Safestyle UK PLC The leading UK focused retailer and manufacturer of PVCu replacement windows and doors for the homeowner market Annual Report and Accounts 2014 One million orders and counting In November 2014, Safestyle received its millionth customer order since trading began in 1992. “The firm itself has been very good, they’ve let us know everything that’s been going on. It’s lovely, really lovely and it’s been a wonderful day for us.” Mr and Mrs Batchelor with Safestyle fitter Grant Thompson Mrs. Batchelor from Haywards Heath ordered a front and back door to smarten up her house and improve her security. She was a bit surprised when we told her that she had placed our millionth order and Safestyle would be delighted to do the whole job completely free of charge. It took a little time to convince her that she had didn't have to pay a penny but when the good news sank in she was “over the moon”. Contents Strategic Report 2 3 5 6 8 9 10 11 12 13 15 17 Highlights The group at a glance Chairman’s statement CEO statement Our strategy Strategy in action Manufacturing excellence Product development Growth potential in the South and South East Regulation Financial review Principal risks and uncertainties Working responsibly Governance Financial Statements 18 20 22 28 Board of Directors Directors report Remuneration report Independent auditors report 29 30 31 32 33 Consolidated income statement Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the financial statements 1 Safestyle UK PLC Annual Report and Accounts 2014 2014 highlights Financial highlights Revenue Underlying* EBITDA** £136.0m +9% 2014 £124.8m 2013 £17.8m £16.1m +11% 2014 2013 Underlying* PBT Adjusted* EPS (p) £16.8m £15.3m +10% 2014 2013 16.5p 14.8p +11% 2014 2013 * Excludes costs relating to share-based payments, admission fees and historic tax settlement. Final reported figures shown on page 29 ** EBITDA reflects operating profit before depreciation and amortisation. Operational highlights Average installed order value Average frame price £2,806 +4% 2014 £2,704 2013 £504 £496 +2% 2014 2013 Frames installed Orders installed 267,642 +7% 2014 57,682 +5% 2014 250,185 2013 55,112 2013 2 Safestyle UK PLC Annual Report and Accounts 2014 The Group at a glance We aim to be recognised as the UK number one replacement window and door company Established in 1992 in Bradford, West Yorkshire 100% focused on the UK homeowner replacement market Number one in England and Wales since 2012* 8.48% market share All windows and doors made to order in Wombwell, Barnsley 32 sales branches and 11 installation depots located throughout the UK 32 11 01 sales branches installation depots fully integrated manufacturing facility 3 Safestyle UK PLC Annual Report and Accounts 2014 *FENSA annual registration data for England and Wales Eco Diamond Window 4 Safestyle UK PLC Annual Report and Accounts 2014 Chairman’s statement Steve Halbert I am pleased to report the Group's full year results for the year ended 31 December 2014. Summary of Financial Performance The Group has delivered record revenue, market share and operating profit. Revenue for the year increased 9% to £136.0m (2013: £124.8m), delivering profit before tax of £16.4m, up 73% (2013: £9.5m). Underlying profit before tax was £16.8m (2013: £15.3m), an increase of 10% on 2013 and underlying EBITDA was £17.8m, up 11% (2013: £16.1m) after adjusting for listing costs, share based payments and pre-IPO tax settlement costs. Adjusted earnings per share increased 11% to 16.5p (2013: 14.8p). The business continues to be highly cash generative, with 2014 cash conversion (the ratio of net cash inflow from operating activities before taxation to underlying EBITDA) at 88%, compared with 82% for 2013 (after adjusting for the repayment of loans made to directors in the period before the Group's IPO which amounted to £1.8m). As a consequence, our balance sheet remains strong and the business had £8.5m net cash at 31 December 2014, compared with £5.2m at 31 December 2013, having paid dividends of £6.7m in the second half of 2014. The Group has delivered record revenue, market share and operating profit. Revenue for the year increased 9% to £136.0m Market Share Whilst FENSA data reported a 3.1% contraction in the overall market in 2014, the Company has continued to gain market share increasing from 7.85% as at 31 December 2013 to 8.48% as at 31 December 2014. The FENSA data for 2014 showed mixed market dynamics, with the first half up 4.3% by volume (Safestyle installation volumes were up 4.8%), but the second half down by a marked 10.0% (Safestyle up 4.7%). We are pleased with our market share gain and continue to drive towards our medium term target of 10%. We ended the year with our order book up 3% by value compared with 2013. Final Dividend The Board recommends, subject to approval at the Annual General Meeting to be held on 21 May 2015, a final dividend of 6.2p per share payable to ordinary shareholders registered on 19 June 2015. Together with our interim dividend already paid of 3.1p per share, this takes total proposed distributions up to 9.3p per share representing 56% of earnings per share of 16.5p. Looking ahead The majority of general macro-economic indicators are favourable which we believe will result in increased demand in the RMI market from which the replacement windows and doors market should benefit. Since the year end I am pleased to report that incoming orders have been encouraging and the Board looks forward to further progress in 2015 driven by our compelling customer proposition, continuing growth in market share and further geographic penetration. Finally, I would like to thank our many stakeholders, and our employees in particular, for their continued support and their contribution to our success. RS Halbert Chairman 26 March 2015 5 Safestyle UK PLC Annual Report and Accounts 2014 CEO statement Steve Birmingham I am pleased to report that Safestyle UK enjoyed a successful first full year as a public company and I would like to formally express my thanks to all our people for their dedicated hard work and loyalty. Business Review In 2014, the Group increased its market share for the tenth consecutive year to 8.48% (from 7.85% in 2013) maintaining its sector leading position. During the period we carried out a record 57,682 installations (up 4.7% on 2013) consisting of 267,642 window and door frames (up 7.0% on 2013). Our average frame sales price excluding VAT increased by 1.6% to £504 and total average installed order value increased from £2,704 to £2,806. This strong operational performance enabled the Group to deliver increased revenue, up 9% to £136.0m, and profit before tax up 73% from £9.5m in 2013 to £16.4m in 2014. Underlying profit before tax of £16.8m increased by 10% from £15.3m in 2013 after adjusting for listing costs, share based payments and pre-IPO tax settlement costs. In 2014, the Group increased its market share for the tenth consecutive year to 8.48% (from 7.85% in 2013) maintaining its sector leading position. Our focus on continued expansion into the South and South East delivered sales growth of 17.0% in the region. We believe there is further scope for Safestyle UK to continue to gain market share across the South of England given the fragmented market, our attractive pricing proposition compared to our competitors, and an increasing awareness of our brand in the region. We opened two new sales branches during the year in Sittingbourne and Avon, both of which are performing well, and since the year end, we have opened a new branch in Watford. A further sales branch opening is planned for later this year in Surrey. During 2014 we opened a new installation depot in Crawley to cater for our growing footprint in the region. A further installation depot is planned for the Watford area during 2015. The Group has continued to grow its digital and internet presence and leads generated from direct response channels now account for 31% of all business. Whilst door canvassing will remain an important source of lead generation, we believe our increased focus on direct digital marketing will enable us to continue to gain market share and reduce average lead generation costs. During the year we invested significantly in our Wombwell manufacturing facilities in Yorkshire. In particular we upgraded the glass furnace, installed a new sash line and added a new machining and cutting centre. We have already seen improvements in efficiency and quality as a result of this investment. We will retain the flexibility to further invest in our manufacturing site to respond to our growth requirements and will keep the structure and capacity of our site under review to ensure we can meet our medium and long term plans. After a long period of selling price stability we took the decision to increase our prices from 1 January 2015 to reflect some supply side cost inflation, in particular glass prices; more stringent regulation and health & safety standards; and higher TV advertising costs. Despite this price increase the order intake in the first 11 weeks of the current financial year has been strong and we remain significantly cheaper than our national rivals and are committed to our market leading price and value proposition. Regulation Reflecting our market leading position, the Group has continued to work closely with the relevant industry bodies throughout the introduction of new regulation in 2014. We welcome any new legislation that will bring further professionalism to the industry and improve standards, better protect customers and drive out unscrupulous operators. On 1 April 2014 the Financial Conduct Authority (“FCA”) became the regulatory body for organisations offering consumer credit. A stated aim of the FCA is to ensure that businesses put consumer protection and treating customers fairly ahead of profits. Unlike many of our competitors, we do not offer commission or incentives to our sales personnel based on selling finance to our customers and already have the systems and standards in place to ensure we comply with the FCA's legislation. 6 Safestyle UK PLC Annual Report and Accounts 2014 CEO statement Continued... In June 2014, the industry introduced a competent person scheme requiring verification of minimum technical competence and the provision of mandatory insurance backed guarantees. Once again, we already adhere to these requirements and believe we are ideally positioned to benefit from any fall out at the smaller end of the market resulting from this increased regulation. Product Development Whilst our core market and strength remains the manufacture and installation of replacement windows and doors, the Group has been conducting a feasibility study into the launch of a new product offering focused on the conservatory market. We have been very encouraged by the initial feedback and as a result will begin the roll out of the new service across an initial eight sales branches in April 2015. The service will focus on conservatory refurbishment where we will replace the roofs and frames of poorly performing conservatories onto existing bases. The roofs will be sourced as complete units from the leading UK conservatory roof manufacturer and the frames will be produced in our own manufacturing facility. During the period we carried out a record 57,682 installations (up 4.7% on 2013) There are currently around four million conservatories in the UK, many of which were installed in the 1980s and 1990s. We estimate that the refurbishment market totals approximately 20,000 conservatories a year with further growth expected driven by new glass and insulation technology that has vastly improved the energy efficiency of a traditional conservatory. The refurbishment market is highly fragmented with few national players and little brand awareness. The Board believes that by utilising existing levels of customer demand and Safestyle UK's strong brand, combined with our current installation infrastructure and manufacturing capabilities, the Group can, over time, secure a similar percentage share of the total conservatory refurbishment market to that which it enjoys in the retail replacement market. Outlook Turning to the future, we will continue our drive to grow our market share whilst building our geographic penetration. We are seeing material benefits from the significant investment we have made in new manufacturing equipment and we are excited about the prospects of our entry into the conservatory refurbishment market. Moreover, our robust cash generation and strong financial position enables the Group to retain the flexibility to balance shareholder returns with the ability to take advantage of our leading position within a fragmented market should the opportunity arise. We believe that consumers will continue to invest in home improvement, and our A-rated energy efficient products make both financial and aesthetic sense for the homeowner. The Group delivered record results in 2014 and it is our intention to continue our successful journey in 2015. Early signs from the first two months of 2015 are encouraging and we have started the year in line with our expectations. SJ Birmingham Chief Executive Officer 26 March 2015 7 Safestyle UK PLC Annual Report and Accounts 2014 Our strategy In our first annual report we identified six key strategies Strategy Progress in 2014 Next steps Keep things simple and focussed by specialising in replacement windows and doors for the UK homeowner market. Consolidated our Number One market position. Increased market share to 8.48% (7.85%: 2013). Strengthen our product offerings with a wider range of composite doors and window options. Perform a phased roll out for conservatory upgrades. 01 Exploit the upturn in demand in the market. Against a slower than expected market we grew revenue by 9%. We commanded an improved average price per frame of £504 (£496: 2013) Monitor market conditions and respond quickly with marketing and pricing strategies to gain maximum returns. Introduce new, more flexible consumer finance options for customers. 02 Grow Safestyle UK brand appeal optimising the contribution from internet and TV channels. Digital and broadcast marketing now makes up 31% of orders (28%: 2013). Independent brand review and customer research in Feb 2015. Brand developments throughout 2015 starting with a refreshed web presence in Q1 2015. 03 Expand in South and South East, potential for above average selling price. South and South East made up 44% of sales in 2014 (41%: 2013). Average selling price in these regions was 8% higher than our national average. Two new sales branches and one new installation depot planned for H1 2015. Further geo-targeting via digital channels underway. 04 Operate with industry leading effectiveness. £1.8m capital investment has helped push output up by 6% from 767 to 816 frames per manufacturing employee. Execute 5 year asset replacement plan to drive further productivity and quality improvements. 05 Focus on Quality. Safestyle customer satisfaction measures ahead of competition and still rising. Our recommendation score is 80% versus 26% and 20% for our two major national competitors (Source: independent review website reviewcentre.co.uk - Feb 2015) Improved training and operating standards as part of minimum technical competency (MTC). Upgraded field service software and processes to improve aftersales experience. 06 8 Safestyle UK PLC Annual Report and Accounts 2014 Strategy in action - manufacturing excellence Over £1.8m was invested in 2014 The Group runs a five year rolling asset replacement plan to support the long term growth of the business and to improve productivity and quality. As part of this plan over £1.3m was invested in quarter four of 2014 in three key areas. A new state of the art high speed window sash line was introduced to bolster capacity. Alongside this our existing windows sash line was fully upgraded. This highly important area has benefited from a total investment of £0.6m and has already significantly improved capacity, flexibility and quality. Phase two of the glass tempering furnace upgrade was completed with an investment of £0.1m. This will reduce waste, improve outputs and ensure improved reliability of this key asset. A new profile machining centre was introduced to feed the new sash line to boost flexibility and quality whilst reducing labour and energy costs. Capacity was also improved by relocating the old machine as a contingency backup. The total project cost was £0.6m. In addition Safestyle continues to deploy its 'Lean Six Sigma' Continuous Improvement program to give real quantifiable business improvement. We have over eighty Yellow, Green and Black belts on site working together to drive incremental improvement and we continue to look at benchmarking with industry partners and suppliers to identify and adopt best practice. Longer term growth can be supported by a signification expansion of the site on adjacent land owned by the Group. This could be achieved without major disruption to current operations. 9 Safestyle UK PLC Annual Report and Accounts 2014 DEFINE CONTROL MEASURE IMPROVE ANALYZE LEAN SIX SIGMA Strategy in action - product development Launch of Conservatory upgrades There are currently around four million conservatories in the UK – many of which were installed in the 1980s and 1990s. Most conservatories built a number of years ago have limited heating and insulation often making them too cold in winter and too hot in summer. New glass and insulation technology has radically improved thermal efficiency, potentially transforming a conservatory into an everyday room and a very attractive addition to the home. Alongside this, conservatory styles and configurations have expanded to orangeries and solid or partly solid roofed options. We estimate the new UK conservatory market to be worth circa £600m per annum. We believe that the upgrade and refurbishment market totals around 20,000 conservatories and is expected to grow. Supply is highly fragmented with few national players, generally low brand awareness and a host of smaller companies making up the majority of the market. It is Safestyle's belief that a focussed range of conservatory upgrade options will make an appealing customer proposition. By restricting to refurbishment only – i.e. not taking on fresh builds or extensions requiring groundwork or planning – Safestyle already has many of the key capabilities in manufacture and installation to operate efficiently. By utilising existing levels of customer demand together with Safestyle's strong brand the Group can look to compete strongly in this growing market. Following a very encouraging feasibility study, Safestyle will launch the new service in eight of its thirty two sales branches in April 2015. 10 Safestyle UK PLC Annual Report and Accounts 2014 Strategy in action - growth potential in the South and South East Pin-pointing growth areas Safestyle's customer base has been analysed across a number of geo- demographic factors to find out exactly which types of individuals and which property types have the most sales potential. This is mapped and compared to current results and the local sales branch structure. Example of a Safestyle sales planning map – showing areas of high potential (green) surrounding our new Watford branch compared to areas in red surrounding our established Luton branch where we are already performing strongly. Luton Sales Branch Luton Sales Branch Key findings from the latest mapping reasearch Significant growth prospects in the South and South East. Targeted branch openings would be beneficial in the South and South East where brand awareness is lower and our penetration of sales branches is less developed. Opportunities for further growth across many regions outside of the South with most sales branches finding extra unexploited areas. In 2014 sales in the South and South East grew at 17% – further underlining the findings of the Group's research. Sales branch opening programme The Group's strategy of opening sales branches initially as satellites to established, successful branches, has meant that Safestyle benefits from a relatively low cost of establishment, high levels of initial support and the ability to develop and motivate its high performing teams alongside recruiting fresh new talent. Our new Sittingbourne branch was opened at the start of 2014 - initially as a satellite branch from our Maidstone location. Sittingbourne grew quickly and the combination of both branches has yielded an extra £2.7m of sales in the first year - an uplift of 27%. Our Avon sales branch was opened in October 2014 – again as a satellite branch from our Bristol location. Initial results have been encouraging and we expect to generate significant incremental sales within a short space of time. Watford was our latest opening in Feb 2015 and we currently plan to add a further location in the South West of London. 11 Safestyle UK PLC Annual Report and Accounts 2014 Strategy in action - regulation Welcomed legislation The Group welcomes any new legislation that will bring further professionalism to the industry and improve standards, better protect customers and drive out unscrupulous operators. Reflecting our market leading position, the Group has continued to work closely with the relevant industry bodies such as the Glass and Glazing Federation (“GGF”) and FENSA throughout the introduction of new regulation in 2014. Customer protection and treating customers fairly On 1st April 2014 the Financial Conduct Authority (“FCA”) became the regulatory body for organisations offering consumer credit. A stated aim of the FCA is to ensure that businesses put consumer protection and treating customers fairly ahead of profits. Unlike many of our competitors, we do not offer commission or incentives to any of our sales personnel based on selling finance to our customers. Furthermore we do not offer our potential customers additional discounts to take up high interest commission earning products. During the year we have employed two dedicated FCA compliance officers whose sole responsibility is to work with our sales force to ensure best practice in dealing with our potential customers in accordance with the FCA guidelines. High standards of installation and aftercare In June 2014, the industry introduced a competent person scheme requiring verification of minimum technical competence (“MTC”) and the provision of insurance backed ten year guarantees. The impact of MTC regulation means that every individual installer and surveyor must demonstrate that they satisfy MTC to be allowed to continue to work through any of the glazing Competent Persons Schemes such as FENSA. As part of an ongoing drive for the high quality installation and as a response to the changing regulation Safestyle developed an installation and surveying training programme during 2013. Our bespoke training package covers all areas of MTC and carries a nationally accredited NVQ certification in Fenestration Installation Level Two for installers or Fenestration Surveying Level Three for surveyors. The programme is now rolled out and part of business as usual bringing benefits of improved installation and surveying practices. We are pleased to confirm MTC compliance was achieved ahead of the June 2014 deadline. Installation companies who have less structure or resources to organise their MTC compliance may find the new regulations to be burdensome. This could potentially lead to some installation companies leaving the market or risk providing non compliant installations. The Group is ideally placed to take advantage of any market consolidation. 12 Safestyle UK PLC Annual Report and Accounts 2014 Financial review Mike Robinson Results and comparison with previous year Year ended 31 December 2014 £m Year ended 31 December 2013 £m % change Revenue Gross profit Gross margin % Underlying EBITDA* Underlying PBT* Adjusted EPS** 136.0 49.7 36.5% 17.8 16.8 16.5p 124.8 45.2 36.2% 16.1 15.3 14.8p 9% 10% 1% 11% 10% 11% * Excludes costs relating to share-based payments, admission fees and historic tax settlement. Final reported figures can be found on page 29. ** Adjusted for the effect of admission costs and historical tax settlement. 10.9% growth in leads generated from direct response channels Revenue Revenue for the year was £136.0 million, an increase of 9.0% over 2013. The key factors underpinning this growth were: 10.9% growth in leads generated from direct response channels 2.4% improvement in conversion from order to installation 7.0% growth in the volume of frames installed from 250,185 to 267,642 1.6% growth in average unit price from £496 to £504 3.8% growth in average order value from £2,704 to £2,806 Gross margin Gross profit increased by 10% in the year to £49.7 million (2013: £45.2 million), with gross margin higher at 36.5% (2013: 36.2%). The gross margin improvement was driven by a slightly higher average sales price, reflecting the higher growth of sales in the South, and a continued increase in the proportion of direct response leads. Margins in the second half of the year were impacted by the cost of providing compulsory Insurance Backed Guarantees to all our customers and by the imposition of a 20% increase on our glass purchases. Other operating expenses Other operating expenses for 2014 were £33.3 million (2013: £35.8 million), a reduction of 7.0%. The 2013 expenses included items totalling £5.5 million which were the costs of the IPO and the settlement of a historic tax planning scheme relating to National Insurance and PAYE. After adjusting for these one-off costs operating expenses increased from £30.2 million to £33.3 million, an increase of 10%. Salary costs increased slightly ahead of revenues reflecting increased costs resulting from the annual pay award and auto-enrolment. Marketing costs were £1.2 million higher than 2013, an increase of 15%. This was driven by inflation in TV advertising rates and an increased investment in digital marketing which resulted in a 10.9% increase in leads and a 14% increase in digital business. 13 Safestyle UK PLC Annual Report and Accounts 2014 Financial review Continued... EBITDA and PBT Underlying EBITDA was £17.8 million for the year (2013: £16.1 million), an increase of £1.7 million (after adjusting for listing costs, share based payments and pre-IPO tax settlement costs). Reported PBT was £6.9 million higher at £16.4 million, but after adjusting for share- based payments, listing costs and historic tax settlement costs was 10% higher than last year at £16.8 million. The earnings per share are 16.5p, up from 8.3p in 2013. However, after adjusting for admission fees and tax settlement, the earnings per share are up 11% from 14.8p in 2013. The basis for these calculations is detailed in note 8. Cash Strong operating cash flow allowed the Group to increase its cash balance from £5.3 million at 31 December 2013 to £8.5 million as at 31 December 2014 whilst paying £6.7 million in dividends in the year. Dividends The Board is recommending a final dividend of 6.2 pence per share subject to approval by shareholders at the AGM. The dividend will be paid on 13 July 2015 to shareholders on the register at close of business on 19 June 2015. MJ Robinson Chief Financial Officer 26 March 2015 Gross profit increased by 10% in the year to £49.7 million 14 Safestyle UK PLC Annual Report and Accounts 2014 Principal risks and uncertainties The Group's risk management processes The following sets out the Group's risk management processes and the principal risks and uncertainties that the board consider to be material and that may have a significant impact on the Group's financial performance. The Board has ultimate responsibility for setting the Group's risk appetite and for effective management of risk. An annual assessment of key risks is performed by senior management and presented to the Board. A risk register is maintained and regularly reviewed by the senior management team. All risks are scored by taking into consideration the likelihood of the event occurring and the impact of that event. Once the risks have been assessed appropriate mitigation actions are determined for each key risk identified. Summarised below are the key risks that have been identified and that could have a material impact on the Group's performance. Risk Description Mitigation Regulatory The Group operates in a heavily regulated sector, including consumer protection and consumer credit regulations. Should the Group be found liable for breaches of these regulations or any others the business could face severe financial or existential consequences. The Group has programmes of appropriate training to ensure legal compliance and minimise mistakes. This is backed up with comprehensive record keeping and audit trails. The Group also ensures that the process is quality checked by head office with each customer. Reputation with customer base As a retail brand, the Company's future success will be significantly affected by its reputation with its customer base. Should the Company's reputation suffer, fairly or otherwise, future performance could be significantly impaired. The Group operates a rigorous customer complaints process in order to identify issues early and put corrective actions in place. The Group is accredited to ISO 10002 Customer Satisfaction and Complaints Handling. Market and competition The Group operates in a competitive market which is very exposed to the UK's economic performance and general consumer confidence. The Group has historically taken market share in tough market conditions and is well placed to compete effectively against the competition. IT and data security The Group is very dependent on its IT systems and infrastructure to ensure effective operations and customer service. A major disruption to the system would impact performance significantly. The Group's operations are subject to a number of laws relating to data privacy, including the United Kingdom's Data Protection Act 1998. Breach of data privacy legislation by the Group or any third party that processes data on the Group's behalf could result in the Group being subjected to administrative proceedings initiated against it by the data protection regulator. The Group maintains tight access controls over its data and IT systems and has regular reviews to agree priorities and plans. Particular focus is given to the plans and infrastructure required to ensure adequate disaster recovery processes and procedures are in place. 15 Safestyle UK PLC Annual Report and Accounts 2014 Principal risks and uncertainties Continued... Risk Description Mitigation Reliance on key suppliers Reliance on key equipment Dependance on key personal Self-employed individuals Health and safety The Group relies upon certain key suppliers which, if relationships with such suppliers are not maintained, could in the short term disrupt the Group's business, in particular in respect of the suppliers of PVCu to the manufacturing plant. Although alternative suppliers are readily available to provide the supplies required by the Group, any disruption to supply or transition between suppliers may adversely impact the Group's performance. The Group maintains strong working relationships with key suppliers through regular review meetings. In addition robust contractual arrangements are maintained and supplier performance is monitored against agreed standards. In the event of significant disruption to supply alternative suppliers have been identified and a documented disaster recovery process is in place to minimise the impact on performance. The Group relies upon certain key manufacturing equipment. Although most of the manufacturing equipment has back-up capacity there are some machines that have no in-house back-up. In the event of significant downtime on these machines there is a risk of short term disruption and increased costs. The Group has an experienced maintenance team onsite and operates a preventative maintenance programme on all key equipment. For the machines identified the Group has sourced suppliers capable of manufacturing the required products and has a documented disaster recovery process in place to minimise the impact on performance. The Group has a relatively small management team and the loss of any key individual or the inability to attract appropriate personnel could impact on its ability to execute its business strategy successfully and provide quality services to its customers, which could negatively impact upon the Group's future performance. The Group maintains competitive and attractive employment terms and conditions, fully empowering key individuals and allowing them to maximize their job satisfaction. The Group incentivises key management through performance related pay in the short term and through share options for medium and long term retention.. The Group uses the services of a large number of self-employed individuals for marketing, sales, surveying and installation purposes. These individuals are engaged on standard form agreements stating that they act as self-employed commercial agents. Depending on the degree of reliance which these individuals have on the Group and the time spent working for the Group there is a risk of potential claims for employee or worker status, resulting in additional cost for the Group. The Group undertakes on-going reviews of the terms on which self-employed individuals are engaged and historically this has not been an issue for the Group. The Group ensures that all self- employed individuals are registered for income tax purposes and an increasing proportion is now VAT registered. The Group's operations take place in a diverse range of operating environments. These operations require ongoing management of health and safety risks in order to ensure a safe working environment for our employees and others we engage with. A failure to manage these risks may give rise to significant potential liabilities. The group maintains detailed health and safety procedures and processes which are managed by a team of dedicated health and safety professionals. The team support and advise operational management and run a programme of site reviews and audits. Health and safety performance is reviewed regularly by the board. 16 Safestyle UK PLC Annual Report and Accounts 2014 Working responsibly Apprenticeships Our manufacturing apprentice scheme has been running since 2010. It is part of our commitment to providing opportunities for young people and has been a real success story with regular intakes and numbers increasing year-on-year. In the first two months of 2015 we have recruited 9 apprentices to our updated programme that now offers a 3 and 4 year Apprenticeship with NVQ Level II and III. We've also launched a new Adult Apprenticeship Programme aimed at more experienced individuals. Learning, development and training The Group recognises that a highly motivated and well trained workforce is the key to our success. Safestyle's manufacturing facility fully subscribes to Lean Six Sigma training and now has 40 green belts, 40 yellow belts and 1 black belt across our workforce. As part of performance improvement teams they have delivered significant savings and are continually looking for opportunities for further improvement. We encourage and support our staff whilst studying for NVQ Level II and III Leadership, Business Administration and Customer Service programmes and qualifications. Respecting the environment The Group manufacturing site operates an Environmental Management System which assesses activities for their impact on the environment. Our rolling manufacturing five year plan supports energy efficient technology with a dedicated Energy Team to encourage cultural changes in the workforce regarding energy saving opportunities and detailed analysis of usage across the site. Our environmental purchasing policy incorporates supplier assessments to ensure environmental responsibility: Consider goods and services which can be manufactured, used and disposed of in an environmentally responsible way Give preference, where items are of a similar cost, to those that are manufactured with a high recycled content Specify items that can be recycled or reused Consider the energy usage/cost of operating equipment prior to purchase Favour suppliers that are committed to environmental improvement Consider 'whole life' costs and impacts when assessing equipment for purchase. Our manufacturing facility and each of our eleven installation depots have recycling centres dedicated to processing waste as efficiently as possible. Recycling improvements in 2014 have lead to a further reduction in waste – 93% of all waste is now recycled with just 7% going to landfill. Community We are committed to playing a part in helping our communities. The Group is proud to be a leading supporter and donor for Bluebell Wood Children's Hospice. Bluebell Wood offers care and support to children with a shortened life expectancy both in their homes and at their hospice based in North Anston, Sheffield. The charity was chosen by our workforce and is near our manufacturing facility. Our teams have enjoyed a wide variety of fundraising activities including a group entry in a local Tough Mudder event. In addition to our local community charity we are proud to support employee’s initiatives raising money for large national charities with matched funding. 17 Safestyle UK PLC Annual Report and Accounts 2014 Safestyle's Tough Mudder charity challenge- before and after! Board of directors Robert Stephen Halbert BA, FCA, Non-Executive Chairman, aged 57 Steve became Chairman of Safestyle UK on the Company's AIM IPO in December 2013. As Chairman, Steve is responsible for the proper and timely operation of the Board and its committees, for compliance with the company's code of corporate governance and, working closely with the CEO, for ensuring the business establishes and regularly reviews strategy. Steve is Chairman of the Audit Committee and the Nominations Committee. He is also Chairman of AIM quoted NAHL Group plc. Stephen John Birmingham FCA, Chief Executive Officer, aged 56 Steve joined Safestyle UK in 1999 as Group Operations Director, becoming Managing Director in 2007 and subsequently Chief Executive Officer on the company's IPO. Steve takes overall responsibility for the business' day to day operations and oversees implementation of the Group’s long and short term plans in accordance with its strategy. Steve has over 30 years experience of the replacement window industry in senior management positions. Michael John Robinson FCMA, Chief Financial Officer, aged 53 Mike joined Safestyle UK in 2008 and has over 30 years experience in operational finance roles in a range of manufacturing and distribution businesses. As CFO Mike is responsible for the financial control, planning and reporting for the Group. He also has responsibility for the Group’s IT function. Mike has 20 years board level experience mainly within privately owned SMEs. He also spent 13 years with RR Donnelley, a Fortune 500 company, where he held a succession of finance and commercial roles including 3 years as UK Finance Director. Christopher John Davies, BA (Oxon) Non-Executive Director, aged 61 Chris joined the Safestyle UK Board in December 2013. In addition to the customary duties and responsibilities of a Non-Executive Director, he is Chairman of the Remuneration Committee. A former FTSE 250 CEO at SIG plc, Chris has extensive Board, commercial and operational experience from his successful executive career in the construction, manufacturing and support services sectors. 18 Safestyle UK PLC Annual Report and Accounts 2014 Senior management Kiz Misra, Sales Director, aged 50 Kiz is responsible for all areas of sales and marketing. He joined Safestyle UK when the business was established in 1993 and worked his way up to become Sales Director in 1999. Along with day to day responsibility for sales he leads the expansion of Safestyle UK’s sales branch network. David Clarke, Operations Director, Pre Installations, aged 52 Dave became Operations Director in 2009 and is responsible for pre installations operations and transport. He joined Safestyle UK in 2004 and has over 20 years experience in senior logistics, sales and operational roles. Mark Scaife, Operations Director, Manufacturing, aged 46 Mark leads all areas of manufacturing with full day to day responsibility for the manufacturing site and its strategic development. He joined Safestyle UK as Operations Director in 2008 with a background of senior manufacturing roles. He is a Lean Six Sigma practitioner and program deployment champion. Phil O’Malley, Operations Director, Installations, aged 42 Phil was appointed Operations Director in 2009 having joined Safestyle UK’s installation management team in 2001. He has responsibility for all aspects of installation including surveys, our installation network and teams, quality control and after-sales care. Phil has 20 years experience in the building and installation industry. 19 Safestyle UK PLC Annual Report and Accounts 2014 Directors report for the year ended 31 December 2014 The Directors present their annual report and audited financial statements of the Group for the year ended 31 December 2014 Registered office The registered office of Safestyle UK plc is 47 Esplanade, St Helier, Jersey, JE1 0BD. Principal activities Safestyle UK plc is an AIM quoted company. The Group's principal activities are the sale, manufacture and installation of replacement PVCu windows and doors for the UK homeowner market. Business review The Chairman's statement, the Chief Executive's statement and the Financial review on pages 5 to 14 report on the Group's performance during the year and future developments. Strategic Report As explained in the Directors' Responsibilities below these financial statements are prepared in accordance with Companies (Jersey) Law 1991. There is no concept of a Strategic Report included in this legislation which is equivalent to the Companies Act 2006 requirements. In order to follow best practice the Directors have included all information that would have been required to comply with the Companies Act 2006 Strategic Report requirements. This information can be found on pages 2 to 17. Dividends The directors propose a final dividend of 6.2p per share. Governance As an AIM quoted company, Safestyle UK plc is not required to comply with the provisions of the 2012 Combined Code on Corporate Governance. However, the Board recognises the importance and value of good corporate governance and accordingly has selected those elements that it considers relevant and appropriate to the Group. An overview of the Group's corporate governance procedures is given below. The Board The Group is controlled through a Board of Directors which at 31 December 2014 comprised a non-executive chairman, two executive directors and a non- executive director. Both the non-executive chairman and the non-executive director are considered to be independent and bring a wide range of experience and provide a strong balance to the executive directors. The Board meets at least 9 times a year and is responsible, amongst other things, for business strategy, approval of interim and annual financial results, approval of annual budgets, approval of major capital expenditure and the framework of internal controls. Audit Committee The Chairman of the Audit Committee is Steve Halbert with Chris Davies as the other non-executive member. The Committee will have primary responsibility for monitoring the quality of internal controls, ensuring that the financial performance of the Company is properly measured and reported on and reviewing reports from the Company's auditors relating to the Company's accounting and internal controls, in all cases having due regard to the interests of Shareholders. The Audit Committee will meet at least twice a year. Remuneration Committee The Chairman of the Remuneration Committee is Chris Davies with Steve Halbert as the other non-executive member. The Committee reviews the performance of the executive directors and determines their terms and conditions of service, including their remuneration and the grant of options. The Remuneration Committee meets at least once a year. Nomination Committee The Chairman of the Nomination Committee is Steve Halbert with Chris Davies as the other non-executive member. The Committee will identify and nominate for the approval of the Board candidates to fill board vacancies as and when they arise. The Nomination Committee meets at least once a year. Shareholder communication The Board is committed to maintaining good communication with both institutional and private investors. Dialogue with fund managers, institutional investors and analysts to discuss performance and future prospects is actively pursued. The Annual General Meeting provides an opportunity for shareholders to address questions to the Chairman and the Board directly. Risk management and internal controls The Board has overall responsibility for the Group's system of internal controls and for reviewing the effectiveness of this system. It should be recognised that such a system is designed to manage rather than eliminate the risk of failure to achieve the business objectives and can only provide reasonable, and not absolute, assurances against material misstatement or loss. 20 Safestyle UK PLC Annual Report and Accounts 2014 Directors report for the year ended 31 December 2014 Continued... Directors' indemnities and insurance Safestyle UK plc indemnifies its officers and officers of its subsidiary companies against liabilities arising from the conduct of the Group's business, to the extent permitted by law, by the placing of directors' and officers' insurance. The insurance policy indemnifies individual directors' and officers' personal legal liability and cost for claims arising out of actions taken in connection with Group business. Directors' responsibilities The directors are responsible for preparing the financial statements in accordance with applicable law and IFRSs as adopted by the EU. Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that year. In preparing those 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 will continue in business. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group's website. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Substantial shareholdings As at 5 March 2015 the Company has been advised of the following interests in more than 3% of its ordinary share capital. Name Miton Group plc River & Mercantile Asset Management Investec Asset Management Hargreave Hale Premier Fund Managers Limited AXA Framlington Steve Birmingham Majedie Asset Management Henderson Global Investors Standard Life Investments Ruffer LLP Close Brothers Asset Management Kiz Misra Number 7,758,356 7,525,531 5,806,451 5,638,670 5,098,365 4,353,000 3,888,889 3,658,000 3,260,000 3,161,887 2,703,555 2,442,838 2,418,889 % 9.98% 9.68% 7.47% 7.25% 6.56% 5.60% 5.00% 4.70% 4.19% 4.07% 3.48% 3.14% 3.11% Going concern As highlighted in the financial review the Group is very cash generative with cash at 31 December 2014 of £8.5 million. The directors have prepared a cash flow forecast covering a period extending beyond 12 months from the date of these financial statements. After taking account of anticipated overhead costs and revenue, the directors are confident that sufficient funds are in place to support the going concern status of the Group. Auditors The Board has decided to put forward a resolution to reappoint KPMG LLP as auditors at the forthcoming AGM of the Company. Statement of disclosure of information to auditors As at the date this report was signed, so far as each of the Directors is aware, there is no relevant information of which the auditor is unaware and each Director has taken all steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the auditor is aware of that information. Approved by the Board of Directors and signed on behalf of the Board on 26th March 2015 Mike Robinson Company secretary 21 Safestyle UK PLC Annual Report and Accounts 2014 Safestyle UK plc - annual report on remuneration Directors Remuneration Report 2014 Statement from the Chairman of the Remuneration Committee I am pleased to present the Directors' report on remuneration. The Board of Safestyle is committed to a responsible and transparent approach in respect of executive pay. Due to the success of the Company since our initial public offering (“IPO”), the projected future size of the business and feedback from shareholders, the Remuneration Committee (“the Committee”) has decided to conform to best practice for a large AIM listed Company by presenting a clear report on remuneration. It should be noted that the Directors’ Remuneration Report does not include everything which would be required should this Report be a mandatory requirement. This report is presented in two sections: the Directors' Remuneration Policy and the Annual Report on Remuneration. The Directors' Remuneration Policy sets out the forward-looking remuneration policy. The Annual Report on Remuneration provides details of the amounts earned in respect of the year ended 31 December 2014 and how the Directors' Remuneration Policy will be operated for the year commencing 1 January 2015. Both the Annual Report on Remuneration and the Remuneration Policy are subject to an advisory vote at the 2015 Annual General Meeting. The Committee believes the advisory vote will provide a greater degree of accountability and give shareholders a say on this important area of corporate governance. The Committee will continue to monitor remuneration policy to ensure it: remains aligned to the business strategy and delivery of shareholder value; supports our goal to develop a best-in-class team, our remuneration policy is designed to attract and retain high-calibre individuals in a competitive market and to remunerate executives fairly and responsibly; encourages behaviours which facilitate the delivery of sustainable growth and the future development of the business, allowing us to meet our business goal of delivering value to all our stakeholders: the performance metrics for our bonus plan aim to balance earnings growth (via our EBITDA targets) and strategic personal objectives (including delivery against key performance metrics in the 2015 plan, achievement of key project milestones, maintaining a balanced orderbook, our Executive Share Option Plan (“ESOP”) captures long term growth in earnings and only delivers value to the participant where there is an increase in share price. Review of the 2014 financial year As described in the Strategic Report, the Company continues to perform strongly, delivering profitable earnings growth and strong progress against the Company's key strategic priorities. The 2014 annual cash incentive scheme for Executive Directors and the Senior Managers was based exclusively on EBITDA achievement. The actual EBITDA outturn for the year of £17.4m resulting in a payout to the Executive Directors of 76% of the potential maximum on offer. Our Executive Directors and senior management team continue to hold substantial value in market value share options under the Executive Share Option Plan (“ESOP”) which were awarded at the time of our IPO. The Company believes that the ongoing success of the Company depends to a high degree on retaining and incentivising the performance of key personnel. To this end, the Company adopted the ESOP and SAYE plan, to align interests of senior management, and the wider workforce, with those of the shareholders. Since the Executive Directors already hold a considerable number of shares under option, no further share awards were made in 2014. Outlook for the 2015 financial year During 2014 the Committee commissioned Deloitte LLP to undertake a review of remuneration at Safestyle and propose changes to the remuneration structure. Based on this review, the Committee recognised that the arrangements put in place ahead of our IPO in December 2013 required further development in order to support the wider business strategy. Given the culture and history of the Company and that remuneration across sales and general management is heavily performance driven, the Committee has decided to introduce from January 2015 new variable pay arrangements for the Executive Directors and Senior Managers as detailed in the Policy section of this report. The Company consulted with major shareholders as part of the review process and had good support for our proposals. As an overview, the key changes to Executive Director remuneration at the Company in 2015 will be: The Executive Directors were awarded a 2% increase to base salary in 2015, in line with the wider workforce. However, the CEO declined his base salary increase, demonstrating his commitment to the Company as it heads in to a key period in its development. Updating the annual cash incentive structure. These awards are subject to delivery against stretching EBITDA targets as well as a range of strategic and personal objectives (a balanced scorecard approach). Introduction of a new Executive Share Option Plan (ESOP) in order to make annual share awards to the Executive Directors and other selected individuals. The awards will be in the form of market value share options. Private Medical Insurance will now be offered to all Executive Directors and Senior Managers as the Committee considers this to be a cost effective way of maintaining a competitive benefits package. Chris Davies, Chairman of the Remuneration Committee, 26th March 2015 22 Safestyle UK PLC Annual Report and Accounts 2014 Directors' Remuneration Report This part of the report sets out the Company's Directors' Remuneration Policy. The Policy is determined by the Committee. Operation Maximum opportunity Mitigation Salaries are usually reviewed annually. Executive Directors Component Purpose and link to strategy Base salary Fixed remuneration to provide a competitive base salary for the market in which the Company operates to attract and retain Executives of a suitable calibre. n/a No overall maximum has been set under the policy. However, salaries are determined taking into consideration a range of factors, which may include: Underlying Company performance Role, experience and individual performance Competitive salary levels and market forces Pay and conditions elsewhere in the Company Set at a level which the Committee deems appropriate. n/a The Committee may award a maximum employer pension contribution of up to 12% of base salary. In 2015, Executive Directors will receive an employer pension contribution of 8% of base salary. n/a Maximum bonus opportunity is 100% of annual base salary. Executive Directors may receive an award under the ESOP in respect of any year over shares worth up to a maximum of 100% of base salary. In exceptional circumstances such as recruitment, a maximum award of up to 200% of salary may apply. Targets are set annually reflecting the Company's strategy and aligned with key financial, strategic and/or individual targets. Stretching targets are required for maximum pay-out. At least 50% of vesting will be subject to achievement of financial objectives. This will generally include a profitability measure. The balance will be based on the delivery of key strategic corporate and personal objectives. In 2015, 70% of annual cash bonus potential will be related to EBITDA targets and 30% to strategic and personal objectives. Relevant performance measures are set that reflect underlying business performance. Performance measures and their weighting where there is more than one measure are reviewed annually to maintain appropriateness and relevance. For awards granted in 2015, the vesting of awards will be subject to stretching Earnings per Share (EPS) targets. Benefits To provide a market competitive benefits package as part of total remuneration. Executive Directors receive benefits in line with market practice. These include life insurance; private medical insurance Retirement benefits Annual bonus To provide an appropriate level of retirement benefit (or cash allowance equivalent). To incentivise Executive Directors to deliver against short and medium term objectives of the Company. Long Term Incentive Plan (“LTIP”) To drive and reward the achievement of longer- term objectives, support retention and promote share ownership for Executive Directors. (including family cover); company car or car allowance; private fuel; and, SAYE. Other benefits may be provided based on individual circumstances. Executive Directors are eligible to participate in the Group defined contribution pension plan or an approved personal pension. Awards are based on annual performance. Pay-out levels are determined by the Committee after the year end based on performance against targets. The Committee has discretion to amend the pay-out should any formulaic output not reflect the Committee's assessment of overall business performance. Annual bonus awards may be subject to malus provisions at the discretion of the Committee. Long-term incentive awards will be granted under an Executive Share Option Plan (“ESOP”). Under the ESOP, awards of share options may be granted with an exercise price equal to the market value of the shares at the date of grant. The vesting of awards will be subject to the achievement of specified performance conditions, over a period of at least three years. Awards may include dividend equivalents earned between the grant and vesting date. Long-term incentive awards may be subject to malus provisions at the discretion of the Committee. 23 Safestyle UK PLC Annual Report and Accounts 2014 Directors' Remuneration Report (continued) Non-Executive Directors Purpose and link to strategy Approach of the Company Sole element of Non-Executive Director remuneration, set at a level that reflects market conditions and is sufficient to attract individuals with appropriate knowledge and experience Fees are normally reviewed annually. Fees paid to Non-Executive Directors for their services are approved by the Board. Fees may include a basic fee and additional fees for further responsibilities (for example, chairmanship of board committees). Non-Executive Directors do not participate in the ESOP or annual bonus scheme nor do they receive any pension contributions. Non-Executive Directors may be eligible to receive benefits such as the use of secretarial support, travel costs or other benefits that may be appropriate. Explanation of performance measures chosen Performance measures are selected that are aligned with the performance of the Company and the interests of shareholders. Stretching performance targets are set each year for the annual bonus and going forward for long term incentive awards. When setting these performance targets, the Committee will take into account a number of different reference points, which may include the Company's business plans and strategy and the economic environment. Full vesting will only occur for what the Committee considers to be stretching performance. The annual bonus is predominantly based on EBITDA as this is the key financial measure of the business. The first awards under the ESOP will be based on EPS growth as the Committee considers this to be the key external measure of financial performance over the longer term in delivering value to shareholders. Policy for the remuneration of employees more generally Remuneration arrangements throughout the Company are heavily performance driven. The Committee considers the general basic salary increase, remuneration arrangements and employment conditions for the broader employee population when determining remuneration policy for the Executive Directors. There is no consultation with employees regarding Directors' remuneration. For 2015 the average salary increase for the wider workforce is 2%. Approach to recruitment remuneration The policy aims to facilitate the appointment of individuals of sufficient calibre to lead the business and execute the strategy effectively for the benefit of shareholders. When appointing a new Director, the Committee seeks to ensure that arrangements are in the best interests of the Company and not to pay more than is appropriate. The Committee will take into consideration a number of relevant factors, which may include the calibre of the individual, the candidate's existing remuneration package, and the specific circumstances of the individual including the jurisdiction from which the candidate was recruited. The Committee will typically seek to align the remuneration package with the Company's remuneration policy (as set out in the policy table). The Committee retains discretion to include other remuneration components or awards which are outside the specific terms of the policy to facilitate the hiring of candidates of an appropriate calibre, where the Committee believes there is a need to do so in the best interests of the Company. In some circumstances, the Committee may make payments or awards to recognise or “buy-out” remuneration arrangements forfeited on leaving a previous employer. The Committee will normally aim to do so broadly on a like-for- like basis taking into account a number of relevant factors regarding the forfeited arrangements which may include the form of award, any performance conditions attached to the awards and the time at which they would have vested. Fees payable to a newly-appointed Non-Executive Director will be set at a level commensurate with their experience and responsibilities, with consideration of the fee policy in place at the time of appointment. Service contracts All of the Executive Directors have service contracts with the Company. The notice period of all Executive Directors' service contracts is kept under review by the Committee. All Non-Executive Directors have fixed-term agreements with the Company. Details of the Directors' service contracts, notice periods and, where applicable, expiry dates, are set out below: Name Commencement S J Birmingham M J Robinson C J Davies R S Halbert 5th December 2013 5th December 2013 5th December 2013 5th December 2013 Expiry NA NA 4th December 2016 4th December 2016 Notice period 12 months 12 months 3 months 3 months Payments for loss of office The principles on which the determination of payments for loss of office will be approached are set out below: Policy Payment in lieu of notice Base salary and the value of contractual benefits for the duration of the notice period. Annual Bonus Long term incentives Other payments At the discretion of the Committee dependent upon the circumstances of departure and contribution to the business during the bonus period. The extent to which any unvested award will vest will be determined in accordance with the rules of the ESOP. Unvested awards will normally lapse on cessation of employment, other than when the individual is considered to be a “good leaver”. In appropriate circumstances, payments may also be made in respect of accrued holiday, outplacement, legal fees and under the terms of the SAYE plan. 24 Safestyle UK PLC Annual Report and Accounts 2014 Directors' Remuneration Report (continued) Statement of consideration of shareholder views The Committee considers shareholder feedback received on remuneration matters, including issues arising in relation to the AGM, as well as any additional comments received during any other meetings with shareholders. The Committee will seek to engage directly with major shareholders and their representative bodies should any material changes be made to the Policy. 2014 remuneration The tables below detail the total remuneration receivable by each Director for the financial years ended 31 December 2014 and 31 December 2013. 2014 Salary & fees £’000 Benefits £’000 Annual bonus £’000 LTIP £’000 Pension £’000 Total remuneration £’000 2013 total £’000 Executive Directors S J Birmingham M J Robinson Non-Executive C J Davies R S Halbert 175 150 45 70 13 8 - - 74 74 - - - - - - - 6 - - 262 238 45 70 113 171 3 5 Individual elements of remuneration Base salary and fees The annualised base salaries for 2014 and 2015 are as set out below: 2014 base salary £’000 2015 base salary £’000 % increase S J Birmingham M J Robinson 175 150 175 153 0% 2% Details of Non-Executive Directors' fees for 2014 and 2015 are as set out below: 2014 base salary 2015 base salary % increase Basic fee 115 117 2% Benefits The benefits figures for each of the Executive Directors are as set out below: Company car or cash allowance £’000 10 6 Fuel benefit £’000 3 2 S J Birmingham M J Robinson SAYE £’000 - - Total 2014 £’000 Total 2013 £’000 13 8 10 8 Annual incentive plan For the financial year ended 31 December 2014, the Executive Directors were awarded a maximum bonus opportunity equal to £100,000 dependent on EBITDA performance. The following table sets out the bonus pay-out to the Executive Directors for 2014 and how this reflects EBITDA performance for the year. Performance target Actual performace Executive Director bonus as a percentage of salary 10 £18.0m - £17.4m - 76% Earnings Before Income TAX, Depreciation and Amortisation (EBITDA) Long term incentives No long term incentive awards vested during the financial year. No awards were granted in the year to any former Director of the Company. No payments were made in the year to any former Director of the Company. No payments for loss of office were made in the year to any Director of the Company. 25 Safestyle UK PLC Annual Report and Accounts 2014 Directors' Remuneration Report (continued) Statement of Directors' shareholding and share interests There is no Executive Director shareholding guideline in place. The interests of the Directors and their immediate families in the Company's ordinary shares as at 31 December 2013 and at 31 December 2014 were as follows. 31 December 2014 Number 31 December 2013 Number Executive Directors S J Birmingham M J Robinson Non-Executive C J Davies R S Halbert 3,888,889 25,000 120,000 100,000 3,888,889 25,000 100,000 100,000 The interests of each Executive Director of the Company as at 31 December 2014 in the Company's share scheme were: as follows: Director Scheme Date of grant Exercise price Awards and options held at 31 December 2013 & 2014 S J Birmingham Share option plan 2013 5 December 2013 £1.00 583,333 M J Robinson Share option plan 2013 5 December 2013 £1.00 972,222 Implementation of Directors' Remuneration Policy for the financial year commencing 1January 2015 Information on how the Company intends to implement the Directors' Remuneration Policy for the financial year commencing on 1 January 2015 is set out below. Salary/fees and benefits The Executive Directors were awarded a 2% increase to base salary, with effect from 1st January 2015. However, the CEO declined his base salary increase, demonstrating his commitment to the Company as it heads in to a key period in its development. Private Medical Insurance will now be offered to all Executive Directors as the remuneration committee considers this to be a cost effective way of maintaining a competitive benefits package. The benefits package for Executive Directors previously consisted of a company car or car allowance, the provision of fuel for private use and life assurance up to four times salary. The Company is also enhancing its pension provision for Executive Directors in line with typical market practice. Executive Directors will be now be entitled to receive employer contributions to an occupational pension scheme of up to 8% of base salary. Annual incentive plan The Company is introducing an updated annual cash incentive structure which has a strong emphasis on delivering against stretching EBITDA targets as well as a range of strategic and personal objectives to provide a balanced scorecard approach to measuring and rewarding management performance during the year. The annual cash incentives structure consists of two elements, being EBITDA related targets 70% and strategic and other personal objectives 30%. The maximum opportunity under the annual cash incentive is also being updated to greater incentivise and reward strong performance during 2015. For Executive Directors, maximum opportunity has been increased to 100% of base salary, compared with 2014 when this was £100,000 and not expressed as a percentage of base salary. For delivering on plan, the EBITDA element of the annual cash incentive will deliver 50% of the potential linked to EBITDA (i.e. 35% of salary). The strategic and personal objectives will be tailored to each individual and are likely to focus around key areas such as delivery against various performance metrics in the 2015 plan, achievement of key milestones, maintaining a balanced order book, project delivery and market penetration. Maximum vesting of the potential linked to EBITDA (i.e. 70% of salary) will be realised upon achieving EBITDA in excess of £20.0m in 2015. 26 Safestyle UK PLC Annual Report and Accounts 2014 Directors' Remuneration Report (continued) LTIP The Company has adopted a new Executive Share Option Plan (ESOP) in 2015 in order to make annual share awards to selected individuals. The ESOP will be a market value share option scheme with a three year performance period prior to vesting subject to achievement of stretching Earnings per Share (EPS) growth targets. These targets are: Average EPS growth per annum (%) Percentage of option vesting* 10% 5% 100% 50% *For average EPS growth between threshold and maximum, vesting will be calculated on a straight line interpolation. The Company intends to deliver annual awards at 100% of base salary to the Executive Directors. Consideration by the Directors of matters relating to Directors' remuneration The Remuneration Committee is composed of the Company's independent Non-Executive Directors, C J Davies (Chairman) and R S Halbert. Executive Directors will only attend meetings by invitation. The Committee's key responsibilities are: reviewing the on-going appropriateness and relevance of remuneration policy; reviewing and approving the remuneration packages of the Executive Directors; monitoring the level and structure of remuneration of the senior management; and production of the annual report on the Directors' remuneration. Advisors During the financial year, the Committee received independent advice from Deloitte LLP. Approval This Report was approved by the Board on 25th March 2015 and signed on its behalf by: C J Davies Chairman of the Remuneration Committee 26th March 2015 27 Safestyle UK PLC Annual Report and Accounts 2014 Independent auditor's report to the members of Safestyle UK plc We have audited the group financial statements of Safestyle UK plc for the year ended 31 December 2014 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the EU. This report is made solely to the company's members, as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991. 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 auditors As explained more fully in the Statement of Directors' Responsibilities set out on page 21, the directors are responsible for the preparation of financial statements which 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 An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view, in accordance with International Financial Reporting Standards as adopted by the EU of the state of the Group's affairs as at 31 December 2014 and of the Group's profit for the year then ended; and have been properly prepared in accordance with the Companies (Jersey) Law 1991. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies (Jersey) Law 1991 requires us to report to you if, in our opinion: proper accounting records have not been kept by the company; or proper returns adequate for our audit have not been received from branches not visited by us; or the company financial statements are not in agreement with the accounting records and returns; or we have not received all the information and explanations we require for our audit. David Morritt (Senior Statutory Auditor) for and on behalf of KPMG LLP Chartered Accountants, 1 The Embankment, Neville Street, Leeds, LS1 4DW, 26th March 2015 Notes: The maintenance and integrity of the Group's website is the responsibility of the directors; the work carried out by auditors does not involve consideration of these matters and accordingly, KPMG LLP accepts no responsibility for any changes that may have occurred to the financial statements or our audit report since 26th March 2015. KPMG LLP has carried out no procedures of any nature subsequent to 26th March 2015 which in any way extends this date. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors shall remain responsible for establishing and controlling the process for doing so, and for ensuring that the financial statements are complete and unaltered in any way. 28 Safestyle UK PLC Annual Report and Accounts 2014 Consolidated statement of comprehensive income for the year ended 31 December 2014 Revenue Cost of sales Gross profit Other operating expenses Operating profit Note 2.5 2014 £000 136,012 (86,323) 49,689 (33,339) 2013 £000 124,797 (79,620) 45,177 (35,830) 6 16,350 9,347 EBITDA before share based payments, listing costs and historic tax settlement 17,759 16,076 12 13 (363) (1,046) (273) (923) 16,350 14,880 - (5,533) 16,350 97 (44) 16,403 9,347 164 (48) 9,463 (3,572) (3,002) 12,831 6,461 - - 12,831 6,461 16.5p 15.9p 8.3p 7.6p Equity settled share based payments charges Depreciation and amortisation Operating profit before listing costs and historic tax settlement Listing costs and historic tax settlement Operating Profit Interest on bank deposits Finance costs Profit before taxation Taxation Profit after taxation Other comprehensive income Total comprehensive profit for the period attributable to shareholders Earnings Per Share Basic (pence per share) Diluted (pence per share) All operations were continuing throughout all periods. 29 Safestyle UK PLC Annual Report and Accounts 2014 Consolidated statement of financial position as at 31 December 2014 Assets Intangible assets - Trademarks Intangible assets - Goodwill Intangible assets - Software Property, plant and equipment Deferred tax asset Non-current assets Inventories Trade and other receivables Cash and cash equivalents Current assets Total assets Equity Called up share capital Share premium account Profit and loss account Common control transaction reserve Total equity Liabilities Trade and other payables Financial liabilities Corporation tax liabilities Provision for liabilities and charges Current liabilities Financial liabilities Provision for liabilities and charges Non-current liabilities Total liabilities Total equity and liabilities Note 14 14 14 15 16 17 18 19 20 21 22 23 22 23 2014 £000 504 20,758 492 7,153 340 2013 £000 504 20,758 449 6,610 120 29,247 28,441 1,463 3,314 8,457 13,234 1,350 2,393 5,237 8,980 42,481 37,421 778 77,000 16,537 (66,527) 778 77,000 9,793 (66,527) 27,788 21,044 10,317 96 1,589 690 12,692 179 1,822 2,001 11,352 279 1,936 727 14,294 275 1,808 2,083 14,693 16,377 42,481 37,421 The financial statements were approved by the Board of Directors and authorised for issue on 26th March 2015 and are signed on their behalf by: Steve Birmingham Chief Executive Officer 30 Safestyle UK PLC Annual Report and Accounts 2014 Consolidated statement of changes in equity for the year ended 31 December 2014 Share capital Share premium Profit and loss account Total equity Common control transaction reserve £000 £000 £000 £000 £000 1 - 777 - - - 778 - - - 778 77,777 12,144 (66,527) 23,395 - 6,461 - 6,461 (777) - - - 77,000 - - - - (66,527) - 23 250 (9,085) 9,793 12,831 - - - 77,000 363 239 (6,689) 16,537 - - - (66,527) - 23 250 (9,085) 21,044 12,831 363 239 (6,689) 27,788 Balance at 31 December 2012 Total comprehensive profit for the year Transactions with owners of the company: Issue of bonus Shares Equity settled share based payment Share warrants expense Dividends Balance at 31 December 2013 Total comprehensive profit for the year Transactions with owners of the company: Equity settled share based payments Deferred taxation to reserves Dividends Balance at 31 December 2014 For an explanation of components of shareholders’ equity note 20. 31 Safestyle UK PLC Annual Report and Accounts 2014 Consolidated statement of cash flows for the year ended 31 December 2014 Reconciliation of profit before tax to net cash inflow from operating activities Profit before taxation Interest on Bank Deposits Finance Costs Depreciation of plant, property and equipment Amortisation of intangible fixed assets Profit on sale of plant, property and equipment Increase in inventories (Increase)/decrease in trade and other receivables (Decrease)/increase in trade and other receivables (Decrease)/increase in provisions Equity settled share based payments Share warrants expense Net cash inflow from operating activities before taxation Taxation Returns on investments and servicing of finance Hire purchase interest Other interest Interest received Net cash inflow for returns on investments and servicing of finance 2014 £000 16,403 (97) 44 907 139 (35) (114) (921) (1,035) (23) 363 - 15,631 2013 £000 9,463 (164) 48 855 68 (6) (269) 2,307 2,389 103 23 250 15,067 (3,900) (2,150) (43) (1) 97 53 (42) (6) 164 116 Net cash inflow from operating activities 11,784 13,033 Cash flows from investing activities Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Acquisition of intangible fixed assets Net cash outflow from investing activities Cash flows from financing activities Payment of hire purchase and finance leases Dividends paid Net cash outflow from financing activities Net increase /(decrease) in cash and cash equivalents Cash and cash equivalents at start of period Cash and cash equivalents at end of period 32 Safestyle UK PLC Annual Report and Accounts 2014 (1,573) 159 (182) (1,596) (279) (6,689) (6,968) 3,220 5,237 8,457 (4,750) 100 (429) (5,079) (383) (9,085) (9,468) (1,513) 6,750 5,237 Notes to the financial statements 1 The financial statements set out herein are in respect of Safestyle UK plc and its subsidiaries (the Group) for the year ended 31 December 2014. General information Safestyle UK plc is a public listed company incorporated in Jersey. The company's shares are traded on AIM. The company is required under AIM rule 19 to provide shareholders with audited consolidated financial statements. The registered office address of the Safestyle UK plc is 47 Esplanade, St Helier, Jersey JE1 0BD. The company is not required to present parent company information. Basis of preparation The Group's financial statements for the year ended 31 December 2014 (“financial statements”) have been prepared on a going concern basis under the historical cost convention and are in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and the International Financial Reporting Standards Interpretations Committee interpretations issued by the International Accounting Standards Board (“IASB”) that are effective or issued and early adopted as at the time of preparing these financial statements. Safestyle UK plc was incorporated on 8 November 2013. On 3 December 2013 Safestyle UK plc acquired Style Group Holdings through a share for share exchange. This was accounted for as a common control transaction. The result of this is that the financial statements of Style Group Holdings have been included in the group consolidated financial statement of Safestyle UK plc at their book value at the IFRS transition date of 1 January 2010 with the assumption that the group was in existence for all the periods presented. The excess of the cost at the time of acquisition over its book value has been recorded as a common control transaction reserve. The preparation of financial statements requires Management to exercise its judgement in the process of applying accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to these financial statements are disclosed in note 4. (a) New and amended standards adopted by the Group. The Group has adopted the following new standards and amendments for the first time. Unless otherwise stated, they have not had a material impact on the financial statements. IFRS 10 Consolidated Financial Statements and IAS 27 (2011) Separate Financial Statements IFRS 11 Joint Arrangements and Amendments to IAS 28 (2008) Investments in Associates and Joint Ventures IFRS 12 Disclosure of Interests in Other Entities Amendments to IAS 32 'Offsetting Financial Assets and Financial Liabilities’ Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) (b) New standards, amendments and interpretations issued but not effective and not early adopted At the date of approval of these financial statements, the following standards, amendments and interpretations which have not been applied in these financial statements were in issue but not yet affective (and in some cases have not yet been adopted by the EU): Annual improvement cycles 2010 – 2012 and 2011 – 2013 (mandatory for year ending 31 December 2015) IFRS 14 Regulatory Deferral Accounts (mandatory for year ending 31 December 2016). Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations (mandatory for year ending 31 December 2016). Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation (mandatory for year ending 31 December 2016). R Amendments to IAS 16 and IAS 41: Bearer plants (mandatory for year ending 31 December 2016). Amendments to IAS 27: Equity method in separate financial statements (mandatory for year ending 31 December 2016). Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets (mandatory for year ending 31 December 2016). Annual improvement cycles 2012-2014 (mandatory for year ending 31 December 2016). IFRS 15 Revenue from contracts with customers (mandatory for year ending 31 December 2017). IFRS 9 Financial Instruments (mandatory for year ending 31 December 2018). The Group is currently considering the implication of these standards, however it is anticipated the impact of these standards on the financial position and performance of the Group will be minimal and effects will principally relate to amendment and extension of current disclosures. The Board is aware of the effective dates and will continue to review the potential impact on the financial statements. 33 Safestyle UK PLC Annual Report and Accounts 2014 2 Summary of significant accounting policies Going concern The Group has performed very strongly over recent years and this is highlighted on page 2 of the report. The Group has considerable financial resources and has prepared forecasts that show the Group is expected to continue to trade strongly and as a consequence, the directors believe that the Group is well placed to manage its business risks successfully. The assessment of Group's ability to execute its strategy by funding future working capital requirements involves judgement. The Directors monitor future cash requirements to assess Group's ability to meet these funding requirements. The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. Foreign currencies (a) Functional and presentational currency Items included in the financial statements are measured using the currency of the primary economic environment in which the Company operates (“the functional currency”) which is UK Sterling (£). The financial statements are presented in UK Sterling (£), which is the Company's presentational currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in net profit or loss in the statement of comprehensive income. Non monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Revenue recognition Revenue is recognised at the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of business and is shown net of Value Added Tax. The Group primarily earns revenues from the sale, design, manufacture and installation of domestic double-glazed replacement windows and doors. Product sales revenues and survey fees are recognised once the goods have been installed. Where the customer decides not to proceed with installation outside the cooling off period, the survey fees are recognised at this point due to them being non-refundable. The Group receives commissions for introducing finance products to customers. These commissions are recognised on installation. Revenue from maintenance is recognised on completion of the work carried out. Employee benefits Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due. Goodwill 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. Intangible fixed assets Intangible assets that are acquired by the Company are stated at cost less accumulated amortisation and less accumulated impairment losses. The trademark is considered to have an indefinite useful life because there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the business. The trademark is not amortised but is tested annually to determine whether there is any indication of impairment. Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation of other intangibles is done on a straight-line basis over the estimated useful economic lives of the particular asset categories as follows: Software development 25% on cost Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is charged so as to write off the costs of assets over their estimated useful lives, on the following basis: Leasehold improvements Plant and machinery Office and computer equipment Motor vehicles 25% on cost 15% on cost 20% to 33.3% on cost 25% reducing balance Assets in the course of construction are not depreciated. The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income. 34 Safestyle UK PLC Annual Report and Accounts 2014 2 Summary of significant accounting policies (continued) Impairment The carrying amounts of the Group's assets, other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. For goodwill, assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised (not relating to other intangible assets specifically) are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash-generating unit is the group of assets identified on acquisition that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of assets or the cash-generating unit is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss in respect of goodwill is not reversed. In respect of other assets, 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. Inventories Inventories are stated at the lower of cost and net realisable value. Work in progress comprises direct materials, labour costs, site overheads and other attributable overheads. Bank and other borrowing Interest bearing borrowings, bank and other borrowings are carried at amortised cost. Finance charges, including issue costs are charged to the income statement using an effective interest rate method. Provisions A provision is recognised in the balance sheet if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, 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 current market assessments of the time value of money and the risks specific to the liability. A provision for warranties is recognised when the underlying products are sold, based on historical service call data and a weighting of possible outcomes against their associated probabilities. Financial instruments Financial assets and financial liabilities are recognised in the consolidated statement of financial position when the Group becomes party to the contractual provisions of the instrument. Financial assets are de-recognised when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are de-recognised when the obligation specified in the contract is discharged, cancelled or expired. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Appropriate provisions for estimated irrecoverable amounts are recognised in the statement of comprehensive income when there is objective evidence that the assets are impaired. Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would be immaterial. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Trade and other payables Trade payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest rate method; this method allocates interest expense over the relevant period by applying the “effective interest rate” to the carrying amount of the liability. Financial liabilities – Non-current borrowings Borrowings, including advances received from related parties are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. 35 Safestyle UK PLC Annual Report and Accounts 2014 2 2 Summary of significant accounting policies (continued) Summary of significant accounting policies (continued) Taxation Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income 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. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. The amount of deferred tax provided is based on the carrying amount of assets and liabilities, using the prevailing tax rates. The deferred tax balance has not been discounted. Current tax is the expected tax payable on the taxable income for the year, using prevailing tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Leases Leases Assets financed by means of a finance lease are treated as if they had been purchased outright and the corresponding liability to the leasing company is included as an obligation under finance leases. Depreciation on such assets is charged to the income statement, in accordance with the stated accounting policy, over the shorter of the lease term or the asset life. The finance element of payments to leasing companies are calculated so as to achieve a constant rate of interest on the remaining balance over the lease term, and charged to the income statement accordingly. Amounts payable under operating leases are charged to operating expenses on a straight line accruals basis over the lease term. Share Options and Warrants Share Options and Warrants 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 amount recognised as an expense is adjusted to reflect the number of awards for which the related service is expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service condition 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. For share based transactions with parties other than employees, the fair value of the goods or services received and the length of the vesting period is estimated. An expense is recognised for the fair value of the goods or services over the specified vesting period or service with a corresponding increase in equity. Dividends Dividends Dividends are only recognised as a liability to the extent that they are declared prior to the year end. 3 3 Financial Risk Management Financial Risk Management Financial risk factors Financial risk factors Group's activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on its financial performance. Risk management is carried out by the Board of Directors. They identify and evaluate financial risks in close co-operation with key employees. 3.1.1 Market risk is the risk of loss that may arise from changes in market factors such as commodity prices, interest rates and foreign exchange rates. Market risk Credit risk 3.1.2 Credit risk is the financial loss to Group if a customer or counterparty to financial instruments fails to meet its contractual obligation. Credit risk arise from Group's cash and cash equivalents and receivables balances. Liquidity risk 3.1.3 Liquidity risk is the risk that Group will not be able to meet its financial obligations as they fall due. This risk relates to Group's prudent liquidity risk management and implies maintaining sufficient cash. The Board monitors forecasts of Group's liquidity and cash and cash equivalents on the basis of expected cash flow. Capital risk management Capital risk management Group is funded principally by equity although short term loans have been utilised during the review period of this financial statements. The components of shareholders' equity are as follows: The share capital and the share premium account arising on the issue of shares. The retained surplus/deficit reflecting financial result incurred to date. Group's objective when managing capital is to maintain adequate financial flexibility to preserve its ability to meet financial obligations, both current and long term. The capital structure of Group is managed and adjusted to reflect changes in economic circumstances. Group funds its expenditures on commitments from existing cash and cash equivalent balances, primarily received from issuances of shareholders' equity. There are no externally imposed capital requirements. Financing decisions are made by the Board of Directors based on forecasts of the expected timing and level of capital and operating expenditure required to meet Group's commitments and development plans. Fair value estimation Fair value estimation The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values because of the short term nature of such assets and the effect of discounting liabilities is negligible. 36 Safestyle UK PLC Annual Report and Accounts 2014 4 Details of the Group's significant accounting judgements and critical accounting estimates are set out in these financial statements and include: Accounting estimates and judgements Recoverability of trade receivables The assessment of whether trade receivables are recoverable requires judgement. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Further details can be found in note 18. Warranty provisions The Group gives guarantees against all its products, which in the majority of cases covers a period of 10 years. The level of provision required to cover the expected future costs of rectifying faults and the future rate of product failure arising within the guarantee period requires judgement. Segmental information 5 The Directors consider that there are no identifiable business segments that are engaged in providing individual products or services or a group of related products and services that are subject to risks and returns that are different to the core business. The information reported to the Group's board of directors for the purposes of resource allocation and assessment of performance is based wholly on the overall activities of the Group. The Group has therefore determined that it has only one reportable segment under IFRS8, which is “the sale, design, manufacture, installation and maintenance of domestic, double- glazed, replacement windows and doors”. The Group's revenue and results and assets for this one reportable segment can be determined by reference to the Group's statement of comprehensive income and statement of financial position. The Group's carries out all of its activities in the UK and as such only has a single geographic segment. During the periods of the financial statements, no customer generated more than 10 per cent of total revenue. 6 Expenses and auditor's remuneration Depreciation of plant, property and equipment: Owned assets Leased assets Amortisation of Intangibles Assets (Profit)/loss on disposal of plant, property and equipment Operating lease rentals: Hire of plant and machinery Rent payable on land and buildings Auditor's remuneration: Audit of financial statements relating to subsidiaries Audit of financial statements relating to parent Other services relating to taxation Other services relating to admission costs 2014 £000 683 224 139 (35) 2,762 1,008 54 43 7 - 2013 £000 610 245 68 (6) 2,124 1,570 38 57 7 1,441 The operating lease rentals disclosed above for plant and machinery relate to daily contract hire and therefore there is no corresponding lease commitment. 7 Dividends The aggregate amount of dividends comprises: Interim dividends paid in respect of the period of £nil (2013: £nil) per Ordinary, Ordinary 'A', Ordinary 'B' and Ordinary 'C' share Final dividend paid of £0.055 (2013: £nil) per ordinary share Interim dividend paid of £0.031 (2013: £nil) per ordinary share 2014 £000 - 4,278 2,411 6,689 2013 £000 9,085 - - 9,085 Dividends in the prior year relate to payments made to shareholders of Style Group Holdings Ltd prior to the acquisition by Safestyle UK plc. A final dividend of 6.2p per ordinary share is proposed by the Board subject to approval at the AGM. 37 Safestyle UK PLC Annual Report and Accounts 2014 8 Earnings per share Basic earnings per ordinary share (pence) Diluted earnings per ordinary share (pence) Note: Earnings per share a) Basic earnings per share The calculation of basic earnings per share has been based on the following profit attributable to ordinary shareholders and weighted-average number of shares outstanding. i) Profit attributable to ordinary shareholders (basic) Profit attributable to ordinary shareholders ii) Weighted-average number of ordinary shares (basic) In issue during the year 2014 16.5 15.9 2013 8.3 7.6 2014 £000 12,831 2013 £000 6,461 No of shares ‘000 77,778 No of shares ‘000 77,778 On 4 December 2013 the share capital was increased by the creation of 44,860,100 new ordinary shares, 44,950 new A ordinary shares, 44,950 new B ordinary shares and 32,727,777 new C ordinary shares each as bonus shares out of share premium to the existing shareholders in proportion to their existing holdings. At the same time the existing 2,000 shares with a nominal value of £0.50 were subdivided into shares of £0.01 and all shares were reclassified as ordinary shares. This resulted in their being 77,777,777 ordinary shares in issue. As these transactions have changed the number of ordinary shares outstanding without a corresponding change in resources the weighted average number of ordinary shares outstanding during the year and for the comparative year for both basic and diluted EPS have been adjusted. b) Diluted earnings per share The calculation of diluted earnings per share has been based on the following profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares. i) Profit attributable to ordinary shareholders (diluted) Profit attributable to ordinary shareholders ii) Weighted-average number of ordinary shares (diluted) Weighted-average number of ordinary shares (basic) Effect of conversion of share options and warrants 2014 £000 12,831 2013 £000 6,461 No of shares ‘000 77,778 2,843 No of shares ‘000 77,778 131 80,621 77,909 The average market value of the Company's shares for the purpose of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding. 38 Safestyle UK PLC Annual Report and Accounts 2014 8 Earnings per share (continued) c) Earnings per share adjusted for the effect of admission costs and historical tax settlement. i) Profit attributable to ordinary shareholders (basic and diluted) Profit attributable to ordinary shareholders (basic and diluted) Admission costs and historic tax settlement 2014 £000 12,831 - 2013 £000 6,461 5,023 Adjusted profit attributable to ordinary shareholders (basic and diluted) 12,831 11,484 Earnings per share adjusted for the effect of admission costs and historic tax settlement. Basic earnings per ordinary share (pence) Diluted earnings per ordinary share (pence) 9 Admission costs and historic tax settlement PAYE/NIC settlement Vesting of Share Warrants AIM Admission Costs Profit before Taxation Corporation tax adjusted on tax settlement Profit after Taxation 2014 16.5 15.9 2014 £000 - - - - - - 2013 14.8 14.8 2013 £000 3,148 250 2,135 5,533 (510) 5,023 The admission costs in the prior year related to legal and professional costs associated with the AIM admission on 11 December 2013. The Group also issued warrants to Zeus Capital in lieu of payment for services related to the IPO. The warrant is for 3% of the fully diluted share capital of the company following the exercise of the subscription rights. The warrant is exercisable at any time between the 1st and 10th anniversary of admission to AIM. The fair value of the warrant has been determined by the estimated value of services provided and has been charged as an IPO expense in the period. On 25 November 2013, the Group agreed to pay £3,148,000 to Her Majesty's Revenue and Customs (“HMRC”) to settle a previously unprovided payroll liability following an investigation by HMRC. The liability related to 2004/2005 and was unprovided at 31 December 2012 and earlier period ends because the Directors, following advice from external advisors, were confident that they were not liable. However, in October 2013, in preparing to float the Group, the directors received external advice that they should approach HMRC in order to resolve the matter and to avoid a lengthy and drawn out investigation, which could ultimately lead to financial settlement post floatation. A corporation tax adjustment of £510,000 has been netted off these costs. 10 Key management remuneration Key management personnel, as disclosed under IAS24 (Related Party Disclosures), have been identified as the Board of Directors and other senior operational management. Detailed disclosures of individual remuneration, pension entitlements and share options, for the Directors who served during the year, are given in the Directors' remuneration report on pages 22 to 27. A summary of key management remuneration is as follows: Salary, bonus and other benefits Pensions Share based payments Total remuneration 39 Safestyle UK PLC Annual Report and Accounts 2014 2014 £000 1,380 13 310 1,703 2013 £000 1,046 25 23 1,094 11 Employees The average monthly number of persons (including directors) employed by the group during the year analysed by category, were as follows: Manufacturing Sales and distribution Administration Staff costs for above persons Wages and salaries Social security costs Other pension costs Share based payments expenses The analysis of Directors' remuneration is shown in the Directors remuneration report on page 25. No Directors were accruing benefits under money purchase pension schemes (2013: nil). 12 Finance costs Bank interest payable On finance leases and hire purchase contracts 2014 Number 328 34 299 661 2014 £000 16,105 1,471 352 363 18,291 2014 £000 1 43 44 2013 Number 326 29 269 624 2013 £000 13,940 1,289 195 23 15,447 2013 £000 6 42 48 40 Safestyle UK PLC Annual Report and Accounts 2014 13 Employees Current tax Current tax on income for the period Adjustments in respect of prior periods Total current tax Deferred tax Origination and reversal of timing differences Effect of change in tax rate Adjustments in respect of prior periods Total deferred tax (see note 16) Total tax expense The current year tax charge is split into the following: Underlying tax charge Tax reclaimed on admission costs and historic tax settlement (note 9) Total tax expense Reconciliation of effective tax rate Current tax reconciliation Profit before taxation Admission costs and historic tax settlement Profit before taxation, admission costs and historic tax settlement Expected tax charge based on the standard rate of corporation tax in the UK of 21.50% (2013: 23.25%) Effects of: Expenses not deductible for tax purposes Adjustments to tax charge in respect of prior periods Effect of change in tax rate Total on ordinary activities Tax reclaimed on admission costs and historic tax settlement (note 9) Total tax expense 2014 £000 3,610 (56) 3,554 7 (6) 17 18 2013 £000 2,986 (8) 2,978 4 15 5 24 3,572 3,002 3,572 - 3,572 2014 £000 16,403 - 16,403 3,527 90 (39) (6) 3,572 - 3,572 3,512 (510) 3,002 2013 £000 9,463 5,533 14,996 3,487 13 (3) 15 3,512 (510) 3,002 Reductions in the UK corporation tax rate from 24% to 23% (effective from 1 April 2013) and to 21% (effective 1 April 2014) and 20% (effective 1 April 2015) were substantively enacted on 3 July 2012 and 2 July 2013 respectively. This will reduce the company's future current tax charge accordingly. 41 Safestyle UK PLC Annual Report and Accounts 2014 14 Intangible assets Cost At 31 December 2012 Additions At 31 December 2013 Additions At 31 December 2014 Amortisation At 31 December 2012 Amortisation in period At 31 December 2013 Amortisation in period At 31 December 2014 NBV at 31 December 2013 NBV at 31 December 2014 Goodwill £000 20,758 - 20,758 - 20,758 - - - - - Trademark £000 504 - Software £000 336 429 504 - 504 - - - - - 765 182 947 (248) (68) (316) (139) (455) 449 492 20,758 20,758 504 504 Total £000 21,598 429 22,027 182 22,209 (248) (68) (316) (139) (455) 21,711 21,754 The goodwill is allocated to one cash generating unit (“CGU”) being Style Group Holdings Ltd. Management have performed impairment reviews on the carrying value of the goodwill at 31 December 2013 and 31 December 2014. The recoverable amount of the CGU has been determined from value in use calculations based on cash flow projections covering a two year period to 31 December 2016 which are then taken into perpetuity. The assessment was performed on a value in use basis using a 12% discount rate and the following year's budget as approved by the Board and extrapolated forwards using steady growth rate of 5% for the following 2 years. The key assumptions underpinning these forecasts are based on historic growth rates, prices and costs adjusted for up to date information. Management does not currently believe that any reasonably possible change in the key assumptions on which assessments of recoverable amounts have been based would cause the carrying amount of goodwill to exceed its recoverable amount. The trademark represents the Safestyle trademark which was acquired in 2010. The trademark is considered to have an indefinite useful life because there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the business. The trademark is not amortised but is tested annually to determine whether there is any indication of impairment and is included in the review above. 42 Safestyle UK PLC Annual Report and Accounts 2014 15 Plant, property and equipment Freehold property Leasehold improvement Plant and machinery Office and computer equipment Motor vehicles Assets under the course of construction Total Cost At 31 December 2012 Additions Disposals Transfer At 31 December 2013 Additions Disposals Transfer At 31 December 2014 Depreciation At 31 December 2012 Charge for the year Disposals At 31 December 2013 Charge for the year Disposals At 31 December 2014 NBV at 31 December 2013 NBV at 31 December 2014 £000 - 4,029 - - 4,029 - - - 4,029 - - - - 80 - 80 4,029 3,949 £000 1,441 7 (1,421) - 27 1 - - 28 1,415 13 (1,421) 7 5 - 12 20 16 £000 4,392 358 (57) 530 5,223 221 - 86 5,530 2,636 615 (57) 3,194 613 - 3,807 2,029 1,723 £000 3,181 150 (2) - 3,329 230 - - 3,559 2,905 148 - 3,053 168 - 3,221 276 338 £000 393 120 (192) - 321 67 (260) - 128 171 79 (99) 151 41 (137) 55 170 73 Included within the net book value are assets under finance leases and hire purchase contracts as follows: Plant & machinery Motor vehicle Computer equipment The depreciation charged on these assets was £224,000 (2013: £245,000). 16 Deferred taxation asset Balance at beginning of period Debit to the income statement for the period Transfer to reserves Balance at end of period The deferred tax asset provided in the financial statements at 20% (2013: 23%) is as follows: Share based payments Capital allowances in excess of depreciation 43 Safestyle UK PLC Annual Report and Accounts 2014 £000 £000 530 86 - (530) 86 1,054 - (86) 1,054 - - - - - - - 86 1,054 2014 £000 525 69 31 625 2014 £000 120 (19) 239 340 326 14 340 9,937 4,750 (1,672) - 13,015 1,573 (260) - 14,328 7,127 855 (1,577) 6,405 907 (137) 7,175 6,610 7,153 2013 £000 694 131 62 887 2013 £000 144 (24) - 120 14 104 120 17 Inventories Raw materials and consumables Work in progress Finished Goods The above amounts are stated net of inventory provisions. 18 Trade and other receivables Trade receivables (net of provisions) Other receivables Prepayment and accrued income 2014 £000 1,104 53 306 1,463 2014 £000 1,112 186 2,016 3,314 2013 £000 944 59 347 1,350 2013 £000 818 78 1,497 2,393 Contractual payment terms with the Group's customers are typically zero days. Payment is due upon installation and if a customer withholds payment, a trade debtor arises. The above receivables are shown net of the following provisions for doubtful debts. Opening provision against trade receivables Provision created in year Expensed in year Closing provision for trade receivables 2014 £000 206 (155) 88 139 Included in the above analysis of receivables are the following amounts which are past due and for which we have not made any specific provision: Past due receivables < 1 month overdue 1-2 months overdue 2-3 months overdue >3 months overdue Total overdue receivables 2014 £000 108 145 93 746 1,092 2013 £000 82 (130) 254 206 2013 £000 117 31 21 583 752 The balance over 3 months old represents debt accumulated over a number of years. The Directors are comfortable that this is recoverable as the majority is secured with a charge over the customers' property. In the year ended 31 December 2014 there were £503,000 of receivables under such orders (2013: £468,000) and a further £16,000 pending (2013: £71,000). The Directors believe that the carrying value of trade and other receivables represents their fair value. In determining the recoverability of trade receivables the Group considers any change in the credit quality of the receivable from the date credit was granted up to the reporting date. For details on the Group's credit risk management policies, refer to note 24. 44 Safestyle UK PLC Annual Report and Accounts 2014 19 Cash and cash equivalents Cash and cash equivalents Balance at net of period 2014 £000 8,457 8,457 2013 £000 5,237 5,237 All of the Group's cash and cash equivalents are at floating interest rates and is denominated in UK Sterling (£). The Directors consider that the carrying value of cash and cash equivalents approximates to their fair value. For details of the Group's credit risk management policies, refer to note 24. 20 Share capital Authorised 77,777,777 Ordinary Shares @ 1p each Allotted, issued and fully paid 77,777,777 Ordinary Shares @ 1p each 2014 £000 778 778 778 778 2013 £000 778 778 778 778 On 3 December 2013 Safestyle UK issued 2,000 shares at £38,888.89 each (total value of £77,777,777) to acquire a 100% ownership of Style Group Holdings Limited. The 2,000 shares, which each had a nominal value of 50p, comprised 998 ordinary shares, 1 A ordinary share, 1 B ordinary share and 1,000 C ordinary shares. On 4 December 2013 the share capital was increased to £777,777.77 by the creation of 44,860,100 new ordinary shares of £0.01 each, 44,950 new A ordinary shares of £0.01 each, 44,950 new B ordinary shares of £0.01 each and 32,727,777 new C ordinary shares of £0.01 each as bonus shares out of share premium to the existing shareholders in proportion to their existing holdings. At the same time the existing shares with a nominal value of £0.50 were subdivided into shares of £0.01 and all shares were reclassified as ordinary shares resulting in the Company having 77,777,777 ordinary shares of £0.01 in issue. Common control transaction reserve This reserve was created in 2013 through Safestyle UK plc’s acquisition of the group headed by Style Group Holdings Limited. The reserve of £66.5m represents the difference in the fair value of the consideration paid for Style Group Holdings of £77.8m and the share capital and share premium held by Style Group Holdings Limited at the time of acquisition of £11.3m. 21 Trade and other payables Trade payables Other taxation and social security costs Other payables Accruals and deferred income Balance at end of period Obligations under finance leases and hire purchase are secured on the related assets. 2014 £000 3,479 1,952 2,504 2,382 2013 £000 3,403 2,416 3,112 2,421 10,317 11,352 45 Safestyle UK PLC Annual Report and Accounts 2014 22 Financial liabilities Current liabilities Obligations under finance lease and hire purchase contracts Non-current liabilities Obligations under finance lease and hire purchase contracts Total secured financial liabilities 2014 £000 96 96 179 179 275 2013 £000 279 279 275 275 554 The Group has finance leases and hire purchase contracts for some of its plant and machinery, motor vehicles and computer equipment. Future minimum lease payments under finance leases and hire purchase contracts are as follows: Due within one year Due between one and two years Due between two and five years Future minimum lease payment Interest payable on leases Present value of minimum lease payments 2014 £000 112 122 79 313 2013 £000 313 195 121 629 2014 £000 16 13 9 38 2013 £000 34 32 9 75 2014 £000 96 109 70 275 2013 £000 279 163 112 554 The fair value of minimum lease payments is not considered by the Directors to be significantly different to the above analysis. The effective interest rate on finance leases is 3.32% (2013: 2.76%). 23 Provisions for liabilities and charges The group gives guarantees against all its products, which in the majority of cases covers a period of 10 years. Provision is made for the expected future costs of rectifying faults arising within the guarantee period and then discounted at 7% to a net present value. Product guarantees Balance at beginning of year Utilised in year Provided in year Balance at end of year Current Non current Balance at end of year 2014 £000 2,535 (1,277) 1,254 2,512 690 1,822 2,512 2013 £000 2,281 (1,064) 1,318 2,535 727 1,808 2,535 Financial instruments 24 The Group is exposed to the risks that arise from its use of financial instruments. This note describes the objectives, policies and processes of the Group 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. Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders. The Group is funded principally by equity although loans have been utilised during the review period of this financial statements. As at 31 December 2014, no loans were outstanding (31 December 2013: £nil). The capital structure of the Group consists of equity, comprising issued share capital. The Group has no externally imposed capital requirements. 46 Safestyle UK PLC Annual Report and Accounts 2014 Financial instruments (continued) 24 In order to maintain or adjust the capital structure, the Group may return capital to shareholders or issue new shares. Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises are as follows: Trade and other receivables Trade and other payables Cash and cash equivalents The carrying value of these financial instruments is considered to approximate to their fair value. Financial assets At the reporting date, the Group held the following financial assets: Trade debtors Other debtors Cash and cash equivalents Financial liabilities At the reporting date, the Group held the following financial liabilities, all of which were classified as other financial liabilities: Trade payables Other payables Market risk The Group's is not materially exposed to changes in foreign currency exchange rates or interest rate movements. 2014 £000 1,112 186 8,457 9,755 2014 £000 3,479 2,504 5,983 2013 £000 818 78 5,237 6,133 2013 £000 3,403 3,112 6,515 Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises principally from the Group's cash balances and trade and other receivables. The concentration of the Group's credit risk is considered by counterparty. The Group gives careful consideration to which organisation it uses for its banking services in order to minimise credit risk. The Group has a significant concentration of cash held in accounts with one large bank in the UK, an institution with an A credit rating (long term, as assessed by Moody's). The amounts of cash held on deposit with that bank at each reporting date can be seen in the financial assets table above. All of the cash and cash equivalents held with that bank at each reporting date were denominated in UK Sterling. The nature of the Group's business and current stage of its development are such that individual customers can comprise a significant proportion of its trade and other receivables at any point in time. The Group mitigates the associated risk by close monitoring of the debtor ledger. At 31 December 2014, the Group's trade receivables balance was £1,112k (31 December 2013: £818k). The carrying amount of financial assets recorded in the financial statements represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained. In the Directors' opinion, there has been some impairment of trade receivables during the year in the trade receivable provisions table in note 18. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. The Board of Directors considers the above measures to be sufficient to control the credit risk exposure. Trade receivables totalling £503k (31 December 2013: £468k) are secured by charges against the debtor's property. Liquidity risk management Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. Ultimate responsibility for liquidity risk management rests with the Board of Directors. The Board manages liquidity risk by regularly reviewing the Group's cash requirements by reference to short term cash flow forecasts and medium term working capital projections. At 31 December 2014, the Group had £8,457k (31 December 2013: £5,237k) of cash reserves. 47 Safestyle UK PLC Annual Report and Accounts 2014 24 Financial instruments (continued) Foreign currency risk management Historically, the Group's exposure to foreign currency risk has been limited, all of its invoicing and the majority of its payments are in UK Sterling. There are no balances held in foreign currencies at each reporting date and it has made no payments in foreign currencies other than US dollar and Euro. Accordingly, the Board has not presented any sensitivity analysis in this area as it is immaterial. Maturity of financial assets and liabilities All of the Group's non derivative financial liabilities and its financial assets at each reporting date are either payable or receivable within one year. 25 Analysis of Net Funds Cash and cash equivalents Finance leases Total 2012 Cashflow £000 6,750 6,750 (936) 5,814 £000 (1,513) (1,513) 502 (1,011) Non cash movement £000 - - (120) (120) 2013 Cashflow £000 5,237 5,237 (554) 4,683 £000 3,220 3,220 279 3,499 Non cash movement £000 - - - - Major non cash transactions During the period the company entered into £nil finance lease arrangements in respect of assets (2013: £120k). Commitments 26 The group had annual commitment under non-cancellable operating leases as follows: Motor vehicles: Expiring within one year Expiring between two and five years Expiring after five years Plant and machinery: Expiring within one year Expiring between two and five years Expiring after five years Land and buildings Expiring within one year Expiring between two and five years Expiring after five years 2014 £000 2,278 2,804 - 121 140 - 1,069 3,564 1,647 11,623 2014 £000 8,457 8,457 (275) 8,182 2013 £000 1,390 388 - 120 30 - 1,032 3,089 1,545 7,594 During the period ended 31 December 2014, the Group entered into contracts to purchase property, plant and equipment for £78,000 (2013: £198,000). These commitments are expected to be settled in the following financial year. Pension costs 27 The charge for the period amounts to £352,000 (2013: £195,000) and relates to contributions paid into a money purchase scheme in the period. 48 Safestyle UK PLC Annual Report and Accounts 2014 Group Companies 28 Safestyle UK plc holds more than 20% of the share capital of the following companies: Style Group Holdings Limited Style Group Limited* HPAS Limited* Windowstyle UK Limited* Safestyle UK Limited* Style Group Europe Limited* Country of incorporation England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Class of shares Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary % held by parent 100 100 100 100 100 The principal activities of HPAS Limited were that of home improvements and double glazing contractors. Safestyle UK Limited, Windowstyle UK Limited and Style Group Europe Limited were dormant during the year. *Owned Indirectly Related party transactions 29 Loan amounts due from shareholders and/or directors at the period end are held within amounts owed from related parties, details are provided below: 2014 £000 2013 Maximum Outstanding £000 2014 £000 2013 Maximum Outstanding £000 M Misra K K Misra S J Birmingham All directors' loans were repaid prior to admission. M Misra is no longer a shareholder but was a related party in the prior year. During the period the company incurred £nil (2013: £124,000) in consultancy fees from Ravarti Limited, a company controlled by Mr M Misra. At the year end, £nil (2013: £nil) was owed to Ravarti Limited by the company. During the period ended 31st December 2014 the group incurred rental payments of £nil (2013: £604,000) from Acamar Limited, a company owned by Mr M Misra. At the period end £nil (2013: £nil) was owed to Acamar Limited by the company. 6,334 644 258 - - - - - - - - - Ultimate controlling party 30 Safestyle UK plc is quoted on the stock exchange (AIM) and ultimate control is exercised by the shareholders. Share based payments 31 Share award scheme. The Group operates an equity-settled LTIP remuneration scheme for directors and certain management. The only vesting conditions attached to the options are that the individual must remain an employee of the Group for a minimum period. The number of share options in existence during the year were as follows: Outstanding at start of period Granted in year Outstanding at end of period Exercisable at end of period 2014 Number of share options 4,083,333 - 4,083,333 - Weighted average exercise price £1.00 - £1.00 - 2013 Number of share options - 4,083,333 4,083,333 - Weighted average exercise price - £1.00 £1.00 - Options are valued using the Black-Scholes option pricing model. The following information is relevant in the determination of the fair value of the options granted during the period. Risk free interest rate Expected volatility Expected option life (in years) Weighted average share price after adjusting for PV of dividends Weighted average exercise price Weighted average fair value of options granted Expected dividends 2014 1.19% 38.90% 3.5 £0.77 £1.00 15.93p 8% 2013 1.19% 38.90% 3.5 £0.77 £1.00 15.93p 8% At the grant date there was no share price history for the company on which to calculate volatility. Volatility was therefore estimated using companies classified in the 'Home Improvement Retailers' subsector on the London Stock Exchange. 49 Safestyle UK PLC Annual Report and Accounts 2014 Share based payments (continued) 31 Sharesave scheme. In the period the company launched a sharesave (SAYE) scheme for employees. This allowed employees to acquire a certain number of shares at a discount of 20% of the share price prior to the invitation to join the scheme, using amounts saved under a 'Save As You Earn' savings contract. It commenced on the 27 March 2014 and matures on 1 May 2017. Outstanding at start of period Granted in year Outstanding at end of period Exercisable at end of period 2014 Number of share options - 262,598 262,598 - Weighted average exercise price - £1.31 £1.31 - 2013 Number of share options - - - - Weighted average exercise price - - - - .Options are valued using the Black-Scholes option pricing model. The following information is relevant in the determination of the fair value of the options granted during the year. Risk free interest rate Expected volatility Expected option life (in years) Weighted average share price after adjusting for PV of dividends Weighted average exercise price Weighted average fair value of options granted Expected dividends 2014 1.31% 40.40% 3.35 £1.57 £1.31 58.4p 8% 2013 - - - - - - - At the grant date there was little share price history for the company on which to calculate volatility. Volatility was therefore estimated using companies classified in the 'Home Improvement Retailers' subsector on the London Stock Exchange. Warrants In December 2013 the Group also issued warrants to Zeus Capital in lieu of payment for services related to the IPO. The warrant is for 3% of the fully diluted share capital of the company following the exercise of the subscription rights. The warrant is exercisable at any time between the 1st and 10th anniversary of admission to AIM. The fair value of the warrant has been determined by the estimated value of services provided and was charged as an IPO expense in the year ended December 2013. Expense recognised in consolidated statement of comprehensive income The total share-based expense comprises: Equity settled - Share award scheme Equity settled - Sharesave scheme Warrants 2014 £000 325 38 - 363 2013 £000 23 - 250 273 50 Safestyle UK PLC Annual Report and Accounts 2014