 18:53 22/04/2014 18:53 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 incentivises employees through share-based incentives and the payment of bonuses and commissions linked to performance objectives. 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. 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. Appropriate written health and safety information outlining the Group’s policy in each area is issued to all new employees. This includes: • 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. 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. 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. Whenever economically justifiable, the paper and other consumables used are made from environmentally-friendly or recycled material or from renewable resources. 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 at market value, 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. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s l i 231526 PARITY.indd 13 231526 PARITY.indd 13 / / P f 22/04/2014 18:53 22/04/2014 18:53 13 Corporate Governance Report Introduction During the year the Company moved from the Main Market of the London Stock Exchange to AIM. On the 5 June 2013 shareholders resolved to cancel the listing of the Ordinary Shares on the Official List, to remove such Ordinary Shares from trading on the Main Market of the London Stock Exchange and to apply for the Ordinary Shares to be admitted to trade on AIM. On the 4 July 2013 the Company ceased from trading on the Main Market of the London Stock Exchange and its shares were admitted to AIM on 5 July 2013. As Parity plc is listed on AIM, it is neither required to comply with the UK Corporate Governance Code that was published in September 2012 by the Financial Reporting Council (the Code) nor issue a statement of compliance with it. Nevertheless, the Board fully supports the principles set out in the Code and seeks to follow these as best practice wherever this is appropriate; having regard to the size of the Company, the resources available to it and the interpretation of the Code in the Quoted Companies Alliance Corporate Governance Code for Small and Mid-sized Quoted Companies. Details are provided below of how the Company applies the elements of the Code that are deemed appropriate. 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 2. The workings of the Board and its committees The Board At the date of this report the Board comprises of Executive Chairman Philip Swinstead, the Deputy Chairman and Senior Independent Director Lord Freeman, Chief Executive Officer Paul Davies, Group Finance Director Alastair Woolley, Non-executive Directors David Courtley, Sir Peter Luff and Neal Ransome. During the year Mike Phillips Non-executive Director, Suzanne Chase part-time Executive Director and General Counsel, and Stephen Whyte Chief Executive Officer of Parity Digital Solutions were also members of the Board but stepped down on 26 September 2013 at which time Sir Peter Luff and Neal Ransome were appointed to the Board. As from the 26 September 2013 Suzanne Chase continues as General Counsel and took over the role of Company Secretary from Alastair Woolley. The table on page 20 sets out the dates of tenure of the Directors on the Board during the year. The Directors’ biographies, which are set out on page 10, demonstrate a range of business backgrounds and experience appropriate to the Company. Executive Chairman The Executive 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. On the 1 October 2013 Philip Swinstead became Executive Chairman in order to closely direct the Group’s digital strategy utilising his significant experience and leadership qualities. In his executive role the Executive Chairman reports to 14 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY the Senior Independent Director, whilst remaining answerable to the Board at all times. Two independent Non-executive Directors were appointed in the year. During the year the Executive Chairman met the Non-Executive Directors without the Executive Directors present. Senior Independent Director Lord Freeman acts as the Senior Independent Director and his prime responsibility is to provide a sounding board for the Executive Chairman and to serve as an intermediary for the other Directors when necessary. He is also an additional contact point for shareholders if they have reason for concern, when contact through the normal channels of the Executive Chairman, Chief Executive Officer and other executive directors has failed to resolve their concerns, or where such contact is inappropriate. During the year the Senior Independent Director met the Non- Executive Directors without the Executive Chairman and the Executive Directors present. 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 1 and in the separate Notice of Annual General Meeting sent to all Shareholders. The Executive Chairman, and in the case of the Executive 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. New directors receive a comprehensive, formal and tailored induction to the Group’s operations including corporate governance, the legislative framework and visits to Group premises. Board meetings 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 15. 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 November 2013. 231526 PARITY.indd 14 231526 PARITY.indd 14 / / P f 22/04/2014 18:53 22/04/2014 18:53 All members of the Board are supplied in advance of meetings with appropriate information covering the matters which are to be considered. If unable to attend a meeting a Director will provide feedback to the Executive Chairman, the chair of the Committee or the Company Secretary and their comments are then communicated at the meeting. 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. During the reporting period the operational business was divided into two separate divisions, Parity Professionals and Parity Digital Solutions. The Board appointed a Chief Operating Officer for each division and established operational boards with formal terms of reference. Formal monthly business division reviews are held which are attended by the Executive Chairman, the Chief Executive Officer, Group Finance Director and Company Secretary/General Counsel together with the Chief Operating Officer of the relevant business division and members of their finance and operational teams. Any key issues arising from these reviews are reported to the Board. The Executive Directors ensure that informal contact is maintained with the Non-executive Directors who are invited to visit the Group’s premises and are encouraged to have an informal dialogue with the Chief Operating Officers. 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 Executive Chairman was reviewed by the Deputy Chairman. The outcome of the evaluation of the Board is reviewed by the Board as a whole and the results are used to assist the Board in developing its approach going forward. Board balance and independence The 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 on the Board, with their combination of diverse backgrounds and expertise, ensures that this principle is met. The Non-executive Directors ensure that independent judgement is brought to Board discussions and decisions. The Board are aware of the importance of attaining an improved gender balance. 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 and committee meetings During the year 10 scheduled Board meetings, and 8 ad hoc Board meetings were convened as necessary to deal with various matters. Details of attendance at Board meetings is summarised below. Committee attendance is shown for Committee members only. Board Audit Nominations Remuneration Number held Number attended1 Philip Swinstead Lord Freeman Paul Davies Alastair Woolley David Courtley Mike Phillips Suzanne Chase Stephen Whyte Peter Luff Neal Ransome 18 17 16 18 18 14 10 10 7 4 4 3 – 3 – – 3 2 – – 1 1 5 – 5 – – 5 3 – – 1 1 4 – 4 – – 4 2 – – 1 1 1 All Directors who were members of the Board at the time attended the Group’s Annual General Meeting on 30 May 2013 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 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 During the year the audit committee was chaired by Mike Phillips until 26 September 2013 and then by Neal Ransome, the current chairman. Details of Neal Ransome’s recent and relevant financial experience are set out in his biography on page 10. The audit committee meets three times a year. Lord Freeman, David Courtley and Sir Peter Luff 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, and considers 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; 15 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s l i 231526 PARITY.indd 15 231526 PARITY.indd 15 / / P f 22/04/2014 18:53 22/04/2014 18:53 Corporate Governance Report continued • 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. 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 2013, details of which are set out in note 3 to the accounts. Audit committee meetings are attended by invitation of the committee, by the external auditors and 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 18 to 22. Where necessary, specialist external consultants are used to assist the committee. Nominations committee The Nominations Committee comprises all of 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. During the year the committee considered the size, composition, skills, experience and independence of the Board having regard to the requirements of the business. The process for new Board appointments includes an initial search, preliminary interviews and discussions including with the chairman of the committee. Informal meetings are also held with the Non-executive Directors. Following this process recommendations are then made to the committee and the Board on merit against objective criteria. Where necessary, recruitment consultants are used to assist the process. 16 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 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 clear 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. Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements The directors are responsible for preparing the Annual Report and the 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. As required by the AIM Rules of the London Stock Exchange 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. 231526 PARITY.indd 16 231526 PARITY.indd 16 / / P f 22/04/2014 18:53 22/04/2014 18:53 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. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 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 Board does not currently 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 22 to the financial statements. Other risks and uncertainties are discussed in the Financial Review on page 10. Each of the persons who is a director as at the date of approval of this annual report confirms that: • so far as the director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and • the director has taken all the steps that he or she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Suzanne Chase Company Secretary 12 March 2014 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s l i 231526 PARITY.indd 17 231526 PARITY.indd 17 / / P f 22/04/2014 18:53 22/04/2014 18:53 17 Remuneration Report Remuneration committee The remuneration committee comprises Lord Freeman as Chairman, David Courtley and Peter Luff and Neal Ransome. Directors are excluded from discussions about their personal remuneration. 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 2013 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 2013 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 2013 the policy applied as a result of the annual 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. Performance bonus The terms of the incentive bonus for Executive Directors are agreed annually. For 2013 a target for the full year was set. No performance bonuses were earned by, or paid to, Executive Directors in 2013. 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 2013 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 had a performance criterion of growth in EPS exceeding RPI plus an average of 3% per annum. The year 2004 had been taken as the base year against which EPS growth is measured. All of these options lapsed during 2013. 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 greater than or equal to 35 pence for 20 consecutive days. The options will vest in 3 years and lapse in 10 years if not exercised. 18 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 18 231526 PARITY.indd 18 / / P f 22/04/2014 18:53 22/04/2014 18:53 purchased by the employee will be matched on a sliding scale up to a maximum of 1.5-to-1 for outstanding performance. None of the Directors have awards outstanding under the Co-investment Scheme. Share price The Parity Group plc mid market share price on 31 December 2013 was 29.25 pence. During the period 1 January to 31 December 2013 shares traded at market prices between 18.5 pence and 44 pence. 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. 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. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s l i 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 for 20 consecutive days. The options will vest in 3 years and lapse in 10 years if not exercised. On 8 March 2013 a further 300,000 share options were awarded under this scheme to Alastair Woolley. The exercise price of the options is 26.5 pence, and the options are subject to a performance condition being that the share price must be greater than or equal to 33.125 pence for 5 consecutive days. 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 2013, 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 2013. 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 231526 PARITY.indd 19 231526 PARITY.indd 19 / / P f 22/04/2014 18:53 22/04/2014 18:53 19 Remuneration Report continued Contractual arrangements for current Directors are summarised below: Director Philip Swinstead1 Lord Freeman2 Paul Davies1 Alastair Woolley David Courtley2 Peter Luff2 Neal Ransome2 Contract date Notice period Contractual termination payment 1 June 2010 1 July 2007 1 June 2010 1 April 2011 8 June 2011 26 September 2013 26 September 2013 n/a n/a 12 months 6 months n/a n/a n/a n/a n/a 12 months rolling 6 months rolling n/a n/a n/a 1 The Company is required to give 12 months notice of termination of the service agreement to the Executive Chairman and Chief Executive Officer who are required to give 6 months notice to the Company. 2 The appointment of Non-executive Directors is terminable at the will of the parties. 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. Directors’ remuneration (audited) The remuneration of the Directors who served during the year is set out below. Salary/ fees 2013 £’000 Benefi ts 2013 £’000 Compensation for loss of offi ce 2013 £’000 Total emoluments 2013 £’000 Company pension contributions8 2013 £’000 Share Based Payment 2013 £’000 Executive Directors P Swinstead1,2 P Davies A Woolley S Chase3 S Whyte4 Non-executive Directors Lord Freeman D Courtley M Phillips5 P Luff6 N Ransome7 Total emoluments 200 220 120 61 151 40 40 30 10 10 882 – 18 10 6 8 – – – – – – – – – 148 – – – – – 200 238 130 67 307 40 40 30 10 10 42 148 1,072 – 24 6 5 10 – – – – – 45 – – 29 5 – – – – – – 34 20 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 20 231526 PARITY.indd 20 / / P f 22/04/2014 18:53 22/04/2014 18:53 Directors’ remuneration (audited) continued Salary/ fees 2012 £’000 220 120 200 40 40 40 660 Benefi ts 2012 £’000 Compensation for loss of offi ce 2012 £’000 Total emoluments 2012 £’000 Company pension contributions8 2012 £’000 Share Based Payment 2012 £’000 18 10 – – – – 28 – – – – – – 238 130 200 40 40 40 688 174 6 – – – – 180 11 18 – – – – 29 Executive Directors P Davies8 A Woolley Non-executive Directors P Swinstead1,2 Lord Freeman D Courtley M Phillips5 Total emoluments Notes 1 P Swinstead was appointed Executive Chairman on 1 October 2013. Previously Mr Swinstead was Non-executive Chairman. 2 During 2013 and 2012 The Remuneration Committee elected to pay Mr Swinstead an additional fee of £150,000 per annum for discharging services as Non executive Chairman. 3 Appointed 1 February 2013 on a part time basis (3 days a week). Resigned as a Board director on 26 September 2013, but continued employment as the Group’s General Counsel and Company Secretary. 4 Engaged by the Group on 18 February 2013 and appointed to the Board on 7 March 2013. Mr Whyte resigned on 26 September 2013, and was appointed as an independent consultant to the Board for 6 months. 5 Mr Phillips stepped down on 26 September 2013. 6 Appointed 26 September 2013. 7 Appointed 26 September 2013. 8 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 in 2012, which was agreed by The Remuneration Committee. Executive Directors’ share options (audited) As at 31 January 2012 Lapsed/ Surrendered in the year Exercised in the year Awarded In the year As at 31 December 2013 Exercise period Exercise price per share Paul Davies Senior Executive share option plan 2010 Alastair Woolley Executive share option plan 2011 2012 2013 Sub-total Total 2,851,633 300,000 60,000 – 360,000 3,211,633 – – – – – – – – – – – – – 2,851,633 2011-2017 £0.10 – – 300,000 300,000 300,000 2014-2021 £0.28 60,000 2015-2022 £0.2625 300,000 2016-2023 £0.265 660,000 300,000 3,511,633 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 21 231526 PARITY.indd 21 / / P f 22/04/2014 18:53 22/04/2014 18:53 21 Remuneration Report continued 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 2012 (or date of appointment if later) % issued share capital (or date of resignation) % issued share capital Shareholding as at 31 December 2013 12,180,543 6,250 720,000 56 – 6,521,739 – – – 16.25 0.01 0.96 – – 8.70 – – – 13,186,470 6,250 1,275,556 56 – 6,521,739 – – 33,000 12.97 0.01 1.26 – – 6.42 – – 0.03 Philip Swinstead Lord Freeman Paul Davies Alastair Woolley Suzanne Chase David Courtley Mike Phillips Peter Luff Neal Ransome For and on behalf of the Board Lord Freeman Chairman of the remuneration committee 12 March 2014 22 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 22 231526 PARITY.indd 22 / / P f 22/04/2014 18:53 22/04/2014 18:53 Independent Auditor’s Report to the Members of Parity Group Plc We have audited the financial statements of Parity Group Plc for the year ended 31 December 2013 set out on pages 24 to 59. 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 16, 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 2013 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. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report, Directors’ Report for the financial year for which the financial statements are prepared 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 where the Companies Act 2006 requires us 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. Andrew Turner (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 8 Salisbury Square EC4Y 8BB London United Kingdom 12 March 2014 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 23 231526 PARITY.indd 23 / / P f 23/04/2014 13:39 23/04/2014 13:39 23 Consolidated Income Statement for the year ended 31 December 2013 Before non- recurring items 2013 £’000 Notes Non-recurring items 2013 (note 5) £’000 Total 2013 £’000 Before non- recurring items 2012 £’000 Non-recurring items 2012 (note 5) £’000 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 Tax (charge)/credit Loss for the year from continuing operations Discontinued operations Profit/(loss) for the year from Discontinued operations Loss for the year Attributable of owners of the parent Basic and diluted loss per share Total 2012 £’000 85,887 (8,258) (497) (77,832) (86,587) (700) 695 (1,061) (1,066) (349) 2 3 3 3 7 7 11 91,949 (8,163) (271) (82,453) (90,887) 1,062 655 (1,066) 651 (1,115) – (173) – 91,949 (8,336) (271) (1,427) (83,880) (92,487) (538) 655 (1,600) (1,600) – – (1,600) 372 85,887 (8,032) (497) (76,708) (85,237) 650 695 (1,066) (1,061) (949) (743) 284 (497) – (226) – (1,124) (1,350) (1,350) – – (1,350) 148 (464) (1,228) (1,692) (213) (1,202) (1,415) 8 (5) 46 41 45 (19) 26 (469) (1,182) (1,651) (168) (1,221) (1,389) 12 (1.88p) (2.00p) The notes on pages 29 to 59 form part of the financial statements. 24 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 24 231526 PARITY.indd 24 / / P f 22/04/2014 18:53 22/04/2014 18:53 Statements of Comprehensive Income for the year ended 31 December 2013 Loss for the year Other comprehensive income: Items that may be reclassifi ed to profi t or loss Exchange differences on translation of foreign operations Items that will never be reclassified to profit or loss Actuarial gain/(loss) on defined benefit pension scheme Deferred taxation on actuarial gains/(losses) 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 29 to 59 form part of the financial statements. Notes 24 16 Consolidated 2013 £’000 2012 £’000 (1,651) (1,389) (25) (25) 220 (23) 197 172 (64) (64) (1,554) 287 (1,267) (1,331) (1,479) (2,720) i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 25 231526 PARITY.indd 25 / / P f 22/04/2014 18:53 22/04/2014 18:53 25 Total £’000 3,878 (1,651) (25) 220 (23) 7,142 120 9,661 Total £’000 5,719 (1,389) Statements of Changes in Equity for the year ended 31 December 2013 Consolidated At 1 January 2013 Loss for the year Exchange differences on translation of foreign operations Actuarial gain on defined benefit pension scheme Deferred taxation on actuarial gain on pension scheme taken directly to equity Issue of new ordinary shares Share options – value of employee services Share capital £’000 1,437 – – – – 596 – Deferred shares £’000 14,319 Share premium reserve £’000 26,637 Other reserves £’000 44,160 – – – – – – – – – – 6,546 – – – – – – – Retained earnings £’000 (82,675) (1,651) (25) 220 (23) – 120 At 31 December 2013 2,033 14,319 33,183 44,160 (84,034) 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 – – – – 62 – – – – – – – Share premium reserve £’000 25,944 – – – – 693 – Other reserves £’000 44,160 – – – – – – Retained earnings £’000 (80,079) (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 Company At 1 January 2013 Loss for the year Issue of new ordinary shares Share options – value of employee services Share capital £’000 1,437 – 596 – Deferred shares £’000 14,319 – – – Share premium reserve £’000 26,637 – 6,546 – Other reserves £’000 22,729 – – – Retained earnings £’000 (47,758) (3,490) – 34 Total £’000 17,364 (3,490) 7,142 34 At 31 December 2013 2,033 14,319 33,183 22,729 (51,214) 21,050 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 18,986 (2,409) 755 32 At 31 December 2012 1,437 14,319 26,637 22,729 (47,758) 17,364 The notes on pages 29 to 59 form part of the financial statements. 26 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 26 231526 PARITY.indd 26 / / P f 22/04/2014 18:53 22/04/2014 18:53 Statements of Financial Position As at 31 December 2013 Company number 3539413 Assets Non-current assets Intangible assets and goodwill 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 18 30 16 17 18 19 20 21 19 20 21 24 25 23 23 23 Approved by the Directors and authorised for issue on 12 March 2014. The notes on pages 29 to 60 form part of the financial statements. Paul Davies Chief Executive Officer Alastair Woolley Finance Director Consolidated Company 2013 £’000 8,459 334 – – 552 9,345 19 16,360 7,376 23,755 33,100 2012 £’000 7,756 415 – – 1,318 9,489 20 13,044 2,871 15,935 25,424 2013 £’000 2012 £’000 – 2 93,008 20,527 – – – 69,763 20,527 – 113,537 90,290 – 3,481 37 3,518 – 2,619 2,362 4,981 117,055 95,271 (9,909) (10,387) (895) (8,283) (8,938) (308) (21,191) (17,529) – (5,238) (895) (6,133) – (2,491) (305) (2,796) (8) – – (500) (89,806) (74,656) – – (78) (2,170) (2,248) (462) (3,047) (4,017) (23,439) (21,546) 9,661 3,878 16,352 33,183 44,160 15,756 26,637 44,160 (84,034) (82,675) 9,661 3,878 (66) – (89,872) (96,005) 21,050 16,352 33,183 22,729 (51,214) 21,050 (455) – (75,111) (77,907) 17,364 15,756 26,637 22,729 (47,758) 17,364 27 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s l i 231526 PARITY.indd 27 231526 PARITY.indd 27 / / P f 22/04/2014 18:53 22/04/2014 18:53 Statements of Cash Flows for the year ended 31 December 2013 Cash flows from operating activities Loss for year Adjustments for: Finance income Finance expense Share-based payment expense Income tax expense/(credit) Amortisation of intangible assets Depreciation of property plant and equipment Impairment of intangible assets Working Capital Decrease in stocks and work in progress (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Increase/(decrease) in provisions Payments to retirement benefit plan Cash generated from operations Income taxes received Net cash flows from operating activities Investing activities Acquisitions (net of cash received) Purchase of intangible assets Purchase of property, plant and equipment Net cash used in investing activities Financing activities Issue of ordinary shares Proceeds from finance facility Net movements on intercompany funding Repayment of loans acquired through business combinations Interest paid Net cash from financing activities Net increase/(decrease) 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 29 to 59 form part of the financial statements. Consolidated Company Notes 2013 £’000 2012 £’000 2013 £’000 2012 £’000 (1,651) (1,389) (3,490) (2,409) 7 7 10 11 13 15 13 24 9 13 15 25 7 (655) 1,066 120 743 21 250 – (106) 1 (3,324) 1,454 203 (833) (2,605) 8 (695) 1,061 124 349 233 264 721 668 117 (229) (925) (1,178) (1,090) (2,637) – (738) 1,212 34 (658) – 1 – (394) 1,044 32 (641) – – – (3,639) (2,368) – (2,486) 2,217 201 – – 8,496 (9,651) (1,035) – (3,707) (4,558) – – (2,597) (2,637) (3,707) (4,558) (500) (724) (169) (1,138) (3) (113) (1,393) (1,254) 7,142 1,633 – (46) (234) 8,495 4,505 2,871 7,376 5 1,766 – – (250) 1,521 (2,370) 5,241 2,871 – – (4) (4) 7,142 – (5,522) – (234) 1,386 (2,325) 2,362 37 – – – – 5 – 2,057 – (249) 1,813 (2,745) 5,107 2,362 28 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 28 231526 PARITY.indd 28 / / P f 22/04/2014 18:53 22/04/2014 18:53 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 7 to 9 and in note 22 to the financial statements. Note 22 also includes the Group’s objectives for managing capital. As outlined in note 22, 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 2016. 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 2013. 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 £3,490,000 (2012: £ 2,409,000). 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 2013 adopted by the Group and published standards not yet effective No new standards, amendments to published standards or interpretations of existing standards effective in 2013 had a material impact on the Group’s 2013 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. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 29 231526 PARITY.indd 29 / / P f 22/04/2014 18:53 22/04/2014 18:53 29 Notes to the Accounts continued 1 Accounting policies continued 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. 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. 30 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 30 231526 PARITY.indd 30 / / P f 22/04/2014 18:53 22/04/2014 18:53 1 Accounting policies continued Taxation continued 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. 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. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 31 231526 PARITY.indd 31 / / P f 22/04/2014 18:53 22/04/2014 18:53 31 Notes to the Accounts continued 1 Accounting policies continued 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. 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. 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. 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. 32 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 32 231526 PARITY.indd 32 / / P f 22/04/2014 18:53 22/04/2014 18:53 1 Accounting policies continued Stocks and work in progress continued 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 premiums 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. 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. 33 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 33 231526 PARITY.indd 33 / / P f 22/04/2014 18:53 22/04/2014 18:53 Notes to the Accounts continued 1 Accounting policies continued 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 22, 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. 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. 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. 34 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 34 231526 PARITY.indd 34 / / P f 22/04/2014 18:53 22/04/2014 18:53 1 Accounting policies continued Significant accounting estimates and judgements continued 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 24. 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 differences 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). The deferred tax asset would not require writing down if the forecast future profitability of Parity Resources 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 Group Board), have been used as the basis to define reporting segments. During the reporting period each reporting segment was headed up by a dedicated C OO, 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 Group Board 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. Description of the types of services from which each reportable segment derives its revenues The Group has two segments: • • Parity Professionals – this segment provides IT recruitment services across all UK markets. It also provides graduate selection, training, placement and career development services. 91% (2012: 90%) of the continuing Group’s revenues. Parity Digital – this segment delivers unique 3D creative technology, and business intelligence solutions designed around client problems. Digital provides 9% (2012: 10%) of the continuing Group’s revenues. 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. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 35 231526 PARITY.indd 35 / / P f 22/04/2014 18:53 22/04/2014 18:53 35 Notes to the Accounts continued 2 Segmental information continued Revenue from external customers Attributable costs Segmental contribution Central costs Adjusted EBITDA Strategic initiative costs* Depreciation and amortisation Share based payment Other non-recurring items Finance income Finance costs Parity Professionals 2013 £’000 83,711 79,505 4,206 Parity Digital 2013 £’000 8,238 6,308 1,930 Before non- recurring items £’000 Non- recurring items £’000 91,949 85,813 6,136 (3,607) 2,529 (1,076) (271) (120) – 655 (1,066) – – – – – (695) – – (905) – – Profit/(loss) before tax (continuing activities) – – 651 (1,600) Revenue from external customers Attributable costs Segmental contribution Central costs Adjusted EBITDA Strategic initiative costs* Depreciation and amortisation Share based payment Other non-recurring items Finance income Finance costs Profit/(loss) before tax Parity Professionals 2012 £’000 77,491 72,817 4,674 Parity Digital 2012 £’000 8,396 6,850 1,546 – – Before non- recurring items £’000 Non- recurring items £’000 85,887 79,667 6,220 (4,825) 1,395 (124) (497) (124) – 695 (1,061) 284 – – – – – (840) – – (510) – – (1,350) Total 2013 £’000 91,949 85,813 6,136 (3,607) 2,529 (1,771) (271) (120) (905) 655 (1,066) (949) Total 2012 £’000 85,887 79,667 6,220 (4,825) 1,395 (964) (497) (124) (510) 695 (1,061) (1,066) * Strategic initiative costs refer to costs associated with reviewing potential acquisition targets and other costs incurred as a result of pursuing the digital strategy. The continuing Group operates exclusively in the UK. All revenues are generated and all segment assets are located in the UK. 55% (2012: 52%) or £45.8m (2012: £40.2m) of the Parity Professionals revenue was generated in the Public Sector. 32% (2012: 40%) or £2.7m (2012: £3.4m) of the Parity Digital revenue was generated in the Public Sector. The largest single customer in Parity Professionals contributed revenue of £12.5m or 15% and was in the private sector (2012: £11.7m or 15% and in the private sector). The largest single customer in Parity Digital contributed revenue of £2.7m or 33% and was in the private sector (2012: £2.7m or 33% and in the private sector). 36 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 36 231526 PARITY.indd 36 / / P f 22/04/2014 18:53 22/04/2014 18:53 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 Disclosures relating to the remuneration of Directors are set out on page 20. During the year the Group obtained the following services for the Group’s auditor, KPMG Audit plc: Audit of the Group’s fi nancial statements Other services: Audit related assurance services Interim review Tax compliance Other All other services have been performed in the United Kingdom. Other refers to services provided in relation to potential acquisition activity. Consolidated 2013 £’000 2012 £‘000 7,294 816 226 8,336 21 250 271 7,124 768 366 8,258 233 264 497 78,125 71,917 495 56 1,472 (522) 442 405 – 120 3,287 83,880 92,487 990 52 1,245 (452) 495 514 5 124 2,942 77,832 86,587 Consolidated i S t r a t e g c R e p o r t G o v e r n a n c e 2013 £’000 11 62 7 26 150 245 256 2012 £‘000 10 61 7 23 289 380 390 37 i F n a n c a s l i 231526 PARITY.indd 37 231526 PARITY.indd 37 / / P f 22/04/2014 18:53 22/04/2014 18:53 Notes to the Accounts continued 4 Reconciliation of operating loss to adjusted EBITDA Operating loss from continuing operations Strategic initiative costs Non-recurring items Share-based payment charges Depreciation and amortisation Adjusted EBITDA Note 2 5 3 3 2013 £’000 (538) 1,076 1,600 120 271 2,529 2012 £’000 (700) 124 1,350 124 497 1,395 The directors use EBITDA before strategic initiative costs, non-recurring items and share-based payment charges (‘Adjusted EBITDA’) as a key performance measure of the business. 5 Non-recurring items Continuing Operations Strategic initiative costs Restructuring – Employee benefi t costs – Other operating costs Property provisions (other operating costs) Discontinued Operations Property provisions 2013 £’000 695 173 – 732 1,600 (46) (46) 2012 £’000 840 226 735 (451) 1,350 19 19 The continuing operations non-recurring charge for 2013 includes strategic initiative costs, restructuring costs and a charge relating to surplus property. Strategic initiative costs refer to the professional services incurred in the Group’s acquisition programme. Restructuring costs refer mainly to the compensation payment for loss of office paid to Stephen Whyte who resigned from the Board on 26 September 2013. Of the charge for surplus properties, £471,000 relates to onerous lease costs in respect of additional unoccupied space at the Wimbledon head office, following the relocation of staff to offices in Chancery Lane and Shoreditch. The charge also includes a top up of £162,000 to the dilapidations provision for the Wimbledon office. The lease expires in September 2014. £60,671 of the property charge relates to onerous lease costs in respect of unoccupied floors of the Camberley office. The remainder of the property charge (£38,000) relates to onerous lease cost for empty properties, which were exited during 2013 and for which the lease had expired by the end of 2013. The discontinued operations non-recurring credit for 2013 relates to a payment received from the administrators of Parity Training Limited. The administration dividend related to a claim made by the Group in respect of costs it incurred under its obligation as guarantor on two Parity Training Limited properties, subsequent to the divestment of Parity Training Limited. The continuing operations non-recurring charge for 2012 included strategic initiative costs, restructuring costs and a credit relating to surplus property. Strategic initiative costs referred to the professional services incurred in the Group’s acquisition programme and included the costs relating to the acquisition of Inition Limited. Restructuring costs referred to the employee costs incurred in relation to the re-organisation of Parity Systems. Other operating costs referred 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. The credit for surplus properties related to the sublet of an unoccupied area of the Wimbledon head office, for which the lease costs had been previously provided for, and reflected the contracted sub-let income to the end of the sub-lease. The discontinued operations non-recurring charge for 2012 related to the costs payable for an ex-Parity Training Limited office, and the unwind of the provision discount in respect of discontinued properties. 38 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 38 231526 PARITY.indd 38 / / P f 22/04/2014 18:53 22/04/2014 18:53 6 Average staff numbers Continuing operations Professionals – United Kingdom1 Digital – United Kingdom, including corporate offi ce2 1 Includes 27 (2012: 29) employees providing shared services across the Group. 2 Includes 8 (2012: 7) employees of the Company. At 31 December 2013, the Group had 148 continuing employees (2012: 156). 7 Finance income and costs Finance income Finance income in respect of post-retirement benefi ts Finance costs Interest expense on fi nancial liabilities Finance costs in respect of post-retirement benefi ts 2013 Number 2012 Number 98 58 156 103 59 162 2013 £’000 655 655 234 832 1,066 2012 £’000 695 695 250 811 1,061 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 £78,000. 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. The post-tax result of discontinued operations was determined as follows: (Expenses)/income other than fi nance costs Non-recurring income/(expenses) (note 5) Pre-tax profi t Taxation Profi t for the year 2013 £’000 (5) 46 41 – 41 2012 £’000 45 (19) 26 – 26 For 2013 the pre-tax profit before non-recurring items relates to legacy overseas subsidiaries of the Group, and comprises company secretarial and accounting fees. 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. The Statement of Cash Flows includes a £32,000 cash inflow (2012: £274,000 cash outflow) from operating activities in respect of discontinued operations. 9 Acquisition of subsidiary On 29 May 2012, the Group acquired Inition Limited. During 2012 the initial cash consideration, less cash acquired, amounted to £1,138,000. The Sale and Purchase agreement included additional cash consideration subject to the ongoing performance o f Inition up to 31 March 2014 (an earn-out of £0.5 million was payable to the vendors if Inition made at least £0.3m profit before interest and tax in the year to 31 March 2013, and a further £0.5 million would become payable if Inition makes a profit before interest and tax of at least £0.5m in the year to 31 March 2014.) Inition met its first earn-out target and consequently £0.5 million was paid to the vendors during 2013. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s l i 231526 PARITY.indd 39 231526 PARITY.indd 39 / / P f 22/04/2014 18:53 22/04/2014 18:53 39 Notes to the Accounts continued 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 share price averages a target price for 20 consecutive days 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 £120,000 (2012: £124,000). 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 2013 Weighted average exercise price (p) 12 27 9 26 16 2013 Number 7,406,587 3,602,992 (737,500) (2,422,634) 7,849,445 2012 Weighted average exercise price (p) 12 22 9 24 12 2012 Number 6,368,668 1,542,329 (62,500) (441,910) 7,406,587 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 2013 Weighted average contractual life (years) 3 6 – Number 4,301,633 3,547,812 Exercise price (p) 7.5 – 10 19 – 28 – 165 – 209 7,849,445 2012 Weighted average contractual life (years) 5 6 1 Number 5,039,133 2,357,429 10,025 7,406,587 Of the total number of options outstanding at the end of the year, 4,301,633 (2012: 297,525) had vested and were exercisable at the end of the year. The weighted average exercise price of those options was 10 pence (2012: 15 pence). 737,500 (2012: 62,500) options were exercised during the year at an average exercise price of 9 pence (2012: 9 pence) The weighted average fair value of each option granted during the year was 13 pence (2012: 22 pence). 40 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 40 231526 PARITY.indd 40 / / P f 22/04/2014 18:53 22/04/2014 18:53 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 2013 Stochastic 2012 Stochastic 26 27 10 5 25 22 7 4 54 – 74% 57 – 70% 0.86% 0% 1.18% 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. 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 Write down of deferred tax asset Trading losses Adjustments in respect of prior periods Total tax expense Tax expense on continuing operations 2013 £’000 – – (25) (28) 157 65 545 – 29 743 743 2012 £’000 – – (33) 1 118 245 18 – 349 349 The 2013 Budget on 20 March 2013 announced that the UK corporation tax rate will reduce from 23% to 21% from 1 April 2014 and, further, reduce to 20% from 1 April 2015. These changes were substantively enacted on 2 July 2013. 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 2013 tax expense is after a tax credit of £372,000 (2012: £148,000) in respect of exceptional items. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 41 231526 PARITY.indd 41 / / P f 22/04/2014 18:53 22/04/2014 18:53 41 Notes to the Accounts continued 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 Loss before income tax Expected tax credit based on the standard rate of United Kingdom corporation tax of 23.25% (2012: 24.5%) (Income)/expenses not allowable for tax purposes Adjustment for under provision in prior years Reduction in deferred tax asset due to change in enacted rate Tax losses not recognised Write down of deferred tax asset Tax on each component of other comprehensive income is as follows: Exchange differences on translation of foreign operations Actuarial gain/(loss) on defi ned benefi t pension scheme Before tax £’000 2013 Tax £’000 After tax £’000 Before tax £’000 (25) 220 195 – (25) (64) (23) (23) 197 172 (1,554) (1,618) 2013 £’000 (1,651) 743 (908) (211) (20) 29 157 243 545 743 2012 Tax £’000 – 287 287 2012 £’000 (1,389) 349 (1,040) (256) 264 3 118 220 – 349 After tax £’000 (64) (1,267) (1,331) 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 2013 000’s Earnings 2013 £’000 Earnings per share 2013 Pence Weighted avergae number of shares 2012 000’s Earnings 2012 £’000 (1,651) 87,905 (1.88) (1,415) 70,578 – – – (1,651) 87,905 (1.88) (1,415) 70,578 Earnings per share 2012 Pence (2.00) – (2.00) As at 31 December 2013 the number of ordinary shares in issue was 101,624,020 (2012: 71,835,594). Basic and diluted earnings per share from discontinued operations was 0.05p (2012: basic and diluted loss per share 0.04p). 42 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 42 231526 PARITY.indd 42 / / P f 22/04/2014 18:53 22/04/2014 18:53 13 Intangible assets Cost At 1 January Additions Disposals At 31 December Accumulated amortisation At 1 January Charge for the year Disposals At 31 December Net book amount 2013 £’000 3 724 – 727 – 21 – 21 706 Software Goodwill Total 2012 £’000 1,555 3 (1,555) 2013 £’000 7,753 – – 3 7,753 602 233 (835) – 3 – – – – 2012 £’000 4,594 3,159 – 7,753 – – – – 2013 £’000 7,756 724 – 8,480 – 21 – 21 2012 £’000 6,149 3,162 (1,555) 7,756 602 233 (835) – 7,753 7,753 8,459 7,756 In 2012 the directors decided that the Group’s financial system was no longer appropriate for the Group’s needs. The impairment of the incumbent finance system was £720,000. As at 31 December 2013, the Group had implemented a new financial system and dedicated website for its Digital division at a cost of £160,000 and Inition has been developing intellectual property for its augmented reality product lines which amounts to an investment so far of £110,000. Projects were also in progress to implement a new financial system, a CRM system and to develop and launch a new sophisticated and dedicated website for its Professional division with costs to date of £408,000 being treated as intangible asset additions in 2013. At group level, a new HR system has also been implemented at a cost of £46,000. 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 2013 £’000 1,470 3,124 3,159 7,753 2012 £’000 1,470 3,124 3,159 7,753 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 2013. Years from 2015 onward are based on the budget for 2014 projected forward at expected growth rates. This is considered prudent based on current expectations of the 2014 long-term growth rate. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 43 231526 PARITY.indd 43 / / P f 22/04/2014 18:53 22/04/2014 18:53 43 Notes to the Accounts continued 14 Goodwill continued Major assumptions are as follows: 2013 Discount rate Forecast revenue growth Operating margin 2014 Operating margin 2015 onward 2012 Discount rate Forecast revenue growth Operating margin 2013 Operating margin 2014 onward Resources % Solutions % Digital Solutions % 11.9 8.3 2.5 2.9 7.7 9.2 2.8 3.2 6.8 1.5 4.2 7.1 6.1 17.7 4.7 5.1 8.9 21.9 4.3 9.3 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 Digital Solutions, 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 2013. 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 2012 Additions Acquisitions through business combinations Disposals Balance at 31 December 2012 Balance at 1 January 2013 Additions Disposals Balance at 31 December 2013 Accumulated depreciation Balance at 1 January 2012 Depreciation charge for the year Acquisitions through business combinations Disposals Balance at 31 December 2012 Balance at 1 January 2013 Depreciation charge for the year Disposals Balance at 31 December 2013 Net book value At 1 January 2012 At 31 December 2012 At 31 December 2013 44 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY Leasehold improvements £’000 Offi ce equipment £’000 Total £’000 1,147 2,845 3,992 17 – (234) 930 930 6 – 96 250 (41) 3,150 3,150 163 – 936 3,313 113 250 (275) 4,080 4,080 169 – 4,249 598 148 – (120) 626 626 142 – 768 549 304 168 2,801 3,399 116 143 (21) 3,039 3,039 108 – 3,147 44 111 166 264 143 (141) 3,665 3,665 250 – 3,915 593 415 334 231526 PARITY.indd 44 231526 PARITY.indd 44 / / P f 22/04/2014 18:53 22/04/2014 18:53 15 Property, plant and equipment continued Company At cost Balance at 1 January 2012 Balance at 31 December 2012 Balance at 1 January 2013 Additions Balance at 31 December 2013 Accumulated amortisation Balance at 1 January 2012 Balance at 31 December 2012 Balance at 1 January 2013 Depreciation charge for the year Balance at 31 December 2013 Net book value At 1 January 2012 At 31 December 2012 At 31 December 2013 Leasehold improvements £’000 Offi ce equipment £’000 Total £’000 – – – 1 1 – – – 1 1 – – – – – – 2 2 – – – – – – – 2 – – – 3 3 – – – 1 1 – – 2 As at 31 December 2013, neither the Group nor the Company had any capital commitments contracted for but not provided, for the purchase of tangible assets (2012: £nil). Leased plant and equipment As a result of the acquisition of Inition during 2012, 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 2013 the net carrying value of the leased equipment was £10,509 (2012: £18,842). 16 Deferred tax At 1 January Acquired in business combinations Depreciation in excess of capital allowances Trading Losses Recognised in other comprehensive income Actuarial gain/(loss) 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 Write down Trading Losses Other short term timing differences At 31 December Consolidated 2013 £’000 1,318 – – 2012 £’000 1,384 (22) 18 (23) 287 (157) (29) 25 (65) (545) – 28 552 (118) 1 33 (245) – (18) (2) 1,318 45 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 45 231526 PARITY.indd 45 / / P f 22/04/2014 18:53 22/04/2014 18:53 Notes to the Accounts continued 16 Deferred tax continued The deferred tax asset of £552,000 (2012: £1,318,000) comprises: Depreciation in excess of capital allowances Retirement benefi t liability Short term and other timing differences Consolidated 2013 £’000 457 – 95 552 2012 £’000 893 314 111 1,318 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 use d in this review were the same as those used in the review of the impairment of goodwill (see note 14). The forecasts for Resources comfortably support the unwinding of the deferred tax asset held by this business of £552,000 (2012: £602,000). However, as a result of the creation of the two divisions which involved the transfer of the Talent Management business from the Systems business unit to the Parity Professionals division, the Directors do not believe there are now sufficient taxable profits in the short to medium term to justify the recognition of the deferred tax asset associated with the System’s business (2012: £716,000). This has resulted in a write down of the tax asset by £545,000, after other movements, during the year. The 2013 Budget on 20 March 2013 announced that the UK corporation tax rate will reduce from 23% to 21% from 1 April 2014 and, further, reduce to 20% from 1 April 2015. These changes were substantively enacted on 2 July 2013. The deferred tax asset at 31 December 2013 has been calculated based on the rate of 20% 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: Depreciation in excess of capital allowances Other short-term timing differences Retirement benefi t plan liability Depreciation in excess of capital allowances Other short-term timing differences Retirement benefi t plan liability Trading Losses Asset 2013 £’000 457 95 – 552 Asset 2012 £’000 893 111 314 – 1,318 Acquired in business combinations 2013 £’000 – – – – (Charged)/ credited to (Charged)/ credited to other income comprehensive income 2013 statement 2013 £’000 (436) (16) (291) (743) £’000 – – (23) (23) Acquired in business combinations 2012 £’000 (Charged)/ credited to income statement 2012 £’000 (Charged)/ credited to other comprehensive income 2012 £’000 (22) – – 18 (4) (44) (11) (276) (18) (349) – – 287 – 287 The Group has unrecognised carried forward tax losses of £27,928,000 (2012: £23,649,000). The Company has unrecognised carried forward tax losses of £21,899,000 (2012: £17,216,000). The Group has unrecognised capital losses carried forward of £281,875,386 (2012: £281,875,386). These losses may be carried forward indefinitely. 46 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 46 231526 PARITY.indd 46 / / P f 22/04/2014 18:53 22/04/2014 18:53 17 Stocks and work in progress Stocks Consolidated 2013 £’000 19 19 2012 £’000 20 20 Stocks refers to 3D equipment purchased for resale, and are stated at the lower of cost and net realisable value. 18 Trade and other receivables Amounts falling due within one year: Trade receivables Accrued income Amounts recoverable on contracts Amounts owed by subsidiary undertakings Corporation tax due to be refunded Other receivables Prepayments Amounts falling due after one year: Amounts owed by subsidiary undertakings Total Consolidated 2013 £’000 8,939 5,575 1,262 – – 32 552 2012 £’000 7,626 4,351 510 – 8 57 492 Company 2013 £’000 2012 £’000 – – – – – – 3,479 2,613 – – 2 – – 6 16,360 13,044 3,481 2,619 – – 16,360 13,044 93,008 96,489 69,763 72,382 The fair values of trade and other receivables are not considered to differ from the values set out above. £8,173,000 (2012: £7,626,000) of the Group’s trade receivables, and £5,116,000 (2012 £4,176,000) 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 £9,904,000 (2012: £8,270,000). 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: i S t r a t e g c R e p o r t G o v e r n a n c e Opening balance (Decreases)/increases in provisions Written off against provisions Recovered amounts reversed Closing balance Consolidated 2013 £’000 33 48 (42) (6) 33 2012 £’000 87 (36) (18) – 33 All balances provided at 31 December 2013 and 31 December 2012 were greater than 60 days old. The allowance account represents full provision against specific gross debts. As at 31 December 2013 trade receivables of £1,146,000 (2012: £902,000) 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 7,793 548 385 246 8,972 Impaired £’000 – – – (33) (33) 2013 Total £’000 7,793 548 385 213 Gross £’000 6,724 605 211 119 8,939 7,659 Impaired £’000 – – – (33) (33) 2012 Total £’000 6,724 605 211 86 7,626 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. 47 i F n a n c a s l i 231526 PARITY.indd 47 231526 PARITY.indd 47 / / P f 22/04/2014 18:53 22/04/2014 18:53 Notes to the Accounts continued 19 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 finance lease liabilities Finance lease liabilities Less than one year Between one and two years Future minimum lease payments 2013 £’000 5 – 5 Present value of minimum lease payments 2013 £’000 5 – 5 Future minimum lease payments 2012 £’000 13 8 21 Interest 2013 £’000 – – – Further details of the Group’s banking facilities are given in note 22. 20 Trade and other payables Consolidated 2013 £’000 2012 £’000 – – 8 8 9,904 5 9,909 8,270 13 8,283 Present value of minimum lease payments 2012 £’000 12 8 20 Interest 2012 £’000 1 – 1 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 2013 £’000 312 6,767 – 1,260 2,048 10,387 2012 £’000 165 5,365 – 1,412 1,996 8,938 2013 £’000 – 126 4,961 26 125 5,238 2012 £’000 – – 2,209 23 259 2,491 – – – 500 89,806 74,656 – – 10,387 9,438 95,044 77,147 48 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 48 231526 PARITY.indd 48 / / P f 22/04/2014 18:53 22/04/2014 18:53 21 Provisions Consolidated At 1 January 2013 Created in year Utilised in year Unwind of discount At 31 December 2013 Due within one year or less Due after more than one year Total Company At 1 January 2013 Created in year Utilised in year Unwind of discount At 31 December 2013 Due within one year or less Due after more than one year Total Leasehold dilapidations Onerous leases £’000 141 186 – – 327 317 10 327 133 185 – – 318 317 1 318 £’000 629 528 (516) 5 646 578 68 646 627 528 (517) 5 643 578 65 643 Total £’000 770 714 (516) 5 973 895 78 973 760 713 (517) 5 961 895 66 961 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. The total non-current amount provided of £68,000 is expected to fall within 2015. i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 49 231526 PARITY.indd 49 / / P f 22/04/2014 18:53 22/04/2014 18:53 49 Notes to the Accounts continued 22 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, 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 2013 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 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 Amortised cost £’000 Loans and receivables £’000 – – – 7,376 15,808 23,184 9,904 5 10,074 19,983 – – – – – – – 2,871 12,544 15,415 8,270 21 8,773 17,064 – – – – Total £’000 7,376 15,808 23,184 9,904 5 10,074 19,983 2,871 12,544 15,415 8,270 21 8,773 17,064 50 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 50 231526 PARITY.indd 50 / / P f 22/04/2014 18:53 22/04/2014 18:53 22 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 2013 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 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 Amortised cost £’000 Loans and receivables £’000 Total £’000 – – – – 5,125 89,806 94,931 93,008 93,008 37 3,479 96,524 – – – 37 3,479 96,524 5,125 89,806 94,931 – – – – 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 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 53% (2012: 54%) of the Group’s turnover is derived from the public sector. The largest customer balance represents 14% (2012: 20%) 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 18. Financial assets Cash and cash equivalents Trade and other receivables Total fi nancial assets 2013 Carrying value £’000 7,376 15,808 23,184 Maximum exposure £’000 7,376 15,808 23,184 2012 Carrying value £’000 2,871 12,544 15,415 Maximum exposure £’000 2,871 12,544 15,415 51 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 51 231526 PARITY.indd 51 / / P f 22/04/2014 18:53 22/04/2014 18:53 Notes to the Accounts continued 22 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 2013 and 2012 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 £78,000 higher/lower and net assets £78,000 higher/lower. 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 2013 or 2012. The currency profile of the Group’s net financial assets was as follows: Functional currency of individual entity Net foreign currency fi nancial assets 2013 £’000 Sterling Sterling Euro US Dollar Total net exposure – 31 3 34 2012 £’000 – 1 23 24 Euro 2013 £’000 2012 £’000 24,545 23,931 – 1,231 25,776 – 1,225 25,156 US Dollar 2012 £’000 966 – – 966 Total 2013 £’000 2012 £’000 25,511 24,897 31 1,234 26,776 1 1,248 26,146 2013 £’000 966 – – 966 The profile of the Company’s net financial assets was as follows: Net foreign currency fi nancial assets Sterling Euro US Dollar Total net exposure Functional currency: Sterling 2012 2013 £’000 £’000 – 31 3 34 – – 23 23 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. 52 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 52 231526 PARITY.indd 52 / / P f 22/04/2014 18:53 22/04/2014 18:53 22 Financial instruments – risk management continued Foreign exchange risk continued The following table sets out the contractual maturities (representing undiscounted contractual cash flows) of financial liabilities: Consolidated At 31 December 2013 Trade and other payables Borrowings Total Consolidated At 31 December 2012 Trade and other payables Borrowings Total Company At 31 December 2013 Trade and other payables Borrowings Total Company At 31 December 2012 Trade and other payables Borrowings Total Up to 1 month £’000 9,887 9,904 19,791 Up to 1 month £’000 8,938 8,270 17,208 Between 1 and 12 months £’000 Over 1 month £’000 500 5 505 Over 1 month £’000 500 21 521 Over 1 year £’000 Total £’000 10,387 9,909 20,296 Total £’000 9,438 8,291 17,729 Total £’000 – – – 89,806 95,044 – – 89,806 95,044 Between 1 and 12 months £’000 Over 1 year £’000 Total £’000 – – – 74,656 77,147 – – 74,656 77,147 i S t r a t e g c R e p o r t G o v e r n a n c e Up to 1 month £’000 5,238 – 5,238 Up to 1 month £’000 2,491 – 2,491 More detail on trade and other payables is given in note 20. 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 £5,000 and is repayable within one year. 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 15 January 2013 the Group issued 3,125,000 New Ordinary Shares at 20 pence per share. The issue price represented a discount of 7.0% to the closing middle market price on the 9 January 2013. Net proceeds from this issue amounted to £576,199. The proceeds have been used by management to fund the first earn-out in relation to the acquisition of Inition, and other transaction costs. On 27 May 2013 the Group announced its proposal to delist to AIM and, at the same time, proposed a Placing of 25,925,926 New Ordinary Shares at a price of 27 pence per share, representing a discount of 23.4% to the closing share price on 16 May 2013. The Placing was completed on 5 July 2013. The net proceeds of £6,502,140 will be used by the Group to initiate its acquisition strategy in the digital media market. 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. i F n a n c a s i l 231526 PARITY.indd 53 231526 PARITY.indd 53 / / P f 22/04/2014 18:53 22/04/2014 18:53 53 Notes to the Accounts continued 22 Financial instruments – risk management continued Capital disclosures continued Cash and cash equivalents Asset-based borrowings Net Debt 2013 £’000 7,376 (9,904) (2,528) 2012 £’000 2,871 (8,270) (5,399) 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. 23 Reserves The Board is not proposing a dividend for the year (2012: 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. During 2013, the Group issued a total of 29,050,926 New Ordinary Shares. Following the issue of the shares, and also the exercising of 737,500 share options, the share capital increased from £15,755,829 to £16,351,588. 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 exercised during 2013, the share premium increased from £26,637,869 to £33,183,314. 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 (2012: £351,000). 24 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 £226,000 (2012: £216,000). 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. Principal actuarial assumptions Rate of increase of pensions in payment Discount rate Retail price infl ation Consumer price infl ation 2013 % 3.7% – 4.0% 4.5% 3.4% 2.4% 2012 % 3.6% 4.3% 3.0% 2.2% Note: the rate of increase in pensionable salaries is no longer applicable as the scheme is closed for future service. 54 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 54 231526 PARITY.indd 54 / / P f 22/04/2014 18:53 22/04/2014 18:53 24 Pension commitments continued Restated comparatives In accordance with the revised IAS19, the assumption for future investment returns is the same discount rate (4.5%) used in calculating the pension liabilities. The restated 2012 amounts have also been calculated on this basis. The scheme’s assets are invested in equities, gilts and bonds in approximately equal proportions. The underlying mortality assumption used for 2013 is in accordance with the standard table known as S1PA_H or S1PA_L mortality, dependent on the size of each member’s pension, using the CMI_2011 projection based on year of birth with a long term rate of improvement of 1.25% p.a. The 2012 assumption is based upon 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. 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. From 1 August 2013, contributions were reduced to £680,000 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 the beginning of the year Expected return Contributions by Group Benefi ts paid Expenses met by scheme Actuarial (loss)/gain At the end of the year Composition of plan assets Equities Gilts Bonds Options in Parity Group plc Cash Total Reconciliation of plan liabilities At the beginning of the year Interest cost Benefi ts paid Actuarial (gain)/loss At the end of the year 2013 £’000 17,421 (19,591) (2,170) 2013 £’000 16,620 713 833 (653) (58) (34) 2012 £’000 16,620 (19,667) (3,047) 2012 £’000 15,206 695 1,090 (833) 462 2012 Restated £’000 15,206 716 1,090 (833) – 441 17,421 16,620 16,620 2013 £’000 6,385 5,389 5,494 96 57 17,421 2013 £’000 19,667 832 (653) (255) 19,591 2012 £’000 5,938 5,168 5,287 96 131 16,620 2012 £’000 17,673 811 (833) 2,016 19,667 55 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s i l 231526 PARITY.indd 55 231526 PARITY.indd 55 / / P f 22/04/2014 18:53 22/04/2014 18:53 Notes to the Accounts continued 24 Pension commitments continued Reconciliation of plan liabilities continued The actuarial gain for the year of £255,000 (2012: loss of £2,016,000) in respect of plan liabilities is mainly as a result of the change in the mortality assumption in the period, which has decreased the value of the scheme liabilities. The cumulative amount of actuarial losses recognised since 1 January 2002 in other comprehensive income is £6,169,000 (2012: £6,389,000). 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) 2013 £’000 655 832 2012 Restated £’000 716 811 2012 £’000 695 811 The actual return on plan assets was £679,000 (2012: £1,157,000). This represents the sum of the expected return on assets and the actuarial gain. Defined benefit obligation trends Plan assets Plan liabilities Deficit Experience adjustments on assets Experience adjustments on liabilities 25 Share capital Authorised share capital Authorised at 1 January Authorised at 31 December Issued share capital 2013 £’000 17,421 (19,591) (2,170) (34) (0.2%) (255) (1.3%) 2012 Restated £’000 16,620 (19,667) (3,047) 441 2.7% 2,016 11.4% 2012 £’000 16,620 (19,667) (3,047) 462 2.9% 2,016 11.4% 2011 £’000 15,206 (17,673) (2,467) 755 5.2% 674 4.0% 2010 £’000 14,550 (16,975) (2,425) 529 3.7% 321 1.9% Ordinary shares 2p each Deferred shares of 0.04p each 2013 number 409,044,603 409,044,603 2013 £’000 8,181 8,181 2013 number 35,797,769,808 35,797,769,808 2013 £’000 14,319 14,319 Ordinary shares 2p each Deferred shares of 0.04p each 2009 £’000 13,261 (16,587) (3,326) 206 1.6% (169) (1.0%) Total 2013 £’000 22,500 22,500 Total 2013 £000 Issued and fully paid at 1 January New Issue (fully paid) Share options exercised 2013 number 71,835,594 29,050,926 737,500 2013 £000 2013 number 2013 £000 1,437 35,797,769,808 14,319 15,756 581 15 – – – – 581 15 Issued and fully paid at 31 December 101,624,020 2,033 35,797,769,808 14,319 16,352 On 15 January 2013 the Group issued 3,125,000 New Ordinary Shares at 20 pence per share. Net proceeds from this issue amounted to £576,199. On 5 July 2013 the Group completed a Placing of 25,925,926 New Ordinary Shares at a price of 27 pence per share, generating net proceeds of £6,502,140. 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. 56 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 2013 Number 43,143 2012 Number 43,143 231526 PARITY.indd 56 231526 PARITY.indd 56 / / P f 22/04/2014 18:53 22/04/2014 18:53 26 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 Operating leases – lessor Land and buildings 2013 £’000 Plant and machinery 2013 £’000 Land and buildings 2012 £’000 Plant and machinery 2012 £’000 1,098 474 1,572 40 19 59 1,248 1,062 2,310 51 71 122 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 27 Contingencies Land and buildings 2013 £’000 Land and buildings 2012 £’000 339 146 485 522 484 1,006 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. 28 Key management remuneration Key management comprises the Board of Directors. The total remuneration received by key management for 2013 was £1,151,000 (2012: £896,000). 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. i S t r a t e g c R e p o r t G o v e r n a n c e Salary and fees Other short term benefi ts Post employments benefi ts Compensation for loss of offi ce Share-based payments 2013 £’000 882 42 45 148 34 1,151 2012 £’000 660 28 180 – 28 896 57 i F n a n c a s i l 231526 PARITY.indd 57 231526 PARITY.indd 57 / / P f 22/04/2014 18:53 22/04/2014 18:53 Notes to the Accounts continued 29 Related party transactions Consolidated During the period the Group transacted with one entity over which one of the Group’s directors had control or significant influence, as follows: Director D. Courtley Transaction IT interim recruitment Transaction value Balance outstanding 2013 £’000 152 2012 £’000 – 2013 £’000 37 2012 £’000 – The Group provided IT contractors to Mozaic Services Limited, a company that is significantly influenced by Mr D Courtley. Amounts were billed at normal market rates for such services, and were due and payable under standard client payment terms. Company Details of the Company’s holding in Group undertakings are given in note 30. The Company entered into transactions with other Group undertakings as shown in the table below. Operating costs 2013 £’000 Amounts incurred from Group subsidiaries (721) Amounts charged to Group subsidiaries – Finance income 2013 £’000 – 738 Finance expense 2013 £’000 (978) – Operating costs 2012 £’000 (719) – Finance income 2012 £’000 – 394 Finance expense 2012 £’000 (795) – 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 18) Falling due after one year (note 18) Amounts due to subsidiary undertakings Falling due within one year (note 20) Falling due after one year (note 20) During the year, other related party transactions were as follows: Related party relationship Type of transaction Directors Purchase of Group shares 2013 £’000 2012 £’000 3,479 93,008 2,613 69,763 (4,961) (2,209) (89,806) (74,656) Transaction Amount 2013 £’000 Transaction Amount 2012 £’000 10 – 58 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 58 231526 PARITY.indd 58 / / P f 22/04/2014 18:53 22/04/2014 18:53 30 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 subsidiaries was reviewed for impairment at the yearend based on the performance of 2013 and on subsequent years forecast projections. 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 (2012: £20,527,000). The assessment was performed on a value in use basis using discount rates of between 6.8% and 11.9% (2012: between 6.1% and 7.7%) 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 i S t r a t e g c R e p o r t G o v e r n a n c e i F n a n c a s l i 231526 PARITY.indd 59 231526 PARITY.indd 59 / / P f 22/04/2014 18:53 22/04/2014 18:53 59 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 Auditor 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 Nominated advisors & brokers Investec 2 Gresham Street London EC2V 7QP 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 60 Parity Group plc Report and Accounts 2013 www.parity.net stock code: PTY 231526 PARITY.indd 60 231526 PARITY.indd 60 / / P f 22/04/2014 18:53 22/04/2014 18:53 PARITY GROUP PLC 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 231526 Parity Group plc Report and Accounts Year ended 31 December 2013 231526 PARITY COVER.indd 1 231526 PARITY COVER.indd 1 22/04/2014 18:52 22/04/2014 18:52 

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