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2023 ReportAnnual Report 2012 For the year ended 31 December 2012 S t a f f l i n e G r o u p P l c A n n u a l R e p o r t 2 0 1 2 22405.04 9 April 2013 4:46 PM Proof 5 Annual Report 2012 For the year ended 31 December 2012 Company details Company registration number: 05268636 Registered office: 19–20 The Triangle NG2 Business Park Nottingham NG2 1AE Directors: Shaun Brittain (Executive Director) John Crabtree (Non-Executive Chairman) Bankers: Bank of Scotland 33 Old Broad Street London BX2 1LB Solicitors: Browne Jacobson LLP Mowbray House Castle Meadow Road Nottingham NG2 1BJ Marshall Evans (Operations Director) Brabners Chaffe Street LLP Andy Hogarth (Chief Executive) Tim Jackson (Finance Director) Nicholas Keegan (Non-Executive Director) Diane Martyn (Managing Director) Secretary: Tim Jackson Nominated adviser and broker: Liberum Capital Ropemaker Place 25 Ropemaker Street London EC2Y 9LY Registrars: Computershare Investor Services plc PO Box 859 The Pavilions Bridgewater Road Bristol BS99 1XZ 55 King Street Manchester M2 4LQ Auditors: Grant Thornton UK LLP Statutory Auditor Chartered Accountants Colmore Plaza 20 Colmore Circus Birmingham B4 6AT Financial and trade PR: Buchanan Communications 107 Cheapside London EC2V 6DN 22405.04 9 April 2013 4:46 PM Proof 5 Contents Chairman’s statement Chief Executive’s statement Finance Director’s statement Report of the Directors Corporate governance statement Report on remuneration Independent auditor’s report to the members of Staffline Group plc Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of financial position Consolidated statement of cash flows Notes to the financial statements Company statutory financial statements (prepared under UK GAAP) Director’s responsibility statement Independent auditor’s report to the members of Staffline Group plc Principal accounting policies Company balance sheet Notes to the UK GAAP financial statements 2 3 6 7 11 14 16 18 19 20 21 22 45 47 48 49 50 51 1 22405.04 9 April 2013 4:46 PM Proof 5 Chairman’s statement For the year ended 31 December 2012 We are delighted to report that the Group grew revenue and profits during 2012, driven by a combination of organic growth and acquisitions. This good performance was achieved against a backdrop of a challenging macroeconomic outlook and an extremely competitive recruitment market. Whilst this creates many challenges at an operational level, we have continued to grow our OnSite platform, increasing sites by a further 16 this year to 179. Our move in to the Welfare to Work arena during 2011, with the acquisition of EOS, is showing early signs of success and we expect profitability from this division to grow significantly during 2013. We also completed the acquisition of Select Appointments Limited, a long established specialist staffing services business providing office and administration staff across the UK. This transaction will see Staffline expand its services into the ‘White Collar’ arena for the first time, in a move which will see the Group seek to replicate the success of our ‘Blue Collar’ business. Therefore, I remain confident of the Group’s ability to continue to grow. We are seeing further opportunities for both acquisitions and organic growth due to on-going changes in the industry and the ever greater need of our clients to increase their productivity whilst being provided reliable and efficient staffing solutions. John Crabtree OBE Chairman 25 February 2013 2 22405.04 9 April 2013 4:46 PM Proof 5 Chief Executive’s statement For the year ended 31 December 2012 I’m pleased to report the Group has enjoyed another successful year with sales up by 27% and profit after tax up by 15%. We are particularly pleased with this performance given that we suffered the expected reduction in profitability (due to the level of investment committed to supporting our Department for Works and Pensions (“DWP”) contracts) within EOS. As a result of this upfront investment, we had expected at the start of the year that net profit for the Group would remain flat, so it is particularly pleasing to be able to report an increase in operating profit for 2012. We are confident that profitable growth for the Group will continue during 2013, enabling the Board to propose an increased final dividend of 5.0p, (2011: 4.2p) making the full year dividend 8.1p, (2011: 7.1p). This represents an increase of 14% to the full year dividend and we intend to continue to grow the dividend broadly in line with earnings. Operational Review 2012 continued in much the same vein as 2011 with the trading environment remaining difficult. Despite this, sales in our recruitment business grew by 27% and profitability grew by 18%. Sales also grew in our Welfare to Work division, by 33% but, as expected, operating profit before amortisation declined during the year by 48%. This anticipated reduction is due to the structure of the Work Programme contract we operate with the DWP and the upfront investment incurred in 2012. We are confident that profitability will be significantly improved in 2013. In addition we suffered losses on our two European Social Fund contracts due to a shortfall in expected referrals from Local Authorities. The effect on the overall Group results is that our profitability has risen by 4% at the adjusted operating profit level, from £10.3m to £10.7m but more significantly after tax and a reduced charge for amortisation of intangibles from £5.6m to £6.4m. Demand for our OnSite offering continues to generate significant market interest with a good pipeline of new business, the overall trend to outsourcing remaining prevalent for many clients. The number of OnSites we operate from has continued to increase, from 163 in December 2011 to 179 at December 2012; this includes openings from a mixture of new and existing clients and some from acquisitions. Our OnSite model continues to be a driving factor in our success and we anticipate further growth across the UK. Our branch network operation, Staffline Express, grew by 4 locations during the year and now operates from 22 branches. Acquisitions during the period included the well-known British recruitment brand, Select Appointments Ltd (‘Select’), from the Netherlands company Randstad. Select has been established in the UK for 30 years and specialises in both temporary and permanent placements in the white collar market. Select has for the past four years been an exclusively franchise operated business and it is our intention to continue with this model of operation which is capital light and limits the Group’s business risk. We are looking to expand the number of operating branches from 30 at the time of acquisition to over 100 in the next three years, concentrating growth in the major cities and conurbations of the UK. We welcome an approach from individuals looking to operate their own recruitment business with the backing of a national organisation. The acquisition of Select represents an exciting strategic step for the Group as we seek to further broaden our operational reach. Not only is the Select brand instantly recognisable but its established franchise network will provide a stable footing for the Group as we seek to expand our services into the white collar staffing market. We acquired EOS Works Ltd (EOS), the Welfare to Work service provider, in April 2011 and commenced activities with the Coalition Governments new Work Programme Contract in Solihull, Birmingham and the Black Country in June 2011. In October that year, EOS was awarded two further contracts by the DWP, due to be worth £53m over three years. Both contracts are financed by the European Social Fund (ESF), with one operating in our existing Work Programme area in the Midlands and the other based in Yorkshire and Humberside. The nature of all of these contracts means that there is a significant tie up of working capital during the first 18 months which then gradually unwinds as profitability is achieved. At the 31st December 2012 the total additional working capital committed to Eos was £3.2m. Despite the significant amounts of negative publicity surrounding the Work Programme we are extremely pleased with our progress so far, with EOS appearing in the top 3 (out of 40) for all the major performance measures recorded by the DWP. To date we have helped over 8,000 long term unemployed back in to work. Regarding the ESF contracts, whilst we are again performing well against our competition they have been significantly less busy than initially expected, incurred losses in 2012, and are expected to do little more than break even during 2013 despite a number of financial changes by the DWP. This is a matter we continue to discuss with them. 22405.04 9 April 2013 4:46 PM Proof 5 3 Chief Executive’s statement (continued) For the year ended 31 December 2012 Market Overview Gangmaster Licensing Authority (GLA) We are convinced that the GLA has done much to improve standards and drive many sub-standard operators out of the regulated sector. Unfortunately there is considerable evidence that many of these Gangmasters have moved into both the Construction and Hospitality sectors, both of which are unregulated. In addition we have recently experienced an increase in the number of illegal and unlicensed people operating as labour suppliers, sometimes using indentured labour from Eastern Europe. Marshall Evans, Operations Director, continues to be a member of the Board of Directors of the GLA as well as being a member of the REC council and the Chairman of the Policy Committee. I also sit on the board of the Association of Labour Providers. These roles allow us to understand and influence future industry trends and Government policy. PAYE and Travel and Subsistence Schemes We have been encouraged in our long term opposition to the abusive use of travel and subsistence schemes by a more robust response from Government agencies. Whilst during the year we continued to lose a number of clients to competitors operating these schemes we also won business from customers who are realising the potential liabilities they face if they allow their supplier to use these schemes unscrupulously. Health & Safety Our health and safety management system continues to develop using the HSE HSG65 – “Successful Health and Safety Management” guidance as the framework. 2012 saw yet another reduction in the Accident Frequency Rate reporting 0.16 which is a further reduction of 16% on the previous year. Staffline continues to develop its positive culture through its Safety Committee and Safety Champions. ISO 9001 and Investors in People (IIP) In November 2012 Staffline have successfully passed an official ISO external audit confirming continued accreditation, reaffirming our systems and processes are fully compliant with the ISO 9001 standards. As part of our continuous development culture Staffline remain the proud achievers of Investors in People status. People With the continued expansion of the Group, we have seen an increase to 428 employees in our recruitment business and Shared Services this year, giving average sales per employee of £827,000 compared to £763,000 in 2011. In addition a further 224 people are employed by EOS, bringing the Group’s total workforce to 652. In 2012, continuing on the great success of development in operations we enjoyed in 2011, 16 employees passed their REC Certificate in Recruitment Practice, 24 passed the Real Account Management course, 12 achieved Delight the Customer, 10 passed the external business writing course and 4 achieved the Chartered Institute of Environmental Health Level 4 exam in Food Hygiene. In addition, within our Shared Services staff, 3 attended Advanced Certificate in Payroll Techniques, 3 First Aid at Work, 1 Professional CIMA Qualification Dip.MA, with many others attending courses in tax, credit control and other relevant subjects. We congratulate them all on their achievements. 2012 saw the introduction of our residential Leadership Development Course, attended by 20 potential senior managers of the future, which was a great success and continues with a further 20 delegates in 2013. Compliance We take compliance with legislation and industry standards extremely seriously, offering a total commitment to all of our clients to ensure that all of our workers, whether or not covered by the legislation, are recruited and supplied to the standards required by the Gangmaster Licencing Act. This total commitment gives our clients the assurance that all UK ethical and legal standards are fully met. We operate a confidential helpline for our workers to report any concerns and conduct regular surveys to ensure we are achieving our own high standards. 4 22405.04 9 April 2013 4:46 PM Proof 5 Investing for Growth To help us achieve the highest compliance standards we are continuing to develop our new bespoke management information system, Infinity+, which will further improve our operating efficiency. All of the Group’s locations are now live with Infinity+ and we are already deriving a wide range of benefits from it. The new system will provide the platform for further development that will deliver greater efficiencies in the business processes. Agency Workers Regulations These regulations, introduced in October 2011, require recruitment businesses to ensure that temporary contractors working alongside comparable client employed staff are, amongst other things, paid the same amount and enjoy the same holidays. The initial concern amongst some industry commentators that these regulations might cause disruption has not materialised. Board Changes As indicated in the announcement made on 21 February 2013, Marshall Evans has decided to retire from the Board and assume a part-time role with the Group going forward. I would like to personally thank Marshall for providing excellent help and support over the past 10 years and for playing a central role in the growth and success of Staffline. His continued availability, albeit on a part-time basis, and his decision to remain a member of the Board of the REC and the GLA, will be greatly appreciated. I am also pleased to acknowledge the promotion of Shaun Brittain to Joint Managing Director of Staffline Recruitment Ltd. Shaun will be resigning from the Group Board following this promotion to focus on his broader day to day operational duties. Andrew Coop, currently Operations Director at Staffline, will also hold the title of Joint Managing Director of Staffline Recruitment Ltd, and will be responsible for Logistics and Distribution services. Diane Martyn has agreed to become Group Managing Director having joined Staffline as Non-Executive Director last year. Diane will become a full time Executive Director and remain on the Group Board. Finally I would once again thank all our employees for their dedication in ensuring we always offer the best and most innovative service to our clients. Current Trading The first 7 weeks of trading have started strongly and we have developed an excellent pipeline from new and existing customers for the first half of 2013. We have opened a specialised Driving division in Great Britain and in addition have committed to our existing business in Ireland with the appointment of a Divisional Director and team with responsibility for the Group’s growth in that country. We have also recruited the new senior team to manage Select Appointments. Despite the on-going threat arising from the abusive use by some competitors of Travel and Subsistence schemes , the majority of our clients appreciate the reassurance that we offer as a financially stable, ethical and fully compliant public company. Our new business pipeline continues to grow as clients increasingly search for best in class staffing solutions both from a regulatory and business perspective. I am therefore confident that the Group will enjoy another year of substantial growth in 2013. Andy Hogarth Chief Executive 25 February 2013 22405.04 9 April 2013 4:46 PM Proof 5 5 Finance Director’s statement For the year ended 31 December 2012 Financial Highlights The total revenues for the year increased by 27% to £367.0m (2011: £288.3m) reflecting the impact of strong demand for our services from existing customers, new business wins in 2011 and 2012 and also the impact of the acquisitions made during last year and this year. The successful growth of our OnSite business has continued albeit with increased competitive pressure on operating margins. This has resulted in a reduction in overall gross margin to 9.5% (2011: 10.8%). However, adjusted profit from operations has increased by 4% to £10.7m (2011: £10.3m). The charge for amortisation has reduced by £0.8m to £1.8m as historic acquisitions become fully amortised. The charge for employee share options has increased by £0.2m to £0.4m largely due to the share price increasing significantly during the closing months of 2012. The investment in acquisitions, the Welfare to Work business and the growth in working capital offset by continued strong cash flow generation, has led to finance charges increasing to £0.4m (2011: £0.1m) and this has reduced interest cover to a still comfortable 24 times (2011: 60 times). The interest rates on our overdraft facility remain unchanged during the year, at 2.25% (2011: 2.0%) over bank base rate, while the rate for term borrowings remained at 1.0% (2011: 1.0%) over bank base rate and the Revolving Credit Facility at 2.25% to 2.5% over LIBOR. Profit before tax for the year increased to £8.5m (2011: £7.5m) and profit after tax increased to £6.4m (2011: £5.6m). Earnings per Share The basic earnings per share increased by 15% to 29.7p (2011: 25.9p) and the diluted earnings per share increased by 14% to 28.7p (2011: 25.0p). Dividends The Directors propose a final dividend of 5.0p per share against 4.2p per share last year. This gives a total dividend for the year of 8.1p per share which is 14% ahead of the 7.1p per share paid in respect of 2011. Subject to shareholder approval at the AGM, the final dividend will be paid on 3 July 2013 to shareholders on the register on 31 May 2013. Acquisitions During the year we completed four acquisitions for a total consideration of £5.0m. This amount is comprised of £2.8m cash paid at completion, and further potential consideration of £2.2m, £1.0m of which is dependent on future profitability. The acquisitions will add around £18.9m to turnover in a full year, and have resulted in the recognition in the Group balance sheet of additions to goodwill of £0.9m and additions to intangible assets of £0.9m. The intangible assets will be amortised over a period ranging from 1 to 2 years. The acquisitions have been funded from existing bank facilities together with an additional Revolving Credit Facility of £2.5m. Balance Sheet The Group balance sheet has strengthened during the year, with net current assets rising by £6.7m to £11.8m (2011: £5.1m) and a strengthened ratio of current assets to current liabilities of 1.23 (2011: 1.11). It is also pleasing to report that despite the significant growth in the business and investment in acquisitions the gearing has reduced to 12% (2011: 15%). The Group continues to be focused on cash generation and ensuring a robust balance sheet to support the growth of the business. Financing The Group’s current bank facilities include a term loan of £0.6m, repayable in quarterly instalments up to June 2013, a revolving credit facility of up to £7.5m and an overdraft of up to £15.0m. At 31 December 2012 the Group was in a net cash position (excluding the revolving credit facility and term loans). The overdraft facility is renewable annually and was renewed in February 2013 on similar terms to last year. The Board believes that these facilities will ensure that the Group has sufficient headroom to manage the current operations as well as supporting the continued growth of the business. Post tax cash generation during the year has been strong and the relentless focus on debtor management has succeeded in limiting our working capital increase to £2.6m despite the 27% increase in sales. The growth and investment in the business offset by strong operational cash generation have resulted in net debt falling slightly to £4.6m (2011: £4.9m). The investment included £4.1m in acquisitions during the year covering Select Appointments Limited, Go New Recruitment Limited and 2 other businesses, and a further £0.4m investment in our systems development. Tim Jackson Finance Director 25 February 2013 6 22405.04 9 April 2013 4:46 PM Proof 5 Report of the Directors For the year ended 31 December 2012 The Directors present their annual report together with the audited financial statements for the year ended 31 December 2012. Principal activity and business review The principal activity of the Group is the provision of recruitment and outsourced human resource services to industry. A detailed review of the activities of the Group, including financial and non-financial key performance indicators, can be found in the Chairman, Chief Executive and Finance Director’s statements. An interim dividend of £670,120 (3.1p per share) was paid during the year (2011: £623,853, 2.9p per share). The Directors have proposed a final dividend of £1,081,566 (5.0p per share) (2011: £908,027, 4.2p per share) to be paid on 3 July 2013, to shareholders registered on 31 May 2013. This has not been included within creditors as it was not formally approved before the year end. Directors The Directors who held office during the year were as follows: A Hogarth M Evans N Keegan J Crabtree OBE T Jackson S Brittain D Martyn (appointed non-executive 13 February 2012) Substantial shareholdings The interests in excess of 3% of the issued ordinary share capital of the Company which have been notified as at 24 January 2013 were as follows: Octopus Investments Legal and General Investment A J Hogarth ISIS Equity Partners Cazenove Capital Management Investec Asset Management Generali Portfolio Management Hargreave Hale - Stockbrokers Ennismore Fund Management Ordinary shares of Percentage 10p each of ordinary Number 3,241,269 2,465,009 2,068,629 1,917,584 1,600,000 1,555,000 1,091,350 982,716 885,994 shares % 14.16 10.77 9.04 8.38 6.99 6.79 4.77 4.29 3.87 The shareholding for A J Hogarth excludes shares held under the Company’s Joint Share Ownership Plan (JSOP) in which the he is a beneficial co-owner of shares. Details of such shareholdings are given in the Report on Directors’ remuneration. Payment to suppliers It is the Group’s policy to agree appropriate terms and conditions for its transactions with suppliers by means ranging from standard terms and conditions to individually negotiated contracts and to pay suppliers according to agreed terms and conditions, provided that the supplier meets those terms and conditions. The Group does not have a standard or code which deals specifically with the payment of suppliers. Group trade creditors at the year-end amounted to 25 days (2011: 12 days) of average supplies for the year. 22405.04 9 April 2013 4:46 PM Proof 5 7 Report of the Directors (continued) For the year ended 31 December 2012 Financial risk management objectives and policies The Group is exposed to a variety of financial risks which result from both its operating and investing activities. The Group’s risk management is coordinated at its headquarters, in close co-operation with the Board of Directors, and focuses on actively securing the Group’s short to medium term cash flows. The Group does not actively engage in the trading of financial assets for speculative purposes. The most significant financial risks to which, in the opinion of the Directors, the Group is exposed are described below. Credit risk Generally, the maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown on the face of the balance sheet (or in the detailed analysis provided in the notes to the financial statements). Credit risk, therefore, is only disclosed in circumstances where the maximum potential loss differs significantly from the financial asset’s carrying amount. The Group’s trade and other receivables are actively monitored to avoid significant concentrations of credit risk. The Group has adopted a policy of carefully monitoring all customers, in particular those who lack an appropriate credit history. Liquidity risk The Group seeks to manage financial risks to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The Group had net cash of £3,618,000 at 31 December 2012 (2011: £1,841,000) but there are substantial fluctuations within the year. Short term flexibility is achieved by means of a bank overdraft facility of up to £15,000,000 and a revolving credit facility (RCF) of up to £7,500,000. These facilities have been renewed on similar terms in February 2013. Interest rate risk All financial liabilities of the Group owed to the Group’s bankers are subject to floating interest rates. Competitive rates have been negotiated with the Group’s bankers and the rate paid on term bank loans has been set at 1% above base rate (2011: 1% above base rate). The rates paid on the RCFs taken out in 2011 and 2012 is between 2.2% and 2.5% above LIBOR plus a non-utilisation fee of between 0.88% and 1.0%. Details of the key risks impacting on the Group are included in the Corporate Governance statement. Employee Involvement Employees are kept aware of developments within the Group by regular briefings. These include presentations by subsidiary management covering their future budgets. Employee involvement with the financial performance of the Group is further encouraged by the share option scheme. However, as the number of employees now exceeds 250 the qualification criteria for an EMI scheme are no longer met so no further options can be issued under this scheme. Disabled persons It is the Group’s policy to give full and fair consideration to suitable applications for employment from disabled persons. Once employed, disabled persons receive equal opportunities for training, career development and promotion. Opportunities exist for employees of the Group who become disabled to continue their employment or to be trained for other positions within the Group. 8 22405.04 9 April 2013 4:46 PM Proof 5 Directors’ Responsibilities Statement The Directors are responsible for preparing the Directors’ Report and the consolidated financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: ●● select suitable accounting policies and then apply them consistently; ●● make judgments and accounting estimates that are reasonable and prudent; ●● state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; ●● 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 adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. 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 confirm that: ●● so far as each Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and ●● the Directors have taken all steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Auditors Grant Thornton UK LLP offer themselves for reappointment as auditors in accordance with section 489 of the Companies Act 2006. BY ORDER OF THE BOARD Tim Jackson Company Secretary 25 February 2013 05268636 22405.04 9 April 2013 4:46 PM Proof 5 9 10 22405.04 9 April 2013 4:46 PM Proof 5 Corporate governance statement For the year ended 31 December 2012 Statement by the Directors on compliance with the provisions of the UK Corporate Governance Code (the Code) As a company listed on the Alternative Investment Market of the London Stock Exchange, Staffline Group plc is not required to comply with the Code. However, the Board of Directors has considered the effects of the Code and taken steps to comply with the Code insofar as it can be applied practically, given the size of Staffline and the nature of its operations. Due to the size of the Group the number of non executive directors is currently less than the number of executive directors. The Group supports the concept of an effective Board leading and controlling the Group and a brief outline of the role of the Board and its committees, together with the Group’s systems of internal financial control which the Board will continue to keep under review, is given below. The Board The Board currently comprises the Non-Executive Chairman, the Chief Executive, the Group Managing Director, the Finance Director, one Executive Director and one Non-Executive Director. Biographies of the Directors appear below including who sits on which committee (A = Audit Committee, R = Remuneration Committee, N = Nominations Committee). The Non-Executive Directors, although having small shareholdings in the Company, are considered by the Board to be independent. Shaun Brittain — Executive Director Shaun Brittain joined the Group in August 2000 and the Board in February 2009. He was one of the Group’s divisional Directors, with responsibility for the largest region. He has made a significant contribution to the growth of Staffline’s Onsite model and helped to shape the outsourcing development by introducing additional outsourcing services. Prior to that he spent 11 years at Blue Arrow, where he held senior roles, both operational and strategic. John Crabtree OBE — Non-Executive Chairman (A, R, N) John Crabtree joined the Board on 1 March 2005 as a Non-Executive Director and Chairman of the Remuneration Committee. He was appointed Chairman in 2011. John was the senior partner of Wragge & Co, the Birmingham based corporate law firm and whilst in this role John was responsible for the firm’s evolution into a practice with 100 partners and a turnover of £75m. John has a number of business interests, including being Non-Executive Chairman of Real Estate Investors plc, SLR Holdings Limited, Birmingham Hippodrome Theatre Trust, TruckEast Ltd and the charity Sense. Marshall Evans — Executive Director Having gained broad experience with P&O, NFC and Freightliners, Marshall spent six years as Operations Director of TIP Trailer Rental (“TIP”), joining GE Capital when that company acquired TIP in 1993. He then spent four years as part of the acquisition team which purchased and integrated ten further companies, including TLS Vehicle Rental, into GE Capital and became an Executive Director of TLS. He joined Staffline and the Board in July 2002. Marshall is a board member of both the Gangmaster Licensing Authority (GLA) and the Recruitment & Employment Confederation (REC) (the main UK trade body for recruitment agencies). Andy Hogarth — Chief Executive (N) Andy has held senior roles in a wide range of businesses including retail, support services, healthcare, hospitality and construction. As Finance Director he led the MBO and subsequent trade sale in 2002 of Pipeline Constructors Group, a £100m utility services business. He is currently CEO of Staffline Group plc, sits on the board of an elderly care charity and is a Director of Hogarths Hotel, a boutique hotel in Solihull. He is a Fellow of the Association of Chartered Certified Accountants (FCCA) as well as a Master Practitioner of Neuro-Linguistic Programming (NLP) and a Certified NLP coach. He joined Staffline in 2002 as Finance Director, becoming Managing Director in 2005 and was Chief Executive in 2009. Tim Jackson — Finance Director Having qualified as a Chartered Accountant with Grant Thornton, Tim spent nine years in various financial and commercial roles at Salvesen Logistics Plc. He then spent 7 years at Redbridge Holdings Limited culminating in the position of Finance Director of its food service division, Redbridge Fresh Services. As Finance Director of SG Maintenance Services Limited he was instrumental in the operational and finance side of the business and its eventual disposal, before joining Applied Language Solutions Limited, a fast growing translation business, as Finance Director. He joined Staffline as Finance Director in December 2008. He remained a non-executive Director of Applied Language Solutions Limited until its acquisition by Capita plc in December 2011. Nicholas Keegan — Non-Executive Director (A, R, N) Nicholas is a qualified Chartered Accountant, who after spending 10 years in investment banking was Finance Director of a number of quoted and unquoted West Midlands companies, including Newman Tonks Group plc and Frederick Cooper plc. He was from 2005 until 2009 Chief Financial Officer of CompAir Holdings Limited, a venture capital backed international manufacturing business. He was a Non-Executive Director of Interserve plc from 2003 until 2009. He joined Staffline in November 2004 and is Chairman of the Audit Committee. 22405.04 9 April 2013 4:46 PM Proof 5 11 Corporate governance statement (continued) For the year ended 31 December 2012 Diane Martyn – Group Managing Director Diane Martyn was until 2011 CEO of Randstad Staffing in the UK, part of one of the leading human resources services providers in the world, where she was responsible for the merger of Select Appointments plc and Randstad in 2008. She has over 20 years of experience in the staffing industry where she has held senior management roles, including Chief Executive Officer of Select Appointments plc and Managing Director of Blue Arrow. Diane joined the Board of Staffline on 13 February 2012 as a Non-Executive Director and was appointed Group Managing Director on 25 February 2013. Relations with shareholders The Company values the views of its shareholders and recognises their interest in the Group’s strategy and performance. The Annual General Meeting is used to communicate with all investors and they are encouraged to participate. The Directors are available to answer questions. Separate resolutions are proposed on each issue so that they can be given proper consideration and there is a formal resolution to approve the Annual Report and Accounts. Internal control The Board is responsible for maintaining a strong system of internal control to safeguard shareholders’ interests and the Group’s assets and for reviewing its effectiveness. The system of internal financial control is designed to provide reasonable, but not absolute, assurance against material misstatement or loss. The Remuneration Committee, chaired by John Crabtree has met three times during the year. It is responsible for determining the level of remuneration to be paid to the Executive Directors. A separate report on remuneration follows. The Nominations Committee, chaired by John Crabtree has met twice during the year. It is responsible for ensuring that the balance of the board is appropriate to control and direct the business. The Audit Committee, chaired by Nicholas Keegan, has met three times during the year and is responsible for ensuring that the financial performance of the Group is properly monitored and reported on, as well as meeting the auditors and reviewing any reports from the auditors regarding accounts and internal control systems. Auditor independence is maintained through regular meetings with the Audit Committee with management excluded. The Audit Committee is responsible for identifying and commissioning specific internal control reviews as required. The Group has several mechanisms for ensuring internal controls are operating effectively. There is an independent compliance audit team responsible for checking legality to work and compliance with relevant standards (e.g. GLA and REC). Within the payroll team a compliance officer role has been created during the year to ensure payroll team compliance with relevant legislation and procedures. From a financial point of view authority levels are in place and there is regular review of financial information at all management levels right up to the Board. The Group tailors its approach to ensuring internal controls are operating effectively over new acquisitions – in the majority of cases the acquired business is integrated into Staffline systems from the outset. Operational responsibility is assigned from day one and the results form part of the usual regular management reporting. In special circumstances acquisitions continue to be run on separate systems. The Board has considered the need for an internal audit function but has decided that, given the size and complexity of the Group does not justify it at present, although it does have the independent compliance audit team referred to above. However, it will keep this decision under annual review. The Directors keep a register of risks faced by the business, rating these risks on a scale of 1 to 5 for both probability and impact. These risks have been mitigated to the extent considered practical and are reviewed annually. The Directors have identified the following principal risks and uncertainties facing the Group: Principal risks ●● Because of the industries in which the Group specialises, principally food processing, the Directors consider the Group to be relatively less affected than others in the sector during a general economic downturn. However, this sector is subject to great change and consolidation as the buying power of major retailers continues to drive the need for rationalisation and greater economies of scale. We are at risk if our clients lose business in this process. We continue to counter this risk by expanding our client base and can expect to gain as much business as we lose if we have a wide enough spread of clients. 12 22405.04 9 April 2013 4:46 PM Proof 5 ●● Because we allow credit to our clients we are at risk if one of them runs into financial difficulties and is unable to pay their outstanding debt. To minimise the risks we monitor client payment patterns, subscribe to a monitoring service and employ pro-active credit control systems. To date these actions have been successful and the total bad debt charge to the Group in the last three years, excluding VAT, has been £85,000 on sales of £861,000,000, equating to 0.01% of sales. ●● In terms of our welfare to work segment (Eos) our key risk is that we will be unable to find jobs for jobseekers and /or having found jobs we are unable to keep those workers in place. Given our other business segment, recruitment services we are ideally placed to find suitable jobs. This, coupled with Eos’s unique tailored approach to help unemployed people back into sustainable employment, through a combination of intensive job search support, comprehensive vacancy matching services, real work experience, skills development and in-work support should mitigate the risk of failing to keep jobseekers in work. The fact that Eos has only one customer, the Government, is also a risk. However, this is somewhat mitigated by the fact that Eos now have a number of different Government contracts. In addition, experience shows that a change in Government policy (and therefore contract terms) would not necessarily have an adverse impact and there are only a limited number of providers who meet the criteria to secure these contracts. ●● We face the risk that one of our members of staff may deliberately by-pass the procedures set up which ensure we fully comply with all legislative requirements. Although we have put robust checks and audit procedures in place that should detect such acts there is a reputational and financial risk to the business should someone deliberately choose to do this. ●● Major failure of IT systems. The Group has a robust Disaster Recovery plan in place in the event of a major internal failure of our IT systems. However as our business grows we become ever more reliant on third party telecommunication and other providers, including BT, BACS and Weston Telecom. We have put back up and alternative solutions in place but there is still a risk a major failure by any of these suppliers would prove very disruptive. ●● Competition. The group operates in the recruitment services sector where there are a significant number of competitors and barriers to entry are relatively low. To counter the threat of competitors seeking to win business from us the Group aims to build strong long term relationships with its customers through excellent service levels and through its rigorous selection and checking procedures which ensure that all contractors provided by the Group are fully compliant with the legal requirements. ●● Acquisitions. The Group has made a number of acquisitions over the past four years. Significant legal, commercial and financial due diligence is undertaken on each acquisition before completion in line with its size and complexity. Post acquisition the integration into the Staffline procedures and systems is managed by the acquisition team. There is a risk post acquisition that an issue with a customers, contract or staff member may impact the value of the acquisition. Uncertainties ●● The recovery of the UK from recession may impact the Group in both positive and negative ways. The core business model, with its emphasis on the food-production sector is considered relatively defensive as food consumption in the home should not be significantly impacted. The recovery may provide some opportunities if clients seek to use temporary staff in lieu of replacing permanent employees. The exposure to permanent recruitment is minimal as permanent appointments represent less than 1% of Group sales. ●● Onerous changes in the regulatory framework, driven by potential European or UK legislation, could lead to greatly increased employment costs which might lead to a reduction in demand for our temporary workers. Going concern In considering the on-going funding requirements of the Group, the Directors have prepared detailed cash flow forecasts extending to December 2014 and these indicate that the Group expects to be able to continue to operate within its existing bank facilities for the foreseeable future. The Group enjoys a strong working relationship with its bank and had undrawn overdraft facilities of £12.3m at 31 December 2012. Coupled with a strong financial performance for the year ended 31 December 2012 and a strong start to 2013 the Directors are of the view that it remains appropriate for the financial statements to be prepared on a going concern basis. 22405.04 9 April 2013 4:46 PM Proof 5 13 Report on remuneration For the year ended 31 December 2012 Remuneration Committee The Company has a Remuneration Committee comprised of John Crabtree, who is the Chairman, Diane Martyn and Nicholas Keegan. Except as shareholders and Directors none of the members has any personal financial interest in the Group. The Group’s current remuneration policies are set out below. Policy on Executive Directors’ remuneration The Executive Directors’ remuneration packages are designed to attract, motivate and retain Directors of the high calibre needed to help the Group successfully compete in its market place. The Group’s policies are to pay Executive Directors a salary at market levels for comparable jobs in the sector whilst recognising the relative size of the Group. The performance management of the Executive Directors and key members of senior management and the determination of their annual remuneration package is undertaken by the Remuneration Committee. No Director plays a part in any decision about his or her own remuneration. Executive Directors are permitted to accept appointments outside the Group subject to prior Board approval. The remuneration packages for Shaun Brittain, Marshall Evans, Andy Hogarth, Tim Jackson and Diane Martyn are comprised of a basic salary and a performance related bonus as well as share-based payment schemes as described below. The remuneration of the Directors, which was all paid by the Group, is detailed in note seven of the notes to the financial statements. Basic salary An individual’s basic salary is reviewed by the Remuneration Committee each year and when an individual changes position or responsibility. In deciding appropriate levels the Committee takes into account objective research on comparable companies and general market conditions. Annual bonus Annual bonuses are awarded at the discretion of the Remuneration Committee as an incentive and to reward performance during the financial year pursuant to specific performance criteria. In exercising its discretion the Committee takes into account (amongst other things) performance against budget and performance against market expectations. The Committee believes that incentive compensation should recognise the growth and profitability of the business, which are tied to the interests of shareholders. A total bonus of £103,000 has been accrued in respect of the Executive Directors in recognition of performance exceeding budget, in line with the Executive Bonus Scheme approved by the Remuneration Committee. Directors’ share options In October 2009, share options were issued to Shaun Brittain, Marshall Evans, Andy Hogarth, Tim Jackson and two other senior executives. These share options have a performance condition based on the increase in reported diluted Earnings per Share of the Group from the base of 10.7p in December 2008 to the achieved diluted EPS in the year to December 2012. The award is scaled up to a maximum of 150,000 shares for a doubling of diluted EPS. These share options can be exercised between three and seven years of being granted and are detailed in note seven to the notes to the financial statements. 14 22405.04 9 April 2013 4:46 PM Proof 5 Joint Share Ownership Plan In 2010 the Company established a Joint Share Ownership Plan (JSOP) to provide additional incentives to senior executives. The JSOP interest runs from the date of the award until 30 June 2015. During this period the right to sell the JSOP award shares is not at the discretion of the Directors but instead at the discretion of the Employee Benefit Trust. On the eventual disposal of the shares, the amount received by the Directors is calculated based on certain business performance conditions. The eventual payment to the Directors takes into account diluted EPS adjusted for amortisation of intangibles in any financial year up to 2014 (from a minimum of 24p to a maximum of 42p) and the share price at the date of disposal. The interests that the directors acquired in the shares jointly with the Staffline Group plc Employee Benefit Trust are contained within note seven of the notes to the financial statements. Policy on Non-Executive Directors’ Remuneration The remuneration of the Non-Executive Directors is determined by the Board and based upon independent surveys of fees paid to Non-Executive Directors of similar companies. The Non-Executive Directors do not receive any benefits apart from their basic salaries or fees. Service contracts Shaun Brittain, Marshall Evans, Andy Hogarth, Tim Jackson and Diane Martyn have rolling service contracts requiring notice from either party of one year. Nick Keegan and John Crabtree each have contracts terminable on six months’ notice given by either party. There are no contractual termination payments other than as a result of the contractual notice period. Pension arrangements The Group has a defined contribution pension scheme with Scottish Widows for all permanent employees. Executive Directors are entitled to receive a contribution from the Group equivalent to 10% of their basic salary into this or another scheme of their choice. Benefits in kind The Group provides private medical insurance for Shaun Brittain, Marshall Evans, Andy Hogarth, Tim Jackson and Diane Martyn. No other benefits in kind are provided to Directors. 22405.04 9 April 2013 4:46 PM Proof 5 15 Independent auditor’s report to the members of Staffline Group plc For the year ended 31 December 2012 We have audited the group financial statements of Staffline Group plc for the year ended 31 December 2012 which comprise the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of financial position, 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 (IFRSs) as adopted by the European Union. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 9, the Directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group 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 (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/ scope/private.cfm. Opinion on the financial statements In our opinion the group financial statements: ●● give a true and fair view of the state of the group’s affairs as at 31 December 2012 and of its profit for the year then ended; ●● have been properly prepared in accordance with IFRSs as adopted by the European Union; and ●● have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the group financial statements are prepared is consistent with the group financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: ●● certain disclosures of Directors’ remuneration specified by law are not made; or ●● we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the parent company financial statements of Staffline Group plc for the year ended 31 December 2012. David Munton Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants BIRMINGHAM Date: 25 February 2013 16 22405.04 9 April 2013 4:46 PM Proof 5 22405.04 9 April 2013 4:46 PM Proof 5 17 Consolidated statement of comprehensive income For the year ended 31 December 2012 2012 Before 2012 amortisation Amortisation Note £’000 £’000 Continuing operations Sales revenue Cost of sales Gross profit Administrative expenses Operating profit before amortisation of intangibles and share based charge Administrative expenses - Share based payment charge Administrative expenses - Amortisation of intangibles Profit from operations Finance costs Profit for the period before taxation Tax expense Net profit and total comprehensive income for the period Total comprehensive income attributable to: Non-controlling interest Owners of the parent Earnings per ordinary share Basic Diluted 4 5 6 8 9 2012 Total £’000 2011 Total £’000 366,980 288,303 (332,268) 34,712 (23,600) (257,161) 31,142 (20,667) 11,112 10,475 (426) (1,802) 8,884 (363) 8,521 (2,111) (209) (2,606) 7,660 (126) 7,534 (1,976) 366,980 (332,268) 34,712 (23,600) 11,112 (426) - 10,686 (363) 10,323 (2,559) - - - - - - (1,802) (1,802) - (1,802) 448 7,764 (1,354) 6,410 5,558 (11) 6,421 (69) 5,627 29.7p 28.7p 25.9p 25.0p The accompanying notes form an integral part of these financial statements. 18 22405.04 9 April 2013 4:46 PM Proof 5 Consolidated statement of changes in equity For the year ended 31 December 2012 Own Share- based Total Profit attributable Non- Share shares Share payment and loss to owners controlling At 1 January 2012 (audited) Dividends Share options issued in equity settled share based payments Share options exercised Acquisition of non- controlling interest (note 20) Transactions with owners Profit for the period Total comprehensive income for the period capital £’000 2,284 - - 5 - 5 - - JSOP premium reserve account of parent interest £’000 £’000 £’000 £’000 £’000 £’000 Total equity £’000 (1,157) - 15,928 - 229 - 17,702 (1,578) 34,986 (1,578) (87) - 34,899 (1,578) - - - - - - - 41 - 41 - - 32 (186) - 186 32 46 - (58) (58) (154) (1,450) (1,558) 6,421 6,421 - - - - 58 58 (11) 32 46 - (1,500) 6,410 At 31 December 2012 2,289 (1,157) 15,969 75 22,673 39,849 (40) 39,809 6,421 6,421 (11) 6,410 Own Share- based Total Profit attributable Non- Share shares Share payment and loss to owners controlling premium reserve account of parent interest At 1 January 2011 Dividends Share options issued in equity settled share based payments Share options exercised Transactions with owners Profit for the period Total comprehensive income for the period Balance at capital £’000 2,264 – – 20 20 – – JSOP £’000 (1,157) – – – – – – £’000 15,735 – – 193 193 – – £’000 198 – £’000 13,512 £’000 30,552 (1,437) (1,437) 31 – – – 31 213 31 (1,437) (1,193) Total equity £’000 £’000 (18) 30,534 – – – – (1,437) 31 213 (1,193) – – 5,627 5,627 (69) 5,558 5,627 5,627 (69) 5,558 31 December 2011 2,284 (1,157) 15,928 229 17,702 34,986 (87) 34,899 The accompanying notes form an integral part of these financial statements. 22405.04 9 April 2013 4:46 PM Proof 5 19 Consolidated statement of financial position As at 31 December 2012 Assets Non-current assets Goodwill Other intangible assets Property, plant & equipment Deferred tax asset Current Trade & other receivables Cash and cash equivalents Total assets Liabilities Current Trade and other payables Borrowings Other current liabilities Current tax liabilities Non-current Borrowings Other non-current liabilities Deferred tax liabilities Total liabilities Equity Share capital Own shares Share premium Share based payment reserve Profit & loss account Non-controlling interest Total equity Total equity & liabilities 31 31 December December 2012 £’000 2011 £’000 Note 10 11 12 18 13 14 15 16 17 16 17 18 19 30,971 3,031 2,343 140 36,485 59,598 3,650 63,248 99,733 46,678 678 2,928 1,325 51,609 7,556 70 689 59,924 2,289 (1,157) 15,969 75 22,673 39,849 (40) 39,809 99,733 30,032 3,898 2,811 - 36,741 46,744 3,687 50,431 87,172 38,463 2,984 2,345 1,519 45,311 5,624 392 946 52,273 2,284 (1,157) 15,928 229 17,702 34,986 (87) 34,899 87,172 The financial statements were approved by the Board of Directors on 25 February 2013. Andy Hogarth Director Tim Jackson Director The accompanying notes form an integral part of these financial statements. 20 22405.04 9 April 2013 4:46 PM Proof 5 Consolidated statement of cash flows For the year ended 31 December 2012 Net cash inflow from operating activities Cash flows from investing activities Purchases of property, plant and equipment Sale of property, plant and equipment Acquisition of businesses - deferred consideration for prior acquisitions Acquisition of businesses - deferred consideration for current acquisitions Acquisition of businesses - cash acquired Acquisition of businesses - cash paid Net cash used in investing activities Cash flows from financing activities: New loans Loan repayments Interest paid Dividends paid Proceeds from the issue of share capital Net cash flows from financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Year Year ended 31 ended 31 December December 2012 £’000 6,843 2011 £’000 402 Note 26 (543) 24 (1,454) (168) 315 (2,810) (4,636) 2,500 (1,060) (338) (1,578) 46 (430) (1,115) - (1,528) (351) 8,896 (7,701) (1,799) 5,000 (809) (126) (1,437) 213 2,841 1,777 1,444 1,841 397 Cash and cash equivalents at end of period 14 3,618 1,841 Net debt at beginning of year Net change in cash and cash equivalents Decrease in loans Increase in RCF Net debt at end of period (4,921) 1,777 1,060 (2,500) (4,584) (2,264) 1,444 899 (5,000) (4,921) The accompanying notes form an integral part of these financial statements. 22405.04 9 April 2013 4:46 PM Proof 5 21 Notes to the financial statements For the year ended 31 December 2012 1 Nature of operations The principal activities of Staffline Group plc and its subsidiaries (the Group) include the provision of recruitment and outsourced human resource services to industry and services in the welfare to work arena. 2 General information and statement of compliance Staffline Group plc, a Public Limited Company is incorporated and domiciled in the United Kingdom. The Company acts as the holding company of the Group. The registered office and principal place of business of the Group and its subsidiary companies is disclosed on the company details page to these financial statements. The financial statements for the year ended 31 December 2012 (including the comparatives for the year ended 31 December 2011) were approved and authorised for issue by the board of Directors on 25 February 2013. The Group does not have an ultimate controlling related party. 3 Accounting policies Basis of preparation The consolidated financial statements of the Group have been prepared using the significant accounting policies and measurement bases summarised below, and in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. Separate financial statements of Staffline Group plc (‘the Company’) have been prepared, on pages 47 to 52, under the historical cost convention and in accordance with UK GAAP. Functional and presentation currency The consolidated financial statements are presented in sterling, which is also the functional currency of the parent company. The principal accounting policies of the Group are set out below. Consolidation of subsidiaries The Group financial statements consolidate those of the parent company and all of its subsidiaries as at 31 December 2012. Subsidiaries are all entities over which the Group has the power to control the financial and operating policies. The Group obtains and exercises control through voting rights and presence on the respective boards of its subsidiaries. All subsidiaries have a reporting date of 31 December. Acquired subsidiaries and businesses are subject to the application of the acquisition accounting method. This involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary or business prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at these fair values, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Group Learner has been consolidated in the financial statements as a subsidiary despite the group holding a non-controlling interest only, of 40%, in the company. The results of Group Learner are highly immaterial to the financial statements however. Material intra-group balances and transactions, and any unrealised gains or losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. 22 22405.04 9 April 2013 4:46 PM Proof 5 Business combinations The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair value of assets transferred, liabilities incurred and the equity interests of the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the sum of a) fair value of consideration transferred, b) the recognised amount of any non-controlling interest in the acquiree and c) acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (i.e. gain on a bargain purchase) is recognised in profit or loss immediately. Segment reporting The Group has two material operating segments: the provision of temporary staff to customers and the provision of welfare to work services. Each of these operating segments is managed separately as each requires different technologies, marketing approaches and other resources. For management purposes, the Group uses the same measurement policies as those used in its financial statements. The placement of permanent staff with customers, training and the provision of outsourced logistics services all contribute less than 10% of the Group’s total revenue, profit and assets. Under the definitions contained in IFRS 8, the only material geographic area that the Group operates in is the United Kingdom. Revenue recognition Income from the provision of temporary contractors is recognised at the end of the completed working week based on hours worked multiplied by the contracted rate, net of rebates. Income from permanent placements is recognised when the candidates start work. Income from training provision is recognised evenly across the period of the training. In each case, revenue is only recognised when the labour or service has been provided and the Group is entitled to the revenue. Provisions for rebates are accounted for in the same period the related sales are recorded, and are calculated in accordance with the contractual arrangements in place. Income from the provision of welfare to work services is recognised at the point the company earns the right to consideration for services performed in agreement with contracts and contractual obligations. Under the terms of the contract with the DWP, the welfare to work segment receives income when certain contractual milestones are met as each customer passes through the programme. The segment recognises revenue in the financial statements in line with when services are provided and when the milestone outcome can be assessed with reasonable certainty. The majority of income is received based upon performance against set criteria. Where income is received in advance this is initially held in the statement of financial position as deferred income and released to the statement of comprehensive income as services are provided. Accrued income is recognised where services have been provided in advance of receipt of income and based on all available evidence, the company expects to receive payment in accordance with the contract. In spreading revenue over the period services are provided, the basis of revenue recognition considers historical experience and future expectations in terms of success rates, and takes into account the anticipated length of period over which the services are ultimately provided. Operating expenses Operating expenses are recognised in profit or loss upon utilisation of the service or at the date of their origin. Goodwill Goodwill represents the excess of the fair value of the cost of a business acquisition over the Group’s share of the fair value of assets and liabilities acquired as at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Intangible assets Assets acquired as part of a business combination In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group. An independent valuation is undertaken in order to assess the fair value of intangible assets acquired in a business combination. 22405.04 9 April 2013 4:46 PM Proof 5 23 Notes to the financial statements (continued) For the year ended 31 December 2012 The fair value is then amortised over the economic life of the asset as detailed below. Where an intangible asset might be separable, but only together with a related tangible or intangible asset, the group of assets is recognised as a single asset separately from goodwill where the individual fair values of the assets in the group are not reliably measurable. Where the individual fair values of the complementary assets are reliably measurable, the Group recognises them as a single asset provided the individual assets have similar useful lives. Customer contracts and Customer Lists The fair value of acquired customer contracts and customer lists is capitalised and, subject to impairment reviews, amortised over the estimated life of the customer contracts and customer lists acquired (estimated to be 2-5 years). The amortisation is calculated so as to write off the fair value of the customer contracts and customer lists less their estimated residual values over their estimated lives. An impairment review of customer contracts and customer lists is undertaken when events or circumstances indicate the carrying amount may not be recoverable. Property, plant and equipment Freehold land and property, computer equipment and fixtures and fittings are carried at acquisition cost less subsequent depreciation and impairment losses. Depreciation is charged on the cost less estimated residual value, which is assessed annually, of these assets on a straight line basis over the estimated useful economic life of each asset. The useful lives of property, plant and equipment can be summarised as follows: Freehold buildings Computer equipment Fixtures and fittings Motor vehicles Impairment 50 years straight-line 3 years straight-line 3 years straight-line 25% reducing balance Goodwill, other intangible assets and property, plant and equipment are subject to impairment testing. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors the related cash flows. Individual intangible assets or cash-generating units that include goodwill with an indefinite useful life are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. Leases In accordance with IAS 17, the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. The related asset is recognised at the time of inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any, to be borne by the lessee. All other leases are treated as operating leases. Payments on operating lease agreements are recognised as an expense on a straight-line basis. Associated costs, such as maintenance and insurance, are expensed as incurred. The Group does not act as a lessor. 24 22405.04 9 April 2013 4:46 PM Proof 5 In December 2007, the Group completed the purchase, sale and leaseback of a new Headquarters building for a purchase price of £1,455,000 and a sale price of £1,727,000, less costs of £101,000, which is considered by management to be above fair value. In accordance with IAS 17 the excess of proceeds over fair value was deferred and is being amortised over the remaining lease term (10 years). The subsequent leasing agreement, which has been considered separately for the land and buildings element, is treated in accordance with the Group’s existing operating lease accounting policy as detailed above. Taxation Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amounts of assets and liabilities in the consolidated financial statements with their respective tax bases. However, in accordance with the rules set out in IAS 12, no deferred taxes are recognised on the initial recognition of goodwill. This applies also to temporary differences associated with shares in subsidiaries if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided for in full if material. Deferred tax assets are recognised if it is probable that they will be able to be offset against future taxable income. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Most changes in deferred tax assets or liabilities are recognised as a component of tax expense in the profit or loss. Only changes in deferred tax assets or liabilities that relate to a change in value of assets or liabilities that are charged directly in other comprehensive income or equity are charged or credited directly to other comprehensive income or equity. Pensions Pensions to employees are provided through defined contributions to individual personal pension plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions to an independent entity. The Group has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. Contributions recognised in respect of personal pension plans are expensed as they fall due. Liabilities and assets may be recognised if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short term nature. Financial assets The Group’s financial assets include cash, trade receivables and other receivables. All financial assets are initially recognised at fair value, plus transaction costs. They are subsequently included at amortised cost using the effective interest rate method. Interest and other cash flows resulting from holding financial assets are recognised in the profit or loss when receivable, regardless of how the related carrying amount of financial assets is measured. Trade receivables are provided against when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of the receivables. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents include cash at bank and in hand, overdrafts and short term highly liquid investments such as bank deposits less advances from banks repayable within three months from the date of advance. 22405.04 9 April 2013 4:46 PM Proof 5 25 Notes to the financial statements (continued) For the year ended 31 December 2012 Financial liabilities The Group’s financial liabilities include bank loans, an overdraft facility, trade and other payables, including liabilities for share-based payments, and other liabilities, which include deferred and contingent consideration payable in respect of business acquisitions. Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument. All interest related charges are recognised as an expense in “Finance Cost” in the statement of comprehensive income. Bank loans are raised for support of long term funding of the Group’s operations. They are recognised at proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the profit or loss on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade payables are recognised initially at their fair value and subsequently measured at amortised cost less settlement payments. Dividend distributions to shareholders are included in ‘other short term financial liabilities’ when the dividends are approved by the shareholders’ meeting. Contingent consideration is measured at fair value through profit or loss. Other provisions, contingent liabilities and contingent assets Other provisions are recognised when present obligations will probably lead to an outflow of economic resources from the Group and they can be estimated reliably. The timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events, for example, legal disputes or onerous contracts. Provisions are measured as the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the balance sheet date, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. In addition, long term provisions are discounted to their present values, where time value of money is material. All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognised in the consolidated statement of financial position. Probable inflows of economic benefits to the Group that do not yet meet the recognition criteria of an asset are considered contingent assets and therefore not recognised. Equity An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Share capital is determined using the nominal value of shares that have been issued. Own shares is determined using the nominal value of shares that were issued to the Employee Benefit Trust in relation to the Joint Share Ownership Plan (JSOP). This Trust is controlled by the Group and therefore consolidated, resulting in the ‘Own shares’ deducted from equity. The share premium account represents premiums received on the initial issuing of the share capital. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any related income tax benefits. The share based payment reserve represents the value of shares provided under share based payment arrangements. The profit and loss account includes all current and prior period results as disclosed in the statement of comprehensive income. 26 22405.04 9 April 2013 4:46 PM Proof 5 Share-based employee remuneration All share based payment arrangements are recognised in the consolidated financial statements. The Group operates equity settled and cash settled share based remuneration plans for remuneration of its employees. Equity Settled share based remuneration All employee services received in exchange for the grant of any share based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value of the share options awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). All share based remuneration is ultimately recognised as an expense in profit or loss in the statement of comprehensive income with a corresponding credit to the share based payment reserve, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised, if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment is made to the expense recognised in prior periods if fewer share options ultimately are exercised than originally estimated. Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as share premium. Cash Settled share based remuneration The Group has issued cash settled share based payments in respect of services provided by key employees. The share based payment is measured at the fair value of the liability at the grant date and remeasured at fair value of the liability at each subsequent balance sheet date. Where the fair value of the services provided cannot reliably be measured, the fair value of the liability is used and the expense allocated over the vesting period. A financial liability is recognised for the fair value of the share-based payments, and remeasured at the end of each reporting period and at settlement, with any changes to the fair value recognised through the statement of comprehensive income. Key sources of estimation uncertainty The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next accounting year are as follows: Impairment of goodwill The annual impairment assessment in respect of goodwill requires estimates of the value-in-use of cash generating units to which goodwill has been allocated to be calculated. As a result, estimates of future cash flows are required, together with an appropriate discount factor for the purpose of determining the present value of those cash flows. The basis of review of the carrying value of goodwill is as detailed in note 10. Contingent consideration As part of the acquisition process, a forecast is prepared which projects the financial performance of the business over the expected earn-out period. These forecasts are reviewed and updated based on actual performance. Part of the cost of the acquisition is dependent on the trading performance of the acquired business following the transaction. The contingent consideration is based on these estimates of the future performance of the acquired business. The contingent consideration is classified as a financial liability, measured at fair value with any changes in estimated value recognised in profit and loss in the statement of comprehensive income. Business combinations On initial recognition, the assets and liabilities of the acquired business and the consideration paid for them are included in the consolidated financial statements at their fair values. In measuring fair value, management uses estimates of future cash flows and discount rates. Any subsequent change in these estimates would affect the amount of goodwill if the change qualifies as a measurement period adjustment. Any other change would be recognised in profit or loss in the statement of comprehensive income in the subsequent period. Details of acquired assets and liabilities assumed are given in note 20. 22405.04 9 April 2013 4:46 PM Proof 5 27 Notes to the financial statements (continued) For the year ended 31 December 2012 Critical judgments in applying the Group’s accounting policies The Directors consider that the only critical judgement in applying the accounting policies which are described above is: Provisions Provisions for future claims or onerous contracts are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required from the Group and amounts can be estimated reliably. Timing or the amount of the outflow may still be uncertain. Adoption of new or amended IFRS The Group has not early adopted the following new standards, amendments or interpretations that have been issued but are not yet effective. The Directors anticipate that the adoption of these standards will not result in significant changes to the Group’s accounting policies. The Group has commenced its assessment of the impact of these standards but it is not yet in a position to state whether these standards would have a material impact on its results of operations and financial position. ●● IFRS 9 Financial Instruments (effective 1 January 2015) ●● IFRS 13 Fair value measurement (effective 1 January 2013) ●● IFRS 10 Consolidated Financial Statements (effective 1 January 2013) ●● IFRS 11 Joint Arrangements (effective 1 January 2013) ●● IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2013) ●● IAS 27 (Revised), Separate Financial Statements (effective 1 January 2013) ●● IAS 28 (Revised), Investments in Associates and Joint Ventures (effective 1 January 2013) 4 Segmental reporting Management currently identifies two operating segments: the provision of recruitment and outsourced human resource services to industry and the provision of welfare to work services. These operating segments are monitored by the Group’s Board and strategic decisions made on the basis of segment operating results. Segment information for the reporting period is as follows: Recruitment services 2012 £'000 Welfare to work 2012 £'000 Total Recruitment Welfare Group services to work 2012 £'000 2011 £'000 2011 £'000 Total Group 2011 £'000 Segment continuing operations: Sales revenue from external customers 354,121 12,859 366,980 (322,201) 31,920 (21,256) (360) (10,067) 2,792 (1,422) (562) (332,268) 34,712 (22,678) (922) 278,631 (251,698) 26,933 (17,751) (251) 9,672 288,303 (5,463) 4,209 (2,219) (446) (257,161) 31,142 (19,970) (697) Cost of sales Segment gross profit Administrative expenses Depreciation Segment operating profit before amortisation of intangibles and share based payment charge Administrative expenses - share based payment charge Amortisation of intangibles Segment profit from operations 10,304 808 11,112 8,931 1,544 10,475 (426) (1,349) 8,529 - (453) 355 (426) (1,802) 8,884 (209) (1,568) 7,154 - (1,038) 506 (209) (2,606) 7,660 Segment assets 91,779 7,954 99,733 77,633 9,539 87,172 The Group purchased Eos Works Group Limited (Eos), a welfare to work provider, on 21 April 2011 thus creating two segments during the year ended 31 December 2011. During 2012, two customers in the recruitment services segment contributed greater than 10% of that segment’s revenues being 17.4% and 10.8% of that segment’s revenues (2011: one customer greater than 10%). The welfare to work segment revenues relate solely to one customer. The Group’s revenues from external customers and its non-current assets all arise in the United Kingdom. 28 22405.04 9 April 2013 4:46 PM Proof 5 5 Administrative expenses Employee benefits expenses (note 7) Depreciation Other expenses 2012 £’000 16,691 1,015 2011 £’000 13,679 697 6,320 24,026 6,500 20,876 Auditors’ remuneration in their capacity as auditors of the parent company is £7,000 (2011: £7,000) and in their capacity as auditor of subsidiary companies is £60,500 (2011: £60,000). Non-audit remuneration in respect of tax compliance services totalled £14,550 (2011: £12,000) and in respect of other advice totalled £7,150 (2011: £15,500). 6 Finance costs Interest payable on bank and other loans and overdraft 7 Directors and employees remuneration Employee benefits expense Expense recognised for employee benefits is analysed below: Wages and salaries Social security costs Other pension costs - defined contribution plans Share option charge - cash settled Share option charge - equity settled The average number of persons (including Directors) employed by the Group during the year was: - administrative staff - sales staff 2012 £’000 363 2011 £’000 126 2012 £’000 17,896 1,787 305 394 2011 £’000 14,086 1,461 287 178 32 20,414 31 16,043 Number Number 632 61 693 457 41 498 Of the £20,414,000 total employee benefits cost above, £3,722,774 relating to Eos is included in cost of sales and therefore not reflected in administrative expenses in note 5 above. Included in cost of sales are temporary workers’ remuneration paid through the temporary payroll of subsidiary companies as follows: Wages and salaries Social security costs The average number of temporary workers contracted by the Group during the year was: 2012 £’000 2011 £’000 300,312 224,493 17,993 318,305 14,313 238,806 Number 22,223 Number 15,811 22405.04 9 April 2013 4:46 PM Proof 5 29 Notes to the financial statements (continued) For the year ended 31 December 2012 Directors’ remuneration The remuneration of the Directors, which was all paid by Staffline Recruitment Limited, the Company’s wholly owned subsidiary undertaking, was as follows: 2012 Salary and fees Bonus Benefits in kind Subtotal Pension contributions Share- based employee remuneration Total 2011 Salary and fees Bonus Benefits in kind Subtotal Pension contributions Share- based employee remuneration Total A Hogarth M Evans T Jackson S Brittain D Martyn N Keegan J Crabtree £'000 £'000 £'000 £'000 £'000 £'000 £'000 192 45 2 239 18 101 358 146 20 2 168 13 51 232 138 19 2 159 12 70 241 138 19 2 159 13 68 240 92 - - 92 5 - 97 35 - - 35 - - 35 62 - - 62 - - 62 A Hogarth M Evans T Jackson S Brittain D Martyn N Keegan J Crabtree £'000 £'000 £'000 £'000 £'000 £'000 £'000 186 98 2 286 18 47 351 127 69 2 198 12 24 234 115 62 2 179 11 120 65 2 187 11 33 223 32 230 - - - - - - - 34 - - 34 - - 34 53 - - 53 - - 53 Total £'000 803 103 8 914 61 290 1,265 Total £'000 635 294 8 937 52 136 1,125 Share-based employee remuneration Approved Employee Share Option Plan At 31 December 2012 the Group operated a share based payment scheme (EMI scheme) for certain employees. However as the number of employees now exceeds 250 the qualification criteria for an EMI scheme are no longer met so no further share options can be issued under the scheme. The share option scheme was available to all full time members of staff, with the exception of the Directors, subject to the rules of the scheme, the key points of which are as follows; ●● only staff with in excess of six months service are eligible; ●● the number of options granted is a factor of length of service and current salary; ●● options are exercisable between two and seven years of being granted; ●● except in certain limited circumstances all options lapse if an employee leaves the Group; and ●● exercise of options is not subject to any specific performance criteria. Performance Related Share Option Plan The share options issued to Shaun Brittain, Marshall Evans, Andy Hogarth and Tim Jackson and two other senior executives have different conditions which are detailed below. These share options have a performance condition based on the increase in reported Diluted Earnings per Share of the Group from the base of 10.7p in December 2008 to the achieved Diluted EPS in the year to December 2012. The award is scaled up to a maximum of 150,000 shares for a doubling of diluted EPS. The share options can be exercised between three and seven years of being granted. Details of the Directors’ share options are as follows: At 1 Jan Exercised/ At 31 Dec Exercise Date of grant 19 Oct 2009 19 Oct 2009 19 Oct 2009 19 Oct 2009 2012 Granted Lapsed 150,000 150,000 150,000 150,000 - - - - - - - - 2012 150,000 150,000 150,000 150,000 price 47.5p 47.5p 47.5p 47.5p A Hogarth M Evans S Brittain T Jackson 30 22405.04 9 April 2013 4:46 PM Proof 5 Except as noted under the Joint Share Option Plan below, all share based employee remuneration will be settled in equity. The Group has no other legal or constructive obligation to repurchase or settle the options in cash. Share options and the weighted average exercise price are as follows for the reporting periods presented: Outstanding at start of period Granted Lapsed Exercised Outstanding at end of period Weighted average exercise price (pence) Number 1,180,095 - (207,263) (43,663) 929,169 2012 Number 73 - 1,187,799 200,000 (176) (4,577) (105) (203,127) 50 1,180,095 Weighted average exercise price (pence) 2011 62 179 (93) (105) 73 The Group has the following outstanding share options and exercise prices: Weighted Weighted average average exercise Contractual price life (pence) (months) 2012 £’000 20112 £’000 - 126 167 92 54 48 - - - - - - - - Number - 3,466 9,976 7,991 7,736 900,000 - Weighted Weighted average average exercise Contractual price life (pence) (months) 2011 £’000 2011 £’000 94 124 158 94 54 48 179 - - - - - 12 54 Number 1,400 10,186 23,101 25,929 19,479 900,000 200,000 Date exercisable and (option life): 2007 (up to 2012) 2008 (up to 2013) 2009 (up to 2014) 2010 (up to 2015) 2011 (up to 2016) 2013 (up to 2016) 2016 (up to 2021) Share options have exercise prices between 47.5p and 174.0p. The weighted average share price during the year was 232p (2011: 213p). During the year, options over 43,663 ordinary shares (2011: 203,127) were exercised and the market price on the date of exercise ranged from 238.0p – 240.0p (2011: 209.5p – 223.5p). The number of share options exercisable at the end of the year was 29,169 (2011: 80,095). The weighted average price of the options exercisable at the end of the year was 50p (2011: 73p). The fair value of options granted was determined using the Black-Scholes valuation model. Significant inputs into the calculations were: ●● share price at date of grant ●● exercise prices as detailed above ●● 30% (2011: 30%) volatility based on expected and historical share price ●● a risk free interest rate of 4% (2011: 4%) ●● all options are assumed to be exercised after two years from the date of grant of the options (with the exception of the Directors and senior managers options which are expected to vest after three years) ●● dividends in line with current levels. 22405.04 9 April 2013 4:46 PM Proof 5 31 Notes to the financial statements (continued) For the year ended 31 December 2012 Joint Share Ownership Plan In 2010 the Company established a Joint Share Ownership Plan (JSOP) to provide additional incentives to senior executives. The directors and senior executives participating in the JSOP acquired an interest in the shares jointly with the Staffline Group plc Employee Benefit Trust. The directors’ interests are detailed below: A Hogarth M Evans S Brittain T Jackson Award date 6 Sep 2010 6 Sep 2010 6 Sep 2010 6 Sep 2010 Participation Interest over Date on which price (number of shares) 92p 92p 92p 92p 306,863 145,400 200,000 205,000 exercisable 30/06/2015 30/06/2015 30/06/2015 30/06/2015 The JSOP interest runs from the date of the award until 30 June 2015. During this period the right to sell the JSOP award shares is not at the discretion of the Directors but instead at the discretion of the Employee Benefit Trust. On the eventual disposal of the shares, the amount received by the Directors is calculated based on certain business performance conditions. The eventual payment to the Directors takes into account diluted EPS adjusted for amortisation of intangibles in any full year up to 2014 (from a minimum of 24p to a maximum of 42p) and the share price at the date of disposal. Diluted EPS adjusted for amortisation of intangibles is disclosed in note 9. The JSOP is settled in cash and therefore accounted for as a cash settled scheme. The fair value of the liability was determined using the Binomial valuation model as at 31 December 2012. Significant inputs into the calculations were: ●● share price at date of grant; ●● exercise prices as detailed above; ●● 30% (2011: 30%) volatility based on expected and historical share price; ●● a risk free interest rate of 4% (2011: 4%); ●● the disposal of shares and settlement of scheme on 30 June 2015; ●● 75% (2011: 62.5%) pay-out ratio based on management expectations; and ●● 33.3% forfeiture rate to account for employees that leave before the vesting date. Share-based employee remuneration In total £426,000 of employee remuneration expense has been included in the consolidated statement of comprehensive income for the year ended 31 December 2012 (2011: £209,000) which increased the share based payment reserve by £32,000 (2011: £31,000) in respect of equity settled schemes and created a liability of £394,000 (2011: £178,000) in respect of cash settled schemes. Key management personnel The key management are considered to be the Board of Directors of Staffline Group plc, whose remuneration can be seen within note 7. Disclosures in accordance with IAS 24 are included in note 21. 8 Tax expense The relationship between the expected tax expense and the tax expense actually recognised in the statement of comprehensive income can be reconciled as follows: Result for the year before tax Tax rate Expected tax expense Adjustment for non-deductible expenses relating to short term temporary differences Other non-deductible expenses Adjustment in respect of prior year Deferred tax credit Actual tax expense Tax expense comprises: Current tax expense Deferred tax expense - origination and reversal of temporary differences Tax expense 32 2012 % 24.5% 24.8% 2012 £’000 8,521 2,088 13 587 - (577) 2,111 2,688 (577) 2,111 2011 % 26.5% 26.2% 2011 £’000 7,534 1,997 20 390 124 (555) 1,976 2,531 (555) 1,976 22405.04 9 April 2013 4:46 PM Proof 5 9 Earnings per share The calculation of basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year, after deducting any own shares (JSOP). The calculation of the diluted earnings per share is based on the basic earnings per share adjusted to allow for all dilutive potential ordinary shares. Details of the earnings and weighted average number of shares used in the calculations are set out below: Earnings (£'000) Weighted average number of shares Earnings per share (pence) Earnings per share (pence) before amortisation Basic 2012 6,410 21,614,114 29.7p 35.9p Basic 2011 5,558 Diluted Diluted 2012 6,410 2011 5,558 21,446,973 22,343,159 22,223,142 25.9p 35.1p 28.7p 34.8p 25.0p 33.9p The weighted average number of shares has been increased by 729,045 (2011: 776,169) shares to take account of all dilutive potential ordinary shares that could be issued under the share option scheme and all shares issued during the year excluding own shares. Dividends During the year, Staffline Group plc paid interim dividends of £670,210 (2011: £623,853) to its equity shareholders. This represents a payment of 3.1p (2011: 2.9p) per share. A final dividend of £1,081,566 has been proposed (2011: £908,027) but has not been accrued within these financial statements. This represents a payment of 5.0p (2011: 4.2p) per share. The final dividend for 2011 was declared and paid in 2012. 10 Goodwill Gross carrying amount At 1 January 2011 Additions At 31 December 2011 Additions At 31 December 2012 Goodwill above relates to the following acquisitions: Staffline Recruitment Limited Onsite Partnership Limited Peter Rowley Limited A La Carte Recruitment Limited Qubic Recruitment Solutions Limited Ethos Recruitment Limited Eos Works Group Limited Taskforce Recruitment Limited Go New Recruitment Limited Total £’000 26,162 3,870 30,032 939 30,971 Original cost £’000 22,326 1,855 764 744 745 76 1,585 1,937 939 Date of acquisition 8 December 2004 16 March 2007 1 December 2009 17 May 2010 5 November 2010 14 March 2011 21 April 2011 12 September 2011 14 September 2012 Following acquisition, with the exception of Eos, each of the businesses have been, or are in the process of being, fully integrated into the core recruitment business of the group. Therefore, management consider there to be two cash generating units (in line with the business segments defined in note 4), and have tested these two cash generating units for impairment. The total net book value of other intangible assets allocated to the two cash generating units is as follows: Recruitment services: £1,446,000 (2011: £1,860,000) and Welfare to Work £1,585,000 (2011: £2,038,000). For both segments the recoverable amount of goodwill was determined based on a value-in-use calculation, covering a detailed one year forecast, followed by an extrapolation of expected cash flows over the next ten years at a growth rate of 5% (Recruitment Services) and 2% (Welfare to Work), and a pre-tax discount rate of 10% based on weighted average cost of capital. The recruitment services growth rate is based on the continuation of historic organic growth achieved by the business over the past 10 years. This has been achieved by sales growth with existing and new customers offset partially by a reduction in gross margins. 22405.04 9 April 2013 4:46 PM Proof 5 33 Notes to the financial statements (continued) For the year ended 31 December 2012 The growth rate exceeds the long term average growth rate for the markets in which the two segments operate, but this is deemed reasonable based on the reasons noted above. Management have used a forecast period of ten years as they feel this represents the minimum period over which the business model they have developed is sustainable. Management’s key assumptions for both segments are that there will be no significant changes in the business and that turnover and profit growth will be below historic levels. In respect of the Welfare to Work segment management have assumed that the existing government contract will be replaced with like contracts over time. Management have considered internal and external market data in setting their assumptions. Apart from the considerations described in determining the value-in-use of the cash generating units above, the Group’s management are not currently aware of any other probable changes that would necessitate changes in its key estimates. Impairment testing For the purpose of annual impairment testing, goodwill is allocated to the cash generating units expected to benefit from the synergies of the business combinations in which the goodwill arises as follows: Recruitment services Welfare to work services Goodwill as at 31 December 2012 £’000 29,386 1,585 30,971 2011 £’000 28,447 1,585 30,032 The Directors do not believe that any reasonably possible changes in the assumptions used in calculating the value-in-use would result in the recoverable amount of goodwill falling below the carrying value and impairment becoming necessary. 11 Other intangible assets The Group’s other intangible assets include the customer contracts and lists obtained through the acquisition of the companies in note 10 above. The expected remaining useful life of these assets is 1 - 5 years. The carrying amounts for the financial year under review can be analysed as follows: Gross carrying amount At 1 January 2011 Additions through business combinations At 31 December 2011 Additions through business combinations At 31 December 2012 Amortisation At 1 January 2011 Provided in year At 31 December 2011 Provided in year At 31 December 2012 Net book amount at 31 December 2012 Net book amount at 31 December 2011 Customer Customer contracts £’000 - 3,076 3,076 - 3,076 £’000 - 1,038 1,038 453 1,491 1,585 2,038 lists £’000 2,350 2,132 4,482 935 5,417 £’000 1,054 1,568 2,622 1,349 3,971 1,446 1,860 Total £’000 2,350 5,208 7,558 935 8,493 £’000 1,054 2,606 3,660 1,802 5,462 3,031 3,898 The carrying amount of the material intangible asset – Eos Work Programme contract is £1,585,000. The remaining amortisation period is 3.5 years. There are no intangible assets with restricted title. 34 22405.04 9 April 2013 4:46 PM Proof 5 12 Property, plant and equipment Gross carrying amount At 1 January 2011 Additions Additions - business combinations Disposals At 31 December 2011 Additions Additions - business combinations Disposals At 31 December 2012 Depreciation At 1 January 2011 Provided in year Disposals At 31 December 2011 Provided in year Disposals At 31 December 2012 Net book value at 31 December 2012 Net book value at 31 December 2011 Land and Computer Fixtures Motor buildings equipment and fittings vehicles £’000 600 570 808 - 1,978 63 - - 2,041 36 264 - 300 348 - 648 1,393 1,678 £’000 590 464 184 (95) 1,143 385 26 (29) 1,525 116 300 (94) 322 479 (14) 787 738 821 £’000 157 255 107 (158) 361 95 38 (65) 429 124 117 (158) 83 182 (40) 225 204 278 £’000 45 - 14 (13) 46 - - (20) 26 - 16 (4) 12 6 - 18 8 34 Total £’000 1,392 1,289 1,113 (266) 3,528 543 64 (114) 4,021 276 697 (256) 717 1,015 (54) 1,678 2,343 2,811 All assets stated above are secured against bank loans outstanding at the year end. 13 Trade and other receivables Trade and other receivables Accrued income 2012 £’000 58,472 1,126 59,598 2011 £’000 46,744 - 46,744 Trade and other receivables are usually due within 14 - 30 days and do not bear any effective interest rate. All trade receivables are subject to credit risk exposure. Other than those disclosed in note 4, the Group does not identify specific concentrations of credit risk with regards to trade and other receivables as the amounts recognised represent a large number of receivables from various customers. The fair value of these short term financial assets is not individually determined as the carrying amount is a reasonable approximation of fair value. Some of the unimpaired trade receivables are past due as at the reporting date. The age of financial assets past due but not impaired, is as follows: Not more than three months More than three months but no more than six months 14 Cash and cash equivalents Cash and cash equivalents Bank overdraft (see note 16) Cash and cash equivalents per cash flow statement 2012 £’000 13,586 293 13,879 2012 £’000 3,650 (32) 3,618 2011 £’000 8,585 139 8,724 2011 £’000 3,687 (1,846) 1,841 Cash and cash equivalents consist of cash on hand and balances with banks only. At the year-end £3,650,000 (2011: £3,687,000) of cash on hand and balances with banks were held by subsidiary undertakings however this balance is available for use by the Company. 22405.04 9 April 2013 4:46 PM Proof 5 35 Notes to the financial statements (continued) For the year ended 31 December 2012 15 Trade and other payables Trade and other payables Accruals Deferred income 2012 £’000 27,926 18,212 540 46,678 2011 £’000 21,752 13,624 3,087 38,463 The fair value of trade and other payables has not been separately disclosed as, due to their short duration, the Directors consider the carrying amounts recognised in the balance sheet to be a reasonable approximation of their fair value. Trade and other payables include a share based payment liability of £588,000. 16 Borrowings Bank loans and overdrafts are repayable as follows: In one year or less or on demand In more than one year but not more than two years In more than two years but not more than three years In more than three years but not more than four years Debt issue costs Split: Current liabilities: Bank loans Overdraft Non-current liabilities: Bank loans and revolving credit facility 2012 £’000 678 7,556 - - 8,234 - 8,234 646 32 678 7,556 8,234 2011 £’000 2,984 603 5,034 25 8,646 (38) 8,608 1,138 1,846 2,984 5,624 8,608 The bank loans and revolving credit facility (RCF) and overdrafts are secured by a debenture over all the assets of the Group. The balance of the first bank loan is repayable in one instalment of £268,000 plus one final payment of £322,000 on 30 June 2013. Interest accrues on the loan at 1.0% (2011: 1.0%) above base rate. The second bank loan is secured by a first legal charge over a freehold property and is repayable in 120 monthly capital and interest payments of £5,830 until 20 June 2015. Interest accrues on the loan at 1.5% (2011: 1.5%) above base rate. The RCF of £7.5 million was drawn down in full on 1 July 2012. The facility is repayable at the latest on 21 July 2014. Interest accrues on the loan at between 2.2% and 2.5% above LIBOR plus a non-utilisation fee of between 0.88% and 1%. During the period repayments totalling £1,060,000 (2011: £809,000) were made against the bank loans. The bank loans contain various covenants which, if breached, could lead to the loans becoming payable on demand. The relevant covenants have all been comfortably satisfied in 2011 and 2012. On the basis of discounting the future loan repayments at a rate of 5% the theoretical fair value of the bank and other loans is £627,432 at 31 December 2012 (2011: £1,680,777). Fair values of the bank and other loans have been determined by calculating the present values at the balance sheet date of the future cash flows, using fixed effective market interest rates available to the Group. 36 22405.04 9 April 2013 4:46 PM Proof 5 17 Other liabilities Due within one year Deferred income Deferred consideration Contingent consideration Due after more than one year Deferred income Contingent consideration 2012 £’000 17 1,158 1,753 2,928 70 - 70 2011 £’000 17 - 2,328 2,345 85 307 392 The deferred income relates to the current head office building for the Group which was subject to a sale and lease back transaction in December 2007, with a sales price above fair value. The excess of proceeds over fair value has been deferred and is being amortised over the remaining lease term. The subsequent leasing agreement is treated as an operating lease. See note 22 for further information relating to details on the Group’s operating lease agreements. See note 20 for further details on the deferred consideration and contingent consideration balances which relate to acquisitions made in the current and prior year. 18 Deferred tax Deferred tax liabilities (assets) Non current assets -Other intangible assets Current liabilities -share based payment liability Recognised as: Deferred tax asset Deferred tax liability Deferred tax liabilities (assets) Non current assets -Other intangible assets Recognised as: Deferred tax liability Recognised Recognised 1 January in business 2012 £’000 combination £’000 180 - 180 946 - 946 - 946 in profit and loss £’000 (437) (140) (577) Recognised Recognised 1 January in business 2011 £’000 combination £’000 in profit and loss £’000 1,500 (554) - - 31 December 2012 £’000 689 (140) 549 (140) 689 31 December 2011 £’000 946 946 There are unprovided deferred tax assets amounting to £200,000 (2011:£Nil) in relation to capital allowances. The gross amount is £834,000. This amount has not been recognised as it is probable that the temporary difference will not reverse in the foreseeable future. 22405.04 9 April 2013 4:46 PM Proof 5 37 Notes to the financial statements (continued) For the year ended 31 December 2012 19 Share capital Authorised 30,000,000 ordinary 10p shares Allotted and issued 22,888,578 ordinary 10p shares Shares issued and fully paid at the beginning of the period Shares issued during the year Shares previously issued paid during the year Shares issued and fully paid Shares issued but not fully paid Shares issued Shares authorised but unissued Total equity shares issued at end of period 2012 £’000 2011 £’000 3,000 3,000 2,289 2,264 Ordinary 10p shares Year ended Year ended 31 December 2012 31 December 2011 22,831,629 22,628,502 43,663 13,286 203,127 - 22,888,578 22,831,629 - 22,888,578 7,111,422 30,000,000 13,286 22,844,915 7,155,085 30,000,000 All ordinary shares have the same rights and there are no restrictions on the distribution of dividends or repayment of capital with the exception of the 1,257,263 shares held by the EBT where the right to dividends has been waived. At 31 December 2012 all issued shares were fully paid, at 31 December 2011 13,286 shares were not fully paid. 20 Business combinations The Company made a total of 4 acquisitions during the year. An adjustment was required to the book values of the assets and liabilities of the businesses acquired in order to present the net assets at fair values in accordance with group accounting policies. The purchases were accounted for as acquisitions. Goodwill is primarily related to growth expectations, expected future profitability, the skill and expertise of the acquired workforce, and expected cost synergies. The goodwill that arose from these business combinations is not expected to be deductible for tax purposes. The following acquisitions were made during the year to enhance the Group’s recruitment services segment: ●● On 10 August 2012 a Group undertaking acquired the trade and assets of DKM Driving Limited and DKM Energy Limited, based in Nottingham; ●● On 14 September 2012 a Group undertaking acquired Go New Recruitment Limited, based in Swindon and Go New Recruitment (Gloucester) Limited based in Gloucester and assumed control by acquiring 100% of the voting rights; ●● On 23 October 2012 a Group undertaking acquired Select Appointments Limited and assumed control by acquiring 100% of the voting rights; and ●● On 11 December 2012 a Group undertaking acquired the trade and assets of GB Resourcing Limited, based in Birmingham. 38 22405.04 9 April 2013 4:46 PM Proof 5 These acquisitions were individually immaterial to the Group and have, therefore, been disclosed in aggregate. The aggregate amounts in respect of the above are detailed below: Intangible Assets - customer lists Fixtures and fittings Trade and other receivables Cash at bank Deferred tax asset Deferred tax liability Trade and other payables Net assets at acquisition Goodwill Satisfied by: Cash Contingent consideration Deferred consideration Total Book Provisional Value at Fair Value Fair Value Acquisition Adjustment to group £’000 - 16 6,372 315 246 - (3,426) 3,523 £’000 935 - - - (211) (185) - 539 £’000 935 16 6,372 315 35 (185) (3,426) 4,062 939 5,001 2,810 1,033 1,158 5,001 Acquisition costs recognised as expenses (included within administrative expenses) in the year amounted to £82,597 (2011: £57,000). Consideration transferred The acquisitions were settled in cash amounting to £2,810,000 with future consideration payable of £1,158,000. The purchase agreements included an additional contingent consideration of £1,033,000 payable only if the profits met the target level agreed by both parties. The additional consideration will be paid in accordance with the specific agreements for each acquisition. The fair value of the contingent consideration liability initially recognised also reflects management’s estimate as at 31 December 2012 based on current results and forecasts. Identifiable net assets The fair value of trade and other receivables acquired as part of the business combination amounted to £6,372,000 which equated to the gross contractual amount. Contribution to the Group results The above acquisitions contributed post acquisition revenues of £3,597,000 and profits totalling £129,000. If the acquisitions had been made on 1 January 2012 revenues of £18,390,000 and an operating profit before amortisation of intangible assets of £502,000 would have been included. Goodwill The goodwill recognised relates to expected synergies to be achieved as a result of combining the operations of the businesses. Acquisition of non controlling interest On 26 July 2012 the company acquired the balance of shares that it did not already own in House of Logistics Limited for nil consideration. Following the transaction the company owns 100% of the share capital and the subsidiary became a dormant company. 22405.04 9 April 2013 4:46 PM Proof 5 39 Notes to the financial statements (continued) For the year ended 31 December 2012 21 Related party transactions The only related parties are the Group’s Directors and Group undertakings. Transactions with wholly owned Group entities are exempt from disclosure. Transactions with Group undertakings not wholly owned On 29 July 2012 the business and assets of House of Logistics Limited were transferred to a Group undertaking. Prior to that point, during the year the Group undertaking has paid for certain expenses on behalf of House of Logistics Limited during the year amounting to £424,230 (2011: £1,700,538). At 31 December 2012 there is no intercompany balance between the Group and House of Logistics Limited as this was eliminated on consolidation (2011: £382,160). Transactions with Group directors The Group Directors’ personal remuneration includes the following expenses: Short-term employee benefits: Salaries and fees Bonus – unpaid Social security costs Benefits in kind Post employment benefits: Pension contributions Share based payments: Share based employee remuneration 2012 £’000 2011 £’000 803 103 140 8 61 290 635 294 190 8 52 136 1,405 1,315 22 Operating leases The Group’s aggregate minimum operating lease payments for the full remaining lives of the leases are as follows: In one year or less Between one and five years In five years or more 2012 2011 Land and Land and buildings buildings £’000 101 1,865 996 2,962 £’000 113 1,864 1,722 3,699 Lease payments recognised as an expense during the year ended 31 December 2012 amounted to £1,163,000 (2011: £477,000). Operating lease agreements do not contain any contingent rent clauses. None of the operating lease agreements contain renewal or purchase options or escalation clauses or any restrictions regarding dividends, future leasing or additional debt. No sub-lease income is due as all assets held under lease agreements are used exclusively by the Group. 23 Contingencies The Group had no contingent assets or liabilities at 31 December 2012 or 31 December 2011. 24 Capital commitments The Group had no capital commitments at 31 December 2012 or 31 December 2011. 40 22405.04 9 April 2013 4:46 PM Proof 5 25 Risk management objectives and policies The Group is exposed to a variety of financial risks through its use of financial instruments which result from both its operating and investing activities. The Group’s risk management is coordinated at its headquarters, in close co-operation with the Board of Directors. The Group does not actively engage in the trading of financial assets for speculative purposes. The most significant financial risks to which the Group is exposed are described below. Credit risk Generally, the Group’s maximum exposure to credit risk is limited to the carrying amount of the financial assets recognised at the balance sheet date, as summarised below: Trade and other receivables (note 13) Cash and cash equivalents Accrued income 2012 2011 Loans and Loans and receivables receivables and and balance balance sheet totals sheet totals £’000 58,472 3,650 1,126 63,248 £’000 46,744 3,687 - 50,431 Credit risk is only disclosed in circumstances where the maximum potential loss differs significantly from the financial asset’s carrying amount. The Group’s trade and other receivables are actively monitored to avoid significant concentrations of credit risk. Details in respect of trade receivables at 31 December 2012 are provided in note 13. The Group has adopted a policy of carefully monitoring all customers, especially those who lack an appropriate credit history. Liquidity risk The Group seeks to manage financial risks to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. Short term flexibility is achieved by the use of a bank overdraft facility up to £15,000,000. Interest rate risk All financial liabilities of the Group are subject to floating interest rates. Competitive rates have been renegotiated with the Group’s bankers and the rate paid on bank loans has been set at 1% or 1.5% above base rate, and interest accrues on the RCF at between 2.2% and 2.5% above LIBOR. The following table illustrates the sensitivity of the net result for the year and equity to a reasonably possible change in interest rates of +/- one percentage point with effect from the beginning of the year. (Decrease)/increase in net result and equity £’000 Foreign currency sensitivity 2012 £’000 +1% (85) 2012 % –1% 85 2011 £’000 +1% (86) 20101 % –1% 86 Most of the Group’s transactions are carried out in sterling. Exposure to currency exchange rates arises from the Group’s overseas sales and purchases which are predominantly denominated in Polish zloty. These sales and purchases are immaterial to the Group’s total sales and purchases. Due to the highly immaterial nature of these foreign currency transactions the Group has not entered into any foreign currency risk mitigation strategies to date. This will be kept under review as overseas business continues to grow. 22405.04 9 April 2013 4:46 PM Proof 5 41 Notes to the financial statements (continued) For the year ended 31 December 2012 Financial liabilities The Group’s liabilities are classified as follows: 2012 2012 2012 2012 Financial liabilities Other financial at fair value through liabilities at amortised Liabilities not within cost the scope of IAS 39 Balance sheet total Bank loan RCF Overdraft Trade and other payables Accruals Deferred income Other liabilities Deferred tax Corporation tax Total Bank loan RCF Overdraft Trade and other payables Accruals Deferred income Other liabilities Deferred tax Corporation tax Total profit or loss £’000 - - - - - - 1,753 - - £’000 702 7,500 32 27,338 11,989 - 1,158 - - £’000 - - - 588 6,223 540 87 689 1,325 9,452 £’000 702 7,500 32 27,926 18,212 540 2,998 689 1,325 59,924 1,753 48,719 2011 2011 2011 2011 Financial liabilities Other financial at fair value through liabilities at amortised Liabilities not within profit or loss £’000 - - - - 2,635 - - - - cost the scope of IAS 39 Balance sheet total £’000 1,762 5,000 1,846 21,558 - 9,384 - - - £’000 - - - 194 102 4,240 3,087 946 1,519 £’000 1,762 5,000 1,846 21,752 2,737 13,624 3,087 946 1,519 2,635 39,550 10,088 52,273 Fair value represents amounts at which an asset could be exchanged or a liability settled on an arm’s length basis. Financial assets and financial liabilities measured at fair value are grouped into three levels of fair value hierarchy. This grouping is determined based on the lowest level of significant inputs used in the fair value measurement, as follows: ●● level 1 - quoted prices in active markets for identical assets and liabilities ●● level 2 - inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly ●● level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs) The Group has financial liabilities in the level 3 classification which are as follows: Other liabilities include £1,753,000 of contingent consideration which has been measured using management’s estimate of the likely amounts payable in respect of acquisitions made in both the current and prior year and the application of a discount rate. 42 22405.04 9 April 2013 4:46 PM Proof 5 Maturity of financial liabilities The analysis of the maturity of financial liabilities at 31 December 2012 is as follows: 2012 Less than Two More to five than five 2011 Less than Two More to five than five Bank loan RCF Overdraft Trade and other payables Other liabilities Total one year £’000 646 - 32 39,327 2,911 42,916 years £’000 56 7,500 - - - 7,556 26 Cash flows from operating activities Profit before taxation Adjustments for: Finance costs Depreciation, loss on disposal and amortisation Operating profit before changes in working capital and provisions Change in trade and other receivables Change in trade and other payables Cash generated from operations* Employee cash settled share options Employee equity settled share options Taxes paid Net cash inflow from operating activities Total one year years £’000 - - - £’000 702 7,500 32 39,327 - - 2,911 - 50,472 £’000 1,138 - 1,846 30,942 2,345 36,271 years £’000 624 5,000 - - 290 5,914 years £’000 - - - - - - Total £’000 1,762 5,000 1,846 30,942 2,635 42,185 Year ended Year ended 31 December 2012 31 December 2011 8,521 363 2,853 11,737 (6,482) 4,044 9,299 394 32 (2,882) 6,843 7,534 126 3,137 10,797 (10,324) 1,506 1,979 178 31 (1,786) 402 * The cash generated from operations in 2011 was lowered by £7,141,000 as a result of creditors acquired through acquisitions but paid after acquisition. 27 Capital management policies and procedures The Board’s current priorities for the Group’s free cash flow are to fund Group development, maintain the strength of the balance sheet and to support a sustainable dividend policy. The Group’s overall strategy remains unchanged from last year in that it manages its capital to ensure that the Group will be able to continue as a going concern through the economic cycle. The capital structure of the Group consists of net debt, which is represented by cash and cash equivalents (note 14), bank loans, overdrafts and revolving credit facilities (note 16) and equity attributable to equity holders of the parent, comprising issued share capital, reserves and retained earnings as disclosed in note 19. The Group is not restricted to any externally imposed capital requirements. 22405.04 9 April 2013 4:46 PM Proof 5 43 Notes to the financial statements (continued) For the year ended 31 December 2012 28 Presentation of summarised consolidated statement of comprehensive income The effect of the amortisation of the Group’s intangible assets has been separately disclosed on the face of the consolidated statement of comprehensive income. This is reported below, together with the comparatives for 2011. 2012 Before 2011 Before amortisation Amortisation Total amortisation Amortisation £’000 £’000 £’000 £’000 £’000 Continuing operations Sales revenue Cost of sales Gross profit Administrative expenses Operating profit before amortisation of intangibles Administrative expenses – share based payment charge Amortisation of intangibles Profit from operations Finance costs Profit for the period before taxation Tax expense Net profit and total comprehensive 366,980 (332,268) 34,712 (23,600) 11,112 (426) - 10,686 (363) 10,323 (2,559) - - - - - - (1,802) (1,802) - (1,802) 448 366,980 (332,268) 34,712 (23,600) 288,303 (257,161) 31,142 (20,667) 11,112 10,475 (426) (1,802) 8,884 (363) 8,521 (2,111) (209) - 10,266 (126) 10,140 (2,611) - - - - - - (2,606) (2,606) - (2,606) 635 Total £’000 288,303 (257,161) 31,142 (20,667) 10,475 (209) (2,606) 7,660 (126) 7,534 (1,976) income for the period 7,764 (1,354) 6,410 7,529 (1,971) 5,558 The above splits out 2011 so that it is directly comparable to 2012. 44 22405.04 9 April 2013 4:46 PM Proof 5 Staffline Group plc Company statutory financial statements (prepared under UK GAAP) For the year ended 31 December 2012 Company number 05268636 22405.04 9 April 2013 4:46 PM Proof 5 45 Contents Directors’ responsibilities statement Report of the independent auditor Principal accounting policies Balance sheet Notes to the financial statements 47 48 49 50 51 – 52 46 22405.04 9 April 2013 4:46 PM Proof 5 Director’s responsibility statement For the year ended 31 December 2012 The Directors are responsible for preparing the Directors’ Report and the company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the company for that period. In preparing these financial statements, the Directors are required to: ●● select suitable accounting policies and then apply them consistently; ●● make judgments and accounting estimates that are reasonable and prudent; ●● state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; ●● prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that: ●● so far as each Director is aware, there is no relevant audit information of which the company’s auditors are unaware; and ●● the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 22405.04 9 April 2013 4:46 PM Proof 5 47 Independent auditor’s report to the members of Staffline Group plc For the year ended 31 December 2012 We have audited the parent company financial statements of Staffline Group plc for the year ended 31 December 2012 which comprise the parent company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the Directors’ Responsibility Statement set out on page 47, the Directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company 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 (APB’s) Ethical Standards for Auditors. Scope of the audit and financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/ scope/private.cfm. Opinion on financial statements In our opinion the parent company financial statements: ●● give a true and fair view of the state of the company’s affairs as at 31 December 2012; ●● have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and ●● have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the parent company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: ●● adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or ●● the parent company financial statements are not in agreement with the accounting records and returns; or ●● certain disclosures of Directors’ remuneration specified by law are not made; or ●● we have not received all the information and explanations we require for our audit. Other matters We have reported separately on the group financial statements of Staffline Group plc for the year ended 31 December 2012. David Munton Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants BIRMINGHAM Date: 25 February 2013 48 22405.04 9 April 2013 4:46 PM Proof 5 Principal accounting policies For the year ended 31 December 2012 Basis of preparation The financial statements have been prepared under the historical cost convention and in accordance with UK accounting standards and applicable law. The principal accounting policies of the Company are set out below which have remained unchanged from the previous year. During the current and previous years a technical breach of the Companies Act 2006 has been identified in relation to dividends paid in 2011 and 2012. This arose due to the previous accounts filed at Companies House not showing sufficient distributable reserves to cover the level of dividends paid. However, at the time the dividend was actually paid, sufficient additional distributable reserves had been paid up to Staffline Group plc from its subsidiaries to ensure that Staffline Group plc was able to pay the dividend. The directors will seek legal advice and will seek to remedy this breach at the earliest opportunity. Investments Investments in the Company are included at cost less amounts written off. Where the consideration for the acquisition of a subsidiary undertaking includes shares in the Company to which the provisions of Section 612 of the Companies Act 2006 apply, cost represents the nominal value of shares issued together with the fair value of any additional consideration given and costs. Deferred taxation Deferred tax is recognised on all timing differences where the transactions or events that give the Company an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised when it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted by the balance sheet date. Deferred tax is not discounted. Financial instruments Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual obligations of financial instruments (including share capital) are equivalent to a similar debt instrument, those financial instruments are classed as financial liabilities. Financial liabilities are presented as such in the balance sheet. Finance costs and gains or losses relating to financial liabilities are included in the profit and loss account. Finance costs are calculated on a straight line basis. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity. Goodwill Goodwill represents the excess of the fair value of the cost of a business acquisition over the Group’s share of the fair value of assets and liabilities acquired as at the date of acquisition. Goodwill is amortised over 20 years which represents its expected useful life. 22405.04 9 April 2013 4:46 PM Proof 5 49 Company balance sheet At 31 December 2012 Fixed assets Investments Intangible assets: Goodwill Total fixed assets Current assets – amounts due from group companies Creditors: amounts falling due within one year Net current assets/(liabilities) Total assets less current liabilities and net assets Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholder’s funds Note 2012 £’000 2011 £’000 30 31 32 33 34 34 18,528 1,900 20,428 1,000 770 230 20,658 2,289 15,969 2,400 20,658 18,528 2,000 20,528 1,316 (1,316) 19,212 2,284 15,928 1,000 19,212 The financial statements were approved by the Board of Directors on 25 February 2013. Andy Hogarth Director Tim Jackson Director 50 22405.04 9 April 2013 4:46 PM Proof 5 Notes to the UK GAAP financial statements For the year ended 31 December 2012 28 Profit for the financial year The Company has taken advantage of section 408 of the Companies Act 2006 and has not included its own profit and loss account in these financial statements. The Company’s profit for the year before dividends paid was £1,500,000 (2011: £1,436,935). Auditors remuneration incurred by the Company during the year for audit services totalled £7,000 (2011: £7,000). 29 Directors and employees remuneration As in previous years all Group Directors are remunerated by Staffline Recruitment Limited. Details of Directors’ remuneration is disclosed within the Report on Remuneration on page 14. The average number of persons (including Directors) employed by the Company during the year was 7 (2011: 6). 30 Fixed asset investments Cost and net book amount at 31 December 2011 and 31 December 2012 The Company holds interests in the following companies: Investment in group undertakings £’000 18,528 Subsidiaries share capital held Country of incorporation Nature of business Proportion of ordinary Staffline Recruitment Limited Peter Rowley Limited* A La Carte Recruitment Limited* Staffline Polska Sp. zoo* Staffline Gliwice Sp. zoo* House of Logistics Limited* Eos Works Limited* Ethos Recruitment Limited* Taskforce Recruitment Limited* Go New Recruitment Limited* 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Go New Recruitment (Glos.) Limited* 100% Select Appointments Limited* 100% England and Wales England and Wales England and Wales Poland Poland England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Recruitment Training Recruitment Recruitment Recruitment Business Consultancy Welfare to work Recruitment Recruitment Recruitment Recruitment Recruitment *These companies are owned indirectly through other group companies. Joint ventures share capital held Country of incorporation Nature of business Group Learner Limited 40% England and Wales Training Proportion of ordinary The financial position and performance of Group Learner Limited for the year ended 31 December 2012 is highly immaterial to Staffline Group plc. 31 Goodwill Cost at 31 December 2011 Amortisation provided in year Gross carrying amount at 31 December 2012 22405.04 9 April 2013 4:46 PM Proof 5 £’000 2,000 100 1,900 51 Notes to the UK GAAP financial statements (continued) For the year ended 31 December 2012 32 Creditors: amounts falling due within one year Amounts due to Group undertakings 33 Share capital Authorised 2012 £’000 770 2012 £’000 2011 £’000 1,316 2011 £’000 30,000,000 (2011: 30,000,000) ordinary 10p shares 3,000 3,000 Allotted and issued 22,888,578 (2011: 22,844,915) ordinary 10p shares 2,289 2,284 Share options At 31 December 2012 the following ordinary share options granted were outstanding Date of grant 8 June 2006 9 December 2006 8 June 2007 1 October 2007 1 April 2008 1 October 2008 1 October 2009 20 October 2009 Number Exercise price Exercise period 1,908 1,558 7,613 2,363 3,822 4,169 7,736 900,000 130p 120p 174p 143p 121p 66p 54p 09/06/08 - 08/06/13 10/12/08 - 09/12/13 09/06/09 - 08/06/14 02/10/09 - 01/10/14 02/04/10 - 01/04/15 02/10/10 - 01/10/15 02/10/11 - 01/10/16 47.5p 21/10/12 - 20/10/16 For full details of share options and the share based payment charge calculation see note 7. 34 Reserves At 1 January 2012 Retained profit for the year Share options exercised Dividends paid At 31 December 2012 35 Contingent liabilities Profit Share and loss premium account £’000 15,928 - 41 - 15,969 £’000 1,000 2,978 - (1,578) 2,400 A cross guarantee exists between all companies in the Group for all amounts payable to Bank of Scotland and NatWest. The maximum potential liability to the Company at year end is £8,466,000. 36 Capital commitments There were no capital commitments at 31 December 2012 or at 31 December 2011. 52 22405.04 9 April 2013 4:46 PM Proof 5 22405.04 9 April 2013 4:46 PM Proof 5 S t a f f l i n e G r o u p P l c A n n u a l R e p o r t 2 0 1 2 Staffline Group plc 19 – 20 The Triangle NG2 Business Park Nottingham NG2 1AE Tel: 0115 950 0885 Fax: 0115 950 0627 www.staffline.co.uk 22405.04 9 April 2013 4:46 PM Proof 5
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