TIDMHLO
RNS Number : 6756M
Healthcare Locums PLC
19 August 2011
19 August 2011
Healthcare Locums plc
("HCL" or the "Company" or the "Group")
Final Results
Year Ended 31 December 2010
Healthcare Locums plc, a market leader in the supply of
workforce solutions to the health and social care industries in the
UK and Australia, today announces its audited results for the year
ended 31 December 2010.
Financial Summary
2009 (1)
Consolidated Income Statement 2010 (Restated)
GBPm GBPm
Revenue 157.2 167.5
Gross Profit 41.2 50.4
Gross Profit % 26% 30%
Adjusted EBITDA * (0.1) 15.6
Adjusted (loss) / profit from operations
** (2.9) 13.7
Highlighted items
Goodwill Impairment (46.0) -
Others (net) *** (3.2) (5.8)
(Loss) / profit from operations (52.1) 7.8
Foreign exchange gains/(losses) (net) 1.5 -
Finance expense (net) (5.9) (2.0)
(Loss)/Profit before tax (56.5) 5.9
Taxation 2.1 (2.8)
-------- ------------
(Loss) / Profit for the year (54.4) 3.1
-------- ------------
Basic (loss)/earnings per share (pence) (50.0)p 2.9p
* Adjusted EBITDA is adjusted (loss)/profit from operations
before depreciation of property, plant and equipment,
amortisation of intangibles and share scheme charges.
** Adjusted (loss) / profit from operations refers to (Loss)
/ Profit from operations before impairment of goodwill
and other highlighted items as analysed in Note 5 to
the Financial Statements
*** Other highlighted items are analysed in Note 5 to the
Financial Statements.
(1) Restatements
The Board has restated the 2009 Financial Statements, as set out
in Note 1. The impact of the Prior Year Adjustments on previously
reported Net Equity may be summarised as follows:
31 Dec 2009 01 Jan 2009
GBPm GBPm
Net equity as previously
reported 67.2 56.1
Restatements for:
Accounting errors (15.3) (6.6)
Change in accounting
policies (4.0) (0.9)
------------ ------------
(19.3) (7.5)
Tax effect of above 2.1 -
Net equity as restated 50.0 48.6
------------ ------------
Further information is provided in Note 1 to the Financial
Statements.
Market Challenges & the new Board's response
-- HCL has a very experienced new Board and executive management
team. Since the new Board and executive management team was formed
in 2011, the business has been refocused and good progress has been
made over recent months.
-- Challenges faced have been considerable. The new Board has
needed to extensively restate prior year figures, propose a
significant refinancing of the Group to ensure future stability and
importantly, re-engineer the UK business to meet the changing needs
in the healthcare staffing market.
-- Following these actions, the Board now believes that HCL is
in a far stronger position to respond to the needs of its customers
and grow sustainably over the long term.
UK & Australian businesses
-- In the UK, HCL is a leading business, one capable of
generating good levels of profit by delivering a high level of
service on competitive terms to the NHS and private sector. The new
executive team is committed to re-focusing the business, to address
changing market dynamics.
-- In Australia, the HCA business, which was acquired in
December 2010 shortly before the financial year end, has continued
to trade in line with expectations since its acquisition.The
Board's goal is to build a broadly based specialist healthcare
recruitment business in Australia, similar to HCL's position in the
UK.
-- Synergies can be achieved over time by owning both the UK and
Australian healthcare recruitment businesses.
Proposed Refinancing & Trading on AIM
-- The Board's priority remains to improve the Group's financial
situation by reducing debt. The Board believes that the proposed
Refinancing announced today is in the best interests of all
shareholders.
-- Toscafund has been very supportive of the company and its
management, reflecting its positive view of the company's future
prospects for growth
-- Trading in the Company's shares is scheduled to resume
consequent to shareholder approval of the proposed Refinancing.
Peter Sullivan, Chairman, said:
"The Group has faced considerable challenges and the complexity
and extent of the challenges faced by the Company has meant that
the process of producing these audited Financial Statements has
taken considerably longer than initially expected. Nevertheless,
the action taken by the Board has been vital in restoring stability
and positioning the Group for sustainable growth in the future.
Despite its recent troubles, HCL remains fundamentally a good
business. Furthermore, having announced a refinancing today, the
Board believes that the Refinancing, if completed, will provide the
Group with a strengthened balance sheet, a much lower level of
debt, and additional cash funding for operational initiatives,
thereby creating a viable, sustainable capital structure giving it
the capability to achieve significant returns.
The Board and I are confident that HCL can grow again and
prosper from here on."
The Annual Report and Accounts for the year ended 31 December
2010 will be posted to shareholders today and will be available for
viewing on the Company's website www.healthcarelocums.com
shortly.
Contact details:
Healthcare Locums Plc
Peter Sullivan, Chairman
Tel: 0207 451 1451
Fairfax I.S. PLC
Nomad and Joint Broker
Simon Bennett/Ewan Leggat/Laura Littley
Tel: 020 7598 5368
Pelham Bell Pottinger
David Rydell/Emma Kent/Duncan Mayall
Tel: 020 7861 3232
Chairman's Statement
INTRODUCTION
This is my first Annual Report Statement since joining the Board
as Chairman on 18 February 2011, some seven weeks after the end of
the period being reported to shareholders.
As shareholders will be aware, on 25 January 2011 the Board
announced the suspension of its shares from trading on AIM with
immediate effect. The announcement stated that the Board had strong
reason to believe that the financial performance of HCL for the
year ended 31 December 2010 would be materially below expectations.
Serious accounting irregularities had been brought to the attention
of the Board as a result of which the Company announced that it
would be carrying out an immediate investigation to consider the
financial implications.
Since then an entirely new Board has been appointed. David
Henderson and I were appointed on 18 February 2011. We were pleased
to be joined on 10 May 2011 by Stephen Burke as Chief Executive
Officer, Colin Whipp as Interim Chief Financial Officer and Andy
McRae as Managing Director of Healthcare Australia Holdings Pty
Limited.
RESULTS OF THE INVESTIGATION
Following the announcement on 25 January 2011, the then Board
launched an immediate internal investigation into the serious
accounting irregularities, the circumstances surrounding their
existence and the financial implications for the Group.
The internal investigation into the apparent accounting
irregularities initially focused on the responsibility, if any, of
the then Chief Financial Officer, Diane Jarvis, and the then
Executive Vice Chairman, Kate Bleasdale. It involved interviews
with all of the previous Directors and senior members of the
finance staff in the UK.
The internal investigation then went on to investigate the
knowledge of the other previous Directors and senior finance staff
regarding the accounting irregularities and other related issues of
Corporate Governance.
The principal findings of the internal investigation and other
reviews by the Directors and the corrective actions taken are
that:
-- In reporting results for earlier years the Group recognised
revenue of GBP0.9m in 2008 in relation to sales in the US, although
none of the revenue had yet been invoiced.
--
In 2009 a further GBP3.1m of revenue was recognised in advance
of invoice date as the previous Directors assessed that the
appropriate milestones had been reached to recognise revenue in
accordance with IAS 18 "Revenue". None of the revenue was invoiced
in 2009.
The Board has reviewed the Group's accounting policy for revenue
recognition in this area and determined that it is more appropriate
to recognise this revenue only when it is invoiced.
The impact before tax of this restatement is to reduce net
assets at 31 December 2009 by GBP4.0m.
-- Software development costs had been capitalised and were
still on the balance sheet even though the assets were no longer
being used by the business.
The Board has made the appropriate impairment.
The impact before tax of this restatement is to reduce net
assets at 31 December 2009 by GBP5.4m.
-- In previous years, the Group capitalised costs associated
with the development of an international candidate database. The
judgement surrounding the appropriateness of that treatment was
disclosed as a 'critical judgement' in prior Annual Reports. The
costs capitalised included the costs of collecting information in
connection with identified candidates.
Following an approach by the Financial Reporting Review Panel
(FRRP), the Directors have reconsidered the previous judgements
made regarding whether these costs meet the definition of an
intangible asset under IAS 38. The Board concluded that whilst the
costs of construction of the underlying database would result in an
intangible asset under IAS 38, the costs of collecting information
in connection with identified candidates do not in themselves
result in obtaining legal control over the individual candidates
and as such the costs are indistinguishable from the costs of
developing the business as a whole.
Consequently, the Board wrote off such costs as incurred, rather
than capitalise them.
The impact before tax of this restatement is to reduce net
assets at 31 December 2009 by GBP4.8m.
-- Sales ledger credits arise as a result of unintentional
overpayments by customers. The Group informs customers when this
happens; amounts overpaid remain as a liability until repaid or no
longer repayable.
The Group previously accounted for such overpayments by
reflecting a liability that represented the Directors' assessment
of the likely amount due to be returned to customers based on
historical levels of credits actually redeemed over a 12 month
period. The remainder of the credits were released to income.
Following a review of the sales ledger credits released to
income, the Directors believe it would be more appropriate to
reinstate these amounts as liabilities of the Group and only to
release such credits to income after the Statute of Limitations
(six years) renders the amount irredeemable or earlier only if
appropriate to derecognise in accordance with IAS 39.
The impact before tax of this restatement is to reduce net
assets at 31 December 2009 by GBP3.3m.
-- During 2010 the Group had an invoice discounting facility
with Barclays Bank, under which it could borrow against certain
unpaid customer invoices.
On a number of occasions the Group used the facility
inappropriately by double counting certain invoices and by
borrowing against fictitious invoices.
The Group discontinued all its invoice discounting facilities in
December 2010.
-- Costs had been allocated incorrectly to reorganisation costs
in the monthly management accounts during 2010, thereby overstating
Adjusted Profit from operations.
The Directors have reviewed the definition of costs previously
designated as reorganisation costs. In the 2009 Financial
Statements, the full year-to-date costs including salary,
employment costs and redundancy or compensation payments of any
staff made redundant during the year were classified as
reorganisation costs. For the 2010 Financial Statements only the
costs directly associated with such terminations have been
classified as reorganisation costs and 2009 has been restated for
consistency.
The reorganisation costs principally include employee redundancy
costs, relocation of offices associated with the ongoing
off-shoring of back and middle office functions to India, legal and
professional fees and also the ongoing restructuring within the
Qualified Social Workers division.
-- Additionally, the Directors have undertaken a review of the
level of accruals at 31 December 2008 and 31 December 2009. The
Group had accounted for various costs for commissions and bonus
expenses for employees and Directors in the year in which they were
paid, rather than accruing them based upon the activities and
performance of the year for which the incentives arose.
The Directors have reviewed this practice and restated the prior
year accounts by accruing costs in the year to which they
relate.
The impact before tax of this restatement is to reduce net
assets at 31 December 2009 by GBP1.8m.
The overall impact after tax of the restatements above is to
reduce net assets at 31 December 2009 from the previously reported
GBP67.2m to the restated GBP49.9m, a reduction of 26%.
The previous Directors resigned at various times prior to the
completion of the internal investigation and, as noted above, a new
Board was appointed.
In response to the findings of the internal investigation, Grant
Thornton was engaged in April 2011 to investigate and report in
relation to the accounting adjustments, the acquisition of Redwood,
the payment of dividends and cash flow management.
Grant Thornton also investigated certain other issues and
identified that historically there were specific transactions which
suggest that the Company was not fully complying with the NHS terms
and conditions set out in the Framework Agreements (FAs).
The Board has had limited time to undertake an entire review of
the practices within the Group and has therefore prioritised areas
which have been highlighted by customer complaints or specific
issues identified internally. The Board has committed significant
resource to uncovering and taking appropriate remedial action in
relation to potential historical breaches of the terms of FAs. The
Group is currently in discussion with certain NHS trusts to resolve
issues they have raised. Should further issues be raised by
customers, the Board will seek to resolve them promptly.
Appropriate specific provisions have been made in the 2010
Financial Statements and in the Board's cash flow forecasts.
The investigations also found that Corporate Governance was
below the level expected from a publicly listed company, as
reported on below.
As a result of the matters described above, a number of
disciplinary hearings have been held with the outcome that certain
previous Directors and other staff were either dismissed or chose
to resign.
The Board is currently considering with its legal advisers how
best to progress any claims that the Company may be able to bring
in connection with the matters described above.
Furthermore, the Board has sought to ensure that appropriate
remedial measures have been taken. New systems have been put in
place so that monthly management accounts can be relied upon in the
future.
2010 PERFORMANCE
Whilst preparing the Financial Statements for 2010 and further
to the findings of the investigations as detailed above, the Board
restated the 2009 Financial Statements, including Net Equity
previously reported at 31 December 2008. Further information is
provided in the Financial Review.
The audited Financial Statements for the year ended 31 December
2010 (including restated figures for 2009) are now available to
shareholders.
As analysed in the Results Summary in the Financial Review, the
Board reports an adjusted loss before interest, tax, depreciation
and amortisation, shares scheme charges and highlighted items
(adjusted EBITDA) of GBP0.1m (2009: GBP15.6m profit). There was a
non-cash goodwill impairment charge of GBP46.0m (2009: GBPNil).
Loss before tax was GBP56.5m (2009: GBP5.9m profit).
The Board believes that during 2010 the Company's previous
strategy of operating largely by contracts not governed by FAs left
it wrong-footed and ill-prepared to respond sufficiently to the
increasing focus of NHS spending through the purchasing FAs. The
previous Board's failure to respond to the changing market place
meant firstly the business had an inadequate supply of locums
clinically compliant with the more detailed and onerous framework
standards and secondly it had access to only a restricted number of
FAs.
The impact on the UK business* in the second half of 2010
compared with the first half was a reduction in revenue of 15% and
gross profit of 24%. Gross profit percentage fell from 28% to
25%.
* excluding the contribution from acquisitions.
The primary reason for the deterioration in performance was the
reduction in typically higher margin off-framework business.
Your new Board has already taken measures to seek to ensure the
UK business model is adapted to changes in its market place.
A more detailed review of the financial information for 2010 and
2009 is provided in the Financial Review, including the effect of
prior year adjustments.
Shareholders' attention is drawn to the Independent Auditors'
Report in which the Company's auditors BDO LLP have qualified their
opinion on the 2010 Financial Statements on the basis stated and
have included sections respectively headed "Emphasis of matter -
Going concern" and "Emphasis of matter - potential illegality of
dividends." See also under Dividend below.
ACQUISITIONS AND DEBT
During the second half of 2010, the previous Directors' strategy
led to the acquisition of Orion Locums Ltd, MJV Locums Ltd, the
assets of Last Minute Locums Pty Ltd and the assets of Redwood
Health Ltd. These acquisitions were made for a total initial
consideration of GBP14.5m (net of cash acquired).
In December 2010 the previous Directors then took up new loan
facilities with the Commonwealth Bank Australia and the National
Australia Bank and a mezzanine facility provided by Ares Capital
Europe. These facilities were used to repay existing debt and to
fund the acquisition of Healthcare Australia Holdings Pty Limited
in Australia for an initial consideration of GBP75.2m (net of cash
acquired). Further information is provided in the Financial
Review.
At 31 December 2010 the gross debt was GBP125.6m. This
significant increase of GBP104.2m when compared to 2009 (2009:
GBP21.4m) was mainly due to GBP89.7m (net of cash acquired) being
spent during the year on acquisitions.
As noted above, on 25 January 2011, just over one month after
the refinancing, the Board announced to shareholders that the
financial performance of HCL for the year to 31 December 2010 would
be materially below market expectations. In particular, it became
evident that the UK business was cash negative before dividend
payments and its business model had not adapted sufficiently to the
changing market place. During the course of the investigations
which took place over the following months, it quickly became
apparent that the current capital structure of the Group and the
costs of servicing its debt were unsustainable and accordingly a
capital restructuring was required.
The new Board believes that it is probable that at 31 December
2010 the Group was in default under the Senior Facilities Agreement
('SFA') and Mezzanine Facility Agreement ('MFA') with its lending
banks. Accordingly the Board considers it appropriate to treat all
of the Group's loans as current liabilities at 31 December 2010.
Further information is provided in the Financial Review.
BOARD OF DIRECTORS
The Board of HCL now comprises three Executive Directors and two
Non-Executive Directors, all of whom joined after 25 January
2011.
The Directors appointed have a wide breadth of experience in
both managing and resolving complex business issues and have played
a significant role in the stabilisation process, for which I am
very grateful.
In particular, I welcome the appointment of Stephen Burke as
CEO. Stephen has joined the business as a long term appointment in
extremely challenging circumstances and has played a critical role
in identifying a number of issues in the UK business earlier than
otherwise may have been the case. Clearly, the situation remains
challenging and Stephen's leadership through this phase will be
critical.
The Interim Chief Financial Officer, Colin Whipp, has quickly
and effectively identified and tackled the multiple accounting and
financial issues facing the business in a short space of time.
Colin has announced that following the successful stabilisation
and recapitalisation of the Company he will be stepping down from
his interim role. Following the completion of the Refinancing, the
Board will commence the process of recruiting a permanent Chief
Financial Officer and will update shareholders in due course.
Special mention must be made of Andy McRae who, as Managing
Director of Healthcare Australia (HCA), was instrumental in
overseeing the successful integration of HCA into HCL. HCA has
continued to perform strongly since its acquisition by the Group
and Andy's leadership has been a key part of this.
The Board is seeking to appoint two additional independent
non-executive directors and will update shareholders as soon as
possible.
CORPORATE GOVERNANCE
On joining as Chairman it was evident that there were extremely
poor levels of Corporate Governance. Additionally, there was a lack
of normal business policies and procedures and insufficient
management of costs. The level of record keeping surrounding major
decisions taken by the previous Board was well below the standard
which Shareholders would expect from a publicly listed company.
Your new Board is committed to maintaining high standards of
Corporate Governance, managing the Group in an effective,
entrepreneurial and ethical manner for the benefit of shareholders
over the longer term.
Under the AIM Rules, the Company is not required to implement
the full provisions of the UK Corporate Governance Code (formerly
the Combined Code), which applies for financial years starting on
or after 29 June 2010. However, the Company is committed to
applying the principles of good governance contained in the Code as
appropriate for a company of this size and nature. Further
information on the Board Committees is provided in the full Annual
Report.
The Board will continue to review appropriate compliance with
the UK Corporate Governance Code at regular intervals. I will be
reporting to shareholders in the 2011 Interim Report and the 2011
Annual Report on further developments in the Group's corporate
governance.
DIsposal of Homecare division in australia
As a first major step in reducing the Group's debt levels, on 18
July 2011 the Directors were pleased to announce that the Company's
wholly owned Australian subsidiary, Healthcare Australia Holdings
(Pty) Ltd ("HCA") had completed the sale of its Homecare Division.
The gross consideration (before estimated expenses of A$2 million)
was A$34 million (approximately GBP22.4 million).
The net proceeds of the sale have been used to reduce the
Group's debt.
PROPOSED refinancing
In the context of the probable default under the SFA and MFA
referred to above, the Board has considered a range of alternatives
that would deliver in the timeframe available the optimum value for
stakeholders and revise the Company's current capital structure to
allow a strengthened business to move forward.
The Board believes that the Refinancing, if completed, will
provide the Group with a strengthened balance sheet and additional
cash funding for operational initiatives, thereby creating a
viable, sustainable capital structure giving it the capability to
achieve significant returns.
The Board has today announced a substantial refinancing of the
Company designed to secure the Company's future by putting it on a
solid financial footing and provide it with the requisite cash and
debt resources and capital structure to give it the capability to
generate significant returns and enable trading in Ordinary Shares
on AIM to be resumed.
The refinancing comprises a GBP60 million placing of new
ordinary shares in the Company, an open offer to qualifying
shareholders of up to GBP4.25 million, a debt for equity conversion
and debt repayment and restructuring as described in the Circular
to shareholders dated -- August 2011 (together referred to as the
"Refinancing").
The key terms of the Refinancing are as follows:
-- A GBP60 million Placing of 600 million New Ordinary Shares at
10p per share;
-- An equitisation of GBP2.5 million of existing debt owed to
Craig Tibbles into 25 million New Ordinary Shares and equitisations
of GBP1.14 million of commission owed to Toscafund and GBP0.45
million of fees and commission owed to ACE Limited, in each case as
part of the Placing. The Interim Working Capital Facility will, to
the extent borrowed, also be equitised as part of the Placing;
-- A GBP22.4 million debt (including accrued interest) for
equity swap with Ares Lux resulting in the issue of 125 million New
Ordinary Shares to Ares Lux at approximately 18p per share,
equating to 14.91 per cent. of the issued share capital (excluding
any take up under the Open Offer) immediately following the
Placing;
This is the same in economic terms as Ares Lux converting
GBP12.5 million of the debt owed to it by the Company into New
Ordinary Shares at the Issue Price and writing off GBP9.9 million
of debt and accrued interest to it;
-- A GBP10.21 million conversion of existing debt owed to Ares
Lux into Zero Coupon Notes issued to Ares Lux in an initial
principal amount of GBP10.21 million, which may increase depending
on certain events occurring, including in relation to the future
performance of the Group;
-- A write-off of approximately GBP6.5 million of existing debt
and accrued interest owed to the Banks and waiver of interest
anticipated. The final figure will be determined when exchange
rates are fixed on or around Admission;
-- The Company and the Banks will partially close their existing
hedging agreements in respect of the sterling facilities under the
Senior Facilities Agreement which will incur break costs of up to a
value of GBP2.7 million which will be written off by the Banks;
-- A GBP35.0 million repayment of existing debt owed to the
Banks and a restatement of the terms of the remaining debt owed to
the Banks;
-- An Open Offer of up to 42,505,790 New Ordinary Shares, open
to all Qualifying Shareholders pro rata to their shareholdings at a
subscription price of 10p per New Ordinary Share; and
-- Qualifying Shareholders wishing to apply for New Ordinary
Shares under the Open Offer in excess of their pro rata
entitlements will be able to apply for additional shares to the
extent that other shareholders do not take up their
entitlements.
The placing, the open offer, the debt for equity conversion and
the debt repayment and restructuring are all conditional upon the
approval of Shareholders at the General Meeting be held at 11.00
a.m. on 12 September 2011 at One Fleet Place, London EC4M 7WS.
The General Meeting will also consider the audited Financial
Statements and conduct other business which would normally be
considered at the Annual General Meeting.
The restoration of trading on AIM of the Ordinary Shares will
take place upon and subject to completion of the Refinancing.
The placing has been offered to, and supported by, a range of
new and existing shareholders. In particular, as part of the
placing, Toscafund, an existing shareholder, has agreed to
subscribe GBP33.6 million for 336,375,000 new Ordinary Shares and
(separately from the debt for equity conversion) ACE Limited has
agreed to subscribe GBP 13.16 million for 131,625,000 new Ordinary
Shares. The issue of placing shares to both Toscafund and ACE
Limited is conditional upon the waiver being granted by the
Takeover Panel becoming effective, which is in turn conditional
upon the approval of the independent shareholders at the General
Meeting voting on a poll.
The independent shareholders are the Shareholders other than the
Toscafund Concert Party. The Toscafund Concert Party comprises
Toscafund, any funds managed or advised by Toscafund and by virtue
of his interest in Toscafund, Mr. Martin Hughes and thereby Old Oak
Holdings Limited, Cheviot Asset Management Limited, Tosca Penta
Holdings Limited, Penta Capital LLP and any funds managed by
Cheviot Asset Management Limited and Penta Capital LLP.
In the event that the Refinancing Resolutions are not passed at
the General Meeting and the Refinancing is not implemented, then
the Group will be unable to satisfy its existing financial
covenants and/or service its existing borrowings or meet its
ongoing funding requirements without further support from the
Lenders. In such event, the Group would be in default under the
Existing Facilities.
Such a default under the Existing Facilities, in addition to any
default which may subsist due to misrepresentations made under the
terms of the Existing Facilities at the time they were entered into
would entitle the Lenders to demand repayment of the Existing
Facilities.
Further, if the Refinancing does not proceed, the Banks have
informed the Company that they will only continue to support the
business on the basis that a sale of all or part of the Group is
pursued. This would be likely to involve formal insolvency
proceedings for all or part of the Group. This would, in the
Board's opinion, result in Shareholders receiving no value for
their current shareholdings.
The Board believes that the Refinancing, if completed, will
provide the Group with a strengthened balance sheet and additional
cash funding for operational initiatives, thereby creating a
viable, sustainable capital structure giving it the capability to
achieve significant returns
DIVIDEND
As a result of the Group's constrained financial position and
the Company's distributable reserves being in deficit at 31
December 2010, the Board will not be recommending the payment of a
final dividend.
The Board will continue to keep its dividend policy under review
with the aim of reintroducing dividends at the appropriate
time.
It has come to the Directors' attention that the dividends paid
in June 2010 and January 2011 were potentially unlawful. The
Directors are taking legal advice in relation to the dividends paid
and what steps would be required to remedy any breach of the law.
Further information is provided in the Financial Review.
the future
Since the announcement on 25 January 2011 of the suspension of
the Company's shares from trading on AIM with immediate effect, the
Group has faced considerable challenges.
However, following the conclusion of the internal investigations
and the subsequent progress made to improve all the business
processes and governance and to re-engineer the business, your
Board believes that HCL is now in a position where, subject to
shareholder approval of the Refinancing, it is able to look forward
to the future with confidence.
The UK business, which remains a leading business in its field,
is in a good position to grow and to meet the changing requirements
of the UK healthcare staffing market.
The HCA business in Australia has continued to trade in line
with expectations since its acquisition.
We also believe that synergies can be achieved over time by
owning both the Australian and UK healthcare recruitment
businesses.
The complexity and extent of the challenges faced by the Company
has meant that the process of producing these audited Financial
Statements has taken considerably longer than initially expected.
Nevertheless, the action taken by your Board has been appropriate
in restoring stability and positioning the Group for sustainable
growth in the future.
Despite its recent troubles, HCL remains fundamentally a good
business. Today the Group employs some 580 staff and plays a very
important role in fulfilling medical staffing needs in both
Australia and the UK, with over 13,000 locums placed and over 600
permanent placements made in the first half of 2011.
In what has been an exceptionally challenging period for HCL, I
would like to thank our staff for the tremendous commitment and
dedication they have shown.
The Board and I are confident that HCL can grow again and
prosper from here on.
Peter Sullivan
Chairman
19 August 2011
Financial Review
INTRODUCTION
Whilst preparing the Financial Statements for 2010, and further
to the findings of the investigations as detailed in the Chairman's
Statement, the Board recognised the need to restate the 2009
Financial Statements, including Net Equity at 31 December 2008.
The Board believes that the Group's accounts are a true and fair
representation of the financial position as at 31 December
2010.
Further information is provided in the Statement of significant
accounting policies in the Financial Statements.
GOING CONCERN
The Consolidated Financial Statements have been prepared on a
Going Concern basis, which assumes that the Group will continue to
be able to meet its liabilities as they fall due for the
foreseeable future.
In forming their opinion that Going Concern is an appropriate
basis, the Directors have reviewed forecasts for the period to 31
December 2012, which have been drawn up with appropriate regard for
the current macroeconomic environment and the particular
circumstances in which the Group operates. These were prepared with
reference to historic and current industry knowledge, taking into
account the Board's strategy for the Group.
The Directors have taken into account conditions which could
indicate the existence of material uncertainties which may cast
significant doubt over the Group's ability to continue as a Going
Concern.
Shareholders' attention is drawn to the conditions which were of
material relevance in forming the Board's opinion, as set out in
the Statement of Significant Accounting Policies in the Financial
Statements.
These conditions include the Board's plans to resolve the
Group's financing challenges by way of a proposed Refinancing. The
Chairman's Statement sets out the key terms of the proposed
Refinancing, which is conditional upon the approval of Shareholders
at the General Meeting to be held on 12 September 2011.
In the event that the Refinancing Resolutions are not passed at
the General Meeting and the refinancing is not implemented, then
the Group will be unable to satisfy its existing financial
covenants and/or service its existing borrowings or meet its
ongoing funding requirements without further support from the
lending banks. In such event, the Group would be in default under
the existing facilities.
Such a default under the existing facilities, in addition to any
default which may subsist under the representations made under the
terms of the existing facilities at the time they were entered
into, would entitle the lending banks to demand repayment of all
outstanding amounts and to cancel the facilities immediately.
Further, if the Refinancing does not proceed, the lending banks
have informed the Company that they will only continue to support
the business on the basis that a sale of all or part of the Group
is pursued. This would be likely to involve the insolvency of all
or part of the Group. This would, in the Board's opinion, result in
shareholders receiving no value for their current
shareholdings.
Additionally, the Group faces a number of Principal Risks &
Uncertainties, as set out in this statement.
In reviewing the forecasts for the period to 31 December 2012,
the Board has sought to take a measured assessment of each and all
the risks in determining the Group's capital requirements.
Not withstanding the above uncertainties, including the need to
obtain approval from shareholders for the Refinancing, obtain
approval for the waiver under Rule 9 and the relisting on AIM, the
Directors are confident that the proposed Refinancing will be
successful. On this basis, they have prepared the Consolidated
Financial Statements on a going concern basis.
The Consolidated Financial Statements do not contain the
adjustments that would be necessary were the Group unable to
continue as a Going Concern.
Given the inherent uncertainty about future events and as with
all business forecasts, the Directors' statement cannot guarantee
that the Going Concern basis will remain appropriate.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group makes estimates and assumptions regarding the future.
Estimates and judgements are continually evaluated based on
historical experience and other factors, including expectations of
future events that are believed to be reasonable under the
circumstances. In the future, actual experience may differ from
these estimates and assumptions.
The Board considers that the estimates and assumptions which
have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next
financial year are the measurement of intangible assets and
contingent consideration on acquisition, the impairment of goodwill
(which the Group tests on an annual basis), the measurement of
intangible assets (where the Group estimates useful lives for the
purposes of amortisation), legal and regulatory contingencies and
finally uncertain tax positions.
Further information is provided in the Statement of Significant
Accounting Policies in the Financial Statements.
RESTATEMENT OF TOTAL EQUITY FOR ACCOUNTING ERRORS & FOR
CHANGE IN ACCOUNTING POLICIES
I note above the need to restate earlier years' Financial
Statements. Further information on the nature and quantum of the
prior year adjustments can be found in Note 1 of the Financial
Statements.
Shareholders' attention is drawn to the Independent Auditors'
Report and their qualified opinion on certain prior year
adjustments.
The impact of the prior year adjustments on previously reported
Net Equity may be summarised as follows:
31 Dec 2009 01 Jan 2009
GBPm GBPm
Net equity as previously
reported 67.2 56.1
Restatements for:
Candidate database
write-off (4.8) (3.0)
Sales ledger credits (3.3) (1.8)
Computer software
impairment (5.4) (0.2)
Under-accrual of costs (1.8) (1.6)
------------ ------------
(15.3) (6.6)
Restatement for change
in accounting policies:
Accrued income adjustment (4.0) (0.9)
------------ ------------
Total Adjustments (19.3) (7.5)
Tax effect of above 2.1 -
Net equity as restated 50.0 48.6
------------ ------------
The impact of prior year adjustments on the previously reported
Revenue, Profit from operations and Profit for the year ended 31
December 2009 may be summarised as follows:
For the year ended Profit from Profit for the
31 December 2009 Revenue operations year
GBPm GBPm GBPm
Previously reported 172.1 19.7 12.8
Restatement for accounting
errors:
Candidate database
write-off - (1.7) (1.7)
Sales ledger credits (1.5) (1.5) (1.5)
Computer software
impairment - (5.3) (5.3)
Under-accrual of costs - (0.2) (0.2)
-------- ------------ ---------------
(1.5) (8.7) (8.7)
Restatement for change
in accounting policies:
Accrued income adjustment (3.1) (3.1) (3.1)
-------- ------------ ---------------
Total adjustments (4.6) (11.8) (11.8)
Tax effect of above - - 2.0
As restated 167.5 7.9 3.0
-------- ------------ ---------------
The impact of prior year adjustments on the 31 December 2009
Consolidated Statement of Financial Position may be summarised as
follows:
2009 original Restatements 2009 restated
GBPm GBPm GBPm
Non-current assets 76.5 (10.0) 66.5
Current assets 35.5 (4.1) 31.4
Non-current liabilities (7.8) 0.7 (7.1)
Current liabilities (36.9) (3.9) (40.8)
-------------- ------------- --------------
Net assets 67.3 (17.3) 50.0
-------------- ------------- --------------
RESTATEMENT OF UNAUDITED RESULTS FOR SIX MONTHS ENDED 30 JUNE
2010
The Board's reviews have concluded that the unaudited results
for the six months ended 30 June 2010 previously reported to
shareholders should also be restated, as follows:
Unaudited Adjustments
Effect of
To comply PYAs made in
with then 2010
H1 2010 extant Financial
previously Accounting Statements H1 2010
stated Policies * ** restated
GBPm GBPm GBPm GBPm
Revenue 76.4 (1.5) - 74.9
Cost of sales (54.0) - - (54.0)
------------- -------------- -------------- --------------
Gross Profit 22.4 (1.5) - 20.9
Admin expenses (14.8) (3.9) 2.0 (16.7)
------------- -------------- -------------- --------------
Profit from
Operations 7.6 (5.4) 2.0 4.2
Financing
costs (net) (0.8) 0.1 - (0.7)
Profit before
taxation 6.8 (5.3) 2.0 3.5
------------- -------------- -------------- --------------
* The current Board have concluded that the unaudited results
for the six months ended 30 June 2010 reported to shareholders by
the previous Board require adjustments to comply with the Group's
Accounting Policies then extant.
** PYAs = Prior Year Adjustments. Note 1 to the Financial
Statements provides information about the Prior Year Adjustments
and their impact on 2009 and earlier years.
The Prior Year Adjustments reported above show the effect on the
previously reported unaudited results for the six months ended 30
June 2010. The GBP2.0m adjustment in the table above arose from the
impact in the six months period from accelerated depreciation and
amortisation in 2009 and earlier years of GBP1.0m and accruals made
in 2009 of GBP1.0m and hence lower costs in the period
RESULTS SUMMARY
2009
2010 (Restated)
GBPm GBPm
Revenue 157.2 167.5
Cost of Sales (116.0) (117.1)
-------- ------------
Gross Profit 41.2 50.4
Gross Profit % 26% 30%
Administrative costs (41.3) (34.8)
-------- ------------
Adjusted EBITDA * (0.1) 15.6
Depreciation of property, plant
and equipment (0.6) (0.5)
Amortisation of intangible
assets (1.7) (1.0)
Share scheme charges (0.5) (0.5)
-------- ------------
Adjusted (loss) / profit from
operations ** (2.9) 13.6
Highlighted items
Goodwill impairment (46.0) -
Others (net) *** (3.2) (5.8)
(Loss) / profit from operations (52.1) 7.8
Foreign exchange gains (net) 1.5 -
Finance expense (net) (5.9) (2.0)
(Loss)/Profit before tax (56.5) 5.9
Taxation 2.1 (2.8)
-------- ------------
(Loss) / Profit for the year (54.4) 3.1
-------- ------------
Basic earnings per share (pence) (50.0)p 2.9p
* Adjusted EBITDA is Adjusted (loss) / profit from operations
before depreciation of property, plant and equipment,
amortisation of intangibles and share scheme charges.
** Adjusted (loss) / profit from operations refers to (Loss)
/ Profit from operations before impairment of goodwill
and other highlighted items as analysed in Note 5 to
the Financial Statements
*** Other highlighted items are analysed in Note 5 to the
Financial Statements.
Revenue in 2010 was GBP157.2m down 6% on 2009 (restated).
Gross profit in 2010 was GBP41.2m, down 18% on 2009 (restated).
Gross profit percentage was 26.2% compared to 30.1% in 2009
(restated).
Further information on the Group's businesses - including
performance in 2010 H1 and H2, together with the effect of
acquisitions made in 2010 on Revenue and Gross Profit - is provided
in the Operational Review .
Although as noted above, Gross Profit in 2010 was down 18% on
2009 (restated), the Group's administrative costs of GBP41.3m were
GBP6.5m (19%) higher.
The result was that the Group reported an adjusted EBITDA loss
of GBP0.1 m (2009 restated: EBITDA GBP15.6m profit).
Depreciation, amortisation and share scheme charges were GBP2.8m
(2009 restated: GBP2.0m).
Highlighted items totalled GBP49.2m (2009 restated: GBP5.8m),
including GBP46.0m (2009 restated: GBPNil) for Goodwill impairment,
which is explained in the Goodwill section below.
Other highlighted items may be analysed as follows:
2009
2010 Restated
GBPm GBPm
Income:
Gain on fair value changes in
contingent consideration 4.2 -
Other income - 2.7
------ ----------
4.2 2.7
Expenses:
Acquisition costs (2.9) -
Reorganisation costs (2.8) (1.8)
Impairment of property, plant
and equipment (0.4) -
Impairment of intangibles (1.3) (5.3)
Costs associated with other income - (1.4)
------ ----------
(7.4) (8.5)
(3.2) (5.8)
------ ----------
The Loss from operations was GBP52.1m (2009 restated: GBP7.8m
profit).
Foreign exchange gains, which arose from the re-translation of
foreign currency borrowings at the exchange rates at the year end,
were GBP1.5m (2009: GBPnil)
Finance expense (net) of GBP5.9m (2009: GBP2.0m) was up almost
three-fold, as the Group's net debt rose from GBP17.3m at 31
December 2009 to GBP104.4m at 31 December 2010. The Group's
cashflow in 2010 and the Group's net debt at year end are explained
below.
The Loss before tax was GBP56.5m (2009 restated: profit
GBP5.9m).
After taxation credit of GBP2.1m (2009 restated: charge of
GBP2.8m), the Loss for the year was GBP54.4m (2009 restated:
profit: GBP3.1m).
ACQUIsiTIONS
During 2010 the Group made four acquisitions.
Cash Total
Acquisition Consideration Consideration Goodwill on
Country Business Month * ** acquisition
GBPm GBPm GBPm
Nursing And
Orion Locums Healthcare
& MJV Staffing
Locums - UK Locums
*** Business July 3.7 8.5 6.8
Qualified
Last Minute Doctors
Locums - Staffing
Australia Business August 4.8 6.1 3.0
Specialist
Redwood In Nursing
Health - Locum
UK Placement August 5.0 6.7 3.7
Provider Of
Healthcare Nursing
Australia Agency
- Australia Staff December 83.3 83.3 13.0
-------------- -------------- ------------
96.8 104.6 26.5
-------------- -------------- ------------
* Of the cash consideration of GBP96.8m, GBP96.3m was paid in
2010 and GBP0.5m deferred consideration was paid in January 2011.
The initial cash consideration included the acquisition of GBP6.6m
(net) cash. Therefore the net initial payment was GBP89.7m, as
shown in the Group's cash flow.
** Including contingent consideration at fair value at
acquisition date of GBP7.7m.
*** Orion Locums and MJV Locums had a common 100% shareholder
prior to the acquisition.
The UK acquisitions represent a significant step towards
implementing the former Board's strategy of developing a major
presence in the UK nursing recruitment market.
The acquisition of Last Minute Locums and especially Healthcare
Australia arose from the previous Board's strategy to pursue
international acquisitions which would generate additional revenue
outside of the UK. The completion of the Healthcare Australia
acquisition significantly increases the Group's international
operations.
Further information about the acquisitions and their impact on
the Group's 2010 performance is provided in the Operational Review
and Note 14 to the Financial Statements.
GOODWILL
Goodwill may be analysed as follows:
Foreign
Goodwill 01-Jan-10 Additions Exchange Impairment 31-Dec-10
GBPm GBPm GBPm GBPm GBPm
Doctors 22.4 - - (22.4) -
QSW 20.6 - - (15.2) 5.4
AHP 17.3 1.8 - (8.4) 10.7
Nursing - 8.7 - - 8.7
Permanent - - - - -
Australia - 16.0 0.6 - 16.6
60.3 26.5 0.6 (46.0) 41.4
---------- ---------- ---------- ----------- ----------
As noted above under Critical Accounting Estimates and
Judgements, the Group tests for possible impairment of goodwill on
an annual basis.
The impairment charge reflects revisions in the assessment of
the future cash flows from the business due to reduced margins and
changes in the NHS procurement practices.
The recoverable amounts have been determined from value in use
calculations based on cash flow projections from formally approved
budgets and forecasts for 2011 and 2012 and estimates for
subsequent years.
The goodwill impairment of GBP46.0m arose after goodwill of
GBP87.4m at 31 December 2010 was assessed to have a value in use
below its carrying value.
Further information is given in Note 13 to the Financial
Statements.
OTHER INTANGIBLE ASSETS
As noted above, the Group makes critical accounting estimates
and judgements about Other intangible assets.
The Group's Other intangible assets may be analysed as
follows:
2010 2009 Restated
GBPm GBPm
Brands and trademarks 33.0 -
Customer relationships 29.2 2.5
Candidate database 13.2 -
Non-compete agreements 0.5 -
Computer software 1.2 1.1
----- --------------
77.1 3.6
An analysis of the geographical distribution of the Group's
non-current assets is provided in Note 2 to the Financial
Statements.
DIVIDENDS
The Directors are not proposing a final dividend for 2010 (2009:
1.9p, GBP2,003,000).
During 2010, the Company paid dividends of 1.5p per share (on 1
April 2010), 1.9p per share (on 25 June 2010) and declared a
dividend of 1.8p per share which was paid on 10 January 2011. At
the previous year end, the parent company profit and loss reserves
as stated in the year-end financial statements showed reserves of
GBP3,576,000 which were sufficient to cover the first of the
dividends. Under the Companies Act 2006 (the "Act"), distributions
by the Company must not exceed the amount of the distributable
profits that are reported in the Company's last annual accounts
unless interim accounts demonstrate that there are sufficient
distributable profits. Such interim accounts are required to be
filed with Companies House before the dividend is paid.
It has come to the Directors' attention that interim accounts
were not prepared and filed and that the dividends paid in June
2010 and January 2011 were therefore potentially unlawful.
Furthermore, as the existence of the errors as discussed in Note
1 may not have been known at the time of declaration of previous
dividends, it is possible that the Company did not have sufficient
distributable reserves at the time of declaring such dividends. The
Directors are seeking advice in relation to the impact of the
correction of errors, described in Note 1, in relation to the
dividends previously paid.
The Directors are also taking legal advice in relation to the
dividends previously paid and what steps would be required to
remedy any breach of the law.
Shareholders' attention is drawn to the Independent Auditors'
Report and their Emphasis of Matter on the potential illegality of
dividends.
CASHFLOW
The following table reconciles the Loss for the year to the Cash
flow from operating activities:
2009
Cash flow from operating activities 2010 Restated
GBPm GBPm
(Loss)/profit for the year (54.4) 3.0
Adjustments for:
Depreciation, amortisation & impairment 50.0 6.8
Finance expense (net) 5.9 2.0
Share based payment charges 0.6 0.5
Corporation tax expense (2.1) 2.8
Gain on FV changes in contingent
consideration (4.2) -
------- ----------
Cash flows from operating activities
before changes in working capital
and provisions (4.2) 15.1
Reduction in working capital and
provisions 9.3 4.2
Cash generated from operations 5.1 19.3
Corporation tax paid (4.0) (1.0)
Cash flow from operating activities 1.0 18.3
------- ----------
The following table analyses Cash flows from operating
activities & Investing and Financing:
Cash flows from operating activities 2009
& investing and financing activities 2010 Restated
GBPm GBPm
Cash flow from operating activities 1.0 18.3
Investing activities
Acquisition of subsidiaries (net
of cash acquired) (89.7) -
Contingent consideration - (1.2)
Acquisition of tangible and intangible
assets (1.8) (1.9)
------- ----------
Net cash used in investing activities (91.5) (3.1)
Financing activities
Issues of ordinary shares 11.7 0.2
New loans acquired 140.5 0.1
Interest paid (12.4) (1.9)
Repayment of borrowings (24.9) (6.2)
Dividends (3.6) (3.7)
------- ----------
Net cash provided / (used in)
financing activities 111.3 (11.5)
Effect of exchange rates movements (2.8) -
Movement in cash * 18.0 3.7
------- ----------
* Cash and cash equivalents, including short-term
borrowings.
BORROWINGS
Net borrowings at 31 December 2010 were GBP104.4m (2009:
GBP17.3m).
As reported under Cashflow above, the significant increase in
borrowing is principally due to the loans and mezzanine finance
facility taken by the Group to finance acquisitions during
2010.
Net borrowings at 31 December 2010 may be analysed as
follows:
Net debt at 31/12/2010 2010
GBPm
Bank loans:
Loans - Principal amount 124.6
Less: Unamortised loan fees (7.6)
Less: Fair value of warrants (3.0)
-------
114.0
Bank overdraft 0.1
Finance lease liability 0.9
115.0
Less Cash (10.6)
Net Debt 104.4
-------
Bank loans - Principal amount at 30 June 2011 may be reconciled
to 31 December 2010 as follows:
Unaudited GBPm
At 31 December 2010 124.6
Drawings since the year end 6.6
Capitalised interest 0.8
Effect of foreign exchange (0.3)
------
At 30 June 2011 131.7
------
CLASSIFICATION OF LOANS AS CURRENT LIABILITIES AND PROPOSED
REFINANCING
The Board believes that it is probable that at 31 December 2010
the Group was in default under the Senior Facilities Agreement
('SFA') and Mezzanine Facility Agreement ('MFA') with its lending
banks.
This potential default relates to misrepresentations in relation
to financial statements and other information provided by the Group
under the SFA and MFA which on signing on 17 December 2010 required
the Group to give representations in relation inter alia to
financial statements and other financial information some of which
are qualified by "the knowledge of the Company". A breach in
December 2010 would have occurred if (1) the financial statements
did not fairly represent the financial position of the Group or (2)
the information representations were not true, bearing in mind what
the Company knew at the time. This would apply in relation to (1)
above even if neither the Company nor the lending banks knew in
December 2010 that the financial statements were inaccurate.
The lending banks have reserved their rights in relation to any
defaults that may subsist and have not waived any defaults that may
subsist.
If a default does subsist the lending banks would, on service of
a notice, have the right, among other things, to require the loans
under the SFA and MFA to be repaid immediately.
In these specific circumstances the Board consider it
appropriate to classify all of the Group's loans as current
liabilities.
The Board has sought to address the Group's financing challenges
by way of a Refinancing. The Chairman's Statement sets out the key
terms of the proposed Refinancing, which is subject to shareholder
approval at the forthcoming General Meeting.
PRINCIPAL rISKS & UNCERTAINTIES
The Board's assessment of the Principal Risks &
Uncertainties facing the business is set in this statement
below.
Shareholders' attention is also drawn to Contingent Assets and
Liabilities in Note 25 to the Financial Statements.
POST BALANCE SHEET EVENTS
On 27 June 2011 the Group announced that it had agreed to sell
its Australian Homecare Division to KinCare Health Services Pty
Limited for A$34 million (approximately GBP22.2 million) before
estimated expenses of A$ 2 million.
The sale was completed on 18 July 2011 and the net cash proceeds
have been used to reduce the Group's debt.
In the year ended 31 December 2010, based on unaudited
management accounts, the Homecare Division generated a turnover of
A$44.7 million (approximately GBP28.1 million), a gross profit of
A$12.2 million* (approximately GBP7.6 million) and an EBITDA before
highlighted items of A$4.0 million* (approximately GBP2.5
million).
* for HCA for the year ending 31 December 2010.
The disposal enables the Group to focus on the development of
the core UK and Australian businesses and to realise value from
non-core elements of the business.
Information on the proposed Refinancing is provided in the
Chairman's Statement.
Further information on Post Balance sheet events is provided in
Note 30 to the Financial Statements.
Colin Whipp
Interim Chief Financial Officer
19 August 2011
Operational Review
Key Features in 2010
-- Challenging year for the Company, because market dynamics
shifted in the UK as a result of changing dynamics of NHS spending
initiatives.
-- Strategic acquisitions in Australia to diversify from
dependence on UK market, with purchase of Last Minute Locums in
August 2010 and Healthcare Australia in December 2010.
-- Creation of the Nursing division, with critical mass gained
through acquisitions of Orion and Redwood Health in the UK.
-- UK business remains a Top 3 healthcare staffing provider and
the Australian business is the largest provider of nursing agency
staff in a consolidating Australian market.
-- Revenues across all UK business units under pressure from
public spending cuts, resulting in an 18% decline year-on-year
(excluding the impact of acquisitions).
-- Pricing and margins under pressure across the UK healthcare
recruitment sector, with competitive reactions to reduced business
from the public sector cuts and a steady movement by trusts to
increasingly buy though Framework Agreements at lower margins and
with higher compliance requirements.
-- Success in negotiating key new contracts with NHS procurement
hubs in London, North-West England and Southern England.
-- International Placements were affected by tighter immigration
rules restricting recruitment from outside the European Union. The
division has seen growth in Private Sector, with almost half of
revenue now coming from Private Hospitals and clinics.
-- Closure of International offices in Far East and Middle East
to reduce cost base.
In the statement below I report on the Revenue and Gross Profit
for 2010 and 2009 and for 2010 H1 and H2, including the impact of
acquisitions.
Subsequently, each of the Group's UK divisions and our
Australian business report on their performance in 2010 (including
the period in 2010 prior to its acquisition by the Group) and
provide an update on Current Trading in the statement below.
People
The Group has been through a very difficult and uncertain
period. I would like to thank our staff for their resilience,
loyalty and perseverance over the course of the past months.
Across the Group, we have a team of highly experienced and
professional personnel. The Board and management are committed to
nurturing and developing the careers of all our employees within a
structured and performance driven environment.
Strategy
The new Board's strategy is founded on a commitment to strong
operational and cost control. It is the intention to grow the
business organically, building on what is already a Top Three
healthcare staffing business in the UK and a leading Australian
healthcare staffing firm.
In the UK, the process of adapting to the changed public sector
environment is now well underway in HCL. We are focused on building
a long term relationship with the NHS and with private sector
providers through a stringent compliance and quality led offering
with pricing transparency. We believe that the current economic
pressures and the longer term market dynamics referred to below
will give rise to opportunities for well-positioned providers to
demonstrate efficiency and value for money in outsourcing
services.
We have undertaken a detailed review of the internal systems and
are now starting to invest in improved systems and compliance
structures and are considering a simplified brand structure, which
we believe will enhance our market presence, whilst generating both
cost savings and improved productivity.
HCA is the largest nursing agency in Australia and a Panel
Supplier (Tier 1) in all States and Territories. Notwithstanding
its leading position, we see significant growth opportunities in a
consolidating market, particularly in the populous Eastern States.
We are in the process of expanding Last Minute Locums, the locum
Doctor business acquired in August 2010, from its core market in
New South Wales into the other States and we will pursue the same
organic strategy for Allied Health Professionals in Australia. Our
goal is to build a broadly based specialist healthcare recruitment
business in Australia, similar to HCL's position in the UK.
Market dynamics favour the Group's new business model and long
term drivers of growth - the growing and ageing population in the
UK and Australia, the demand for greater flexibility amongst both
healthcare workers and providers - remain unchanged.
I look forward with confidence to reporting to shareholders on
our performance in 2011.
Stephen Burke
Chief Executive Officer
19 August 2011
ANNUAL PERFORMANCE BY SEGMENT
Performance by segment in 2010 and 2009 may be analysed as
follows:
2010 2009 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Doctors 33.9 6.3 19% 49.0 12.8 26%
Qualified Social
Workers 35.4 6.8 19% 41.0 8.9 22%
Allied Health
Professionals 60.7 18.1 30% 65.2 21.6 33%
Nursing 12.0 2.9 24% 7.5 1.9 25%
Permanent Placements 4.6 4.6 100% 4.4 4.4 100%
Australia 11.2 3.0 27% NA NA NA
Inter-segment
* (0.7) (0.5) NA 0.5 0.8 NA
Group 157.1 41.2 26% 167.6 50.4 30%
---------------------- -------- -------- ----- -------- ------- ------
* Inter-segment adjustments, which include other reconciling
items, represent removal of the overlapping commission revenue from
placements recognised by two or more segments and measurement
differences between the basis used to report invoiced transactions
to the chief operating decision maker and the basis used in the
Consolidated Financial Statements.
2010 may be reconciled to 2009 as follows:
Revenue Gross Profit
GBPm GBPm
2009 restated 167.6 50.4
Due to:
Organic business -29.5 -13.7
Acquisitions +19.0 +4.5
2010 157.1 41.2
----------------- -------- -------------
Excluding the impact of acquisitions, revenue in 2010 was down
18% on 2009 and gross profit down 27%.
KEY PERFORMANCE INDICATORS - KPIs
The three KPIs used by the Group in 2010 all revolved around the
gross profit.
The key metrics monitored were as follows:
KPI - Group 2010 2009 restated Change
GBP'000 GBP'000 %
Average gross profit
per week 793 970 - 18%
Gross profit per employee 91 132 - 31%
Gross profit as % of
revenue 26% 30% - 4%
All three KPIs demonstrate the Group's decline in performance in
2010 compared with 2009.
2010 PERFORMANCE: H1 & H2 (Unaudited)
Performance by segment in 2010 H1 and H2 may be analysed as
follows:
H1 H2
Revenue Restated Organic Acquisitions Total H2
GBPm GBPm GBPm GBPm
Doctors 17.0 16.2 0.7 16.9
Qualified Social Workers 18.5 16.9 - 16.9
Allied Health
Professionals 32.3 25.5 2.9 28.4
Nursing 4.5 3.3 4.2 7.5
Permanent Placements 2.9 1.7 - 1.7
Australia NA NA 11.2 11.2
Inter-segment (0.3) (0.4) - (0.4)
Group 74.9 63.2 19.0 82.2
--------------------------- ------------- -------- ------------- ---------
H1 H2
Gross Profit Restated Organic Acquisitions Total H2
GBPm GBPm GBPm GBPm
Doctors 3.4 2.8 0.1 2.9
Qualified Social Workers 3.4 3.4 - 3.4
Allied Health
Professionals 10.0 7.4 0.6 8.0
Nursing 1.2 1.0 0.8 1.8
Permanent Placements 2.9 1.7 - 1.7
Australia NA NA 3.0 3.0
Inter-segment - (0.5) - (0.5)
Group 20.9 15.8 4.5 20.3
--------------------------- ------------- -------- ------------- ---------
Organic Gross Profit
%
Gross Margin % H1 restated H2
% %
Doctors 20% 17%
Qualified Social Workers 18% 20%
Allied Health
Professionals 31% 29%
Nursing 27% 29%
Permanent Placements 100% 100%
Australia NA NA
Inter-segment NA NA
Group 28% 25%
--------------------------- ------------- -------- ------------- ---------
Gross profit H2 may be reconciled to H1 as follows:
GBPm
2010 - H1 20.9
Organic business
Effect of lower Volume (3.0)
Effect of lower Margin
% (2.1)
(5.1)
Acquisitions 4.5
2010 - H2 20.3
------
Excluding the impact of acquisitions, 2010 H2 revenue was down
16% on H1 and gross profit was down 24%.
Doctors
2010 2009 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 33.2 6.2 19% 49.0 12.8 26%
Acquisitions 0.7 0.1 14% NA NA NA
-------- -------- ----- -------- -------- -----
33.9 6.3 19% 49.0 12.8 26%
-------- -------- ----- -------- -------- -----
2010 v 2009 -
Organic - 32% - 52%
H1/H2 split is
unaudited 2010 H2 2010 H1 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 16.2 2.8 17% 17.0 3.4 20%
Acquisitions 0.7 0.1 14% NA NA NA
-------- -------- ----- -------- -------- -----
16.9 2.9 17% 17.0 3.4 20%
-------- -------- ----- -------- -------- -----
H2 v H1 - Organic - 5% - 18%
2010 Performance
In 2009 the Doctors division made a strategic choice to focus on
higher margin, direct business outside of the Purchasing Framework
Agreements, termed 'off contract'. During this time, high demand
from the NHS for locum doctors outstripped supply, consequently
'off contract' work was not only profitable for the division, but
also more flexible for hospitals where staffing was a key
priority.
However during 2010, in response to the public spending cuts,
there was a shift in the NHS to buying through the Buying Solutions
National Framework, termed 'on contract'. Although at lower
margins, supplying through the Framework Agreements offers
potentially higher volumes with stricter compliance
requirements.
By mid 2010 it was evident that this trend was set to continue.
Reversing the earlier strategic decision and to switch the focus to
supplying 'on contract' was challenging and required major
operational changes for the division, which included adhering to a
different set of compliance requirements as well as changed
business and administrative processes.
This impacted the division significantly. Essentially a large
database of doctors, which had been built over many years, now
needed to be converted to National Framework compliance standards.
Consequently, margins fell to 'on contract' levels and volumes
declined.
Towards the end of 2010, changes were made to the management
structure to oversee and focus on the new processes required to
ensure the division's database was made fully compliant and
available for work under the NHS PASA Framework.
Current trading
The business change process that started in 2010 has continued
through the first half of 2011, leaving the division well
positioned to grow in the current environment. Margin pressures
remain a challenge for the business, however, the outlook remains
positive as the NHS is still suffering from a shortage of doctors
and there are doctors who choose locum work because of the flexible
working conditions.
Our position in the market remains good and recent contract wins
within key regions of the UK - such as PROCure (Beds, Bucks,
Oxfordshire, Hampshire, IOW) and NWCCA (The North West region) have
increased our fill rate opportunities and serve as reference sites
for new tenders in the future.
QUALIFIED Social Workers
2010 2009 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 35.4 6.8 19% 41.0 8.9 22%
Acquisitions NA NA NA NA NA NA
-------- -------- ----- -------- -------- -----
35.4 6.8 19% 41.0 8.9 22%
-------- -------- ----- -------- -------- -----
2010 v 2009 -
Organic - 14% - 24%
H1/H2 split is
unaudited 2010 H2 2010 H1 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 16.9 3.4 20% 18.5 3.4 18%
Acquisitions NA NA NA NA NA NA
-------- -------- ----- -------- -------- -----
16.9 3.4 20% 18.5 3.4 18%
-------- -------- ----- -------- -------- -----
H2 v H1 - Organic - 9% + 0%
2010 Performance
The market for Qualified Social Workers (QSWs) is split between
direct supply to Local Authorities and supply through Master
Vendors.
Levels of candidate supply were impacted 5 years ago when the
academic requirements for QSWs changed from a 2 year diploma to a 3
year degree course leading to a general shortage of candidates.
However through 2010, market conditions became much more uncertain,
with Local Authorities facing budgetary pressures, despite their
need for QSWs.
2010 saw an increasing number of Local Authorities adopt Master
Vendor solutions to help manage their supply of flexible workers
and to reduce their expenditure. This has resulted in margin
pressure and a reduction in the volumes of 'off contract' work
available.
Current trading
The demand for QSW's remains acute, however the trend that began
to develop towards the end of 2010 of higher case loads for Social
Workers, has continued into 2011 affecting the level of demand.
Recent steps have been taken to reduce the cost base and align
it to current market conditions. Business processes have also been
addressed which we anticipate will result in an increase in fill
rates going forward.
Allied Health Professionals
2010 2009 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 57.8 17.5 30% 65.2 21.6 33%
Acquisitions 2.9 0.6 21% NA NA NA
-------- -------- ----- -------- -------- -----
60.7 18.1 30% 65.2 21.6 33%
-------- -------- ----- -------- -------- -----
2010 v 2009 -
Organic - 11% - 19%
H1/H2 split is
unaudited 2010 H2 2010 H1 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 25.5 7.5 29% 32.3 10.0 31%
Acquisitions 2.9 0.6 21% NA NA NA
-------- -------- ----- -------- -------- -----
28.4 8.1 29% 32.3 10.0 31%
-------- -------- ----- -------- -------- -----
H2 v H1 - Organic - 21% - 25%
2010 Performance
The Allied Health Professionals (AHP) division has historically
been a supplier of locum staff to the NHS on an 'off contract'
basis. This model proved to be very profitable in previous years
due to high demand from the NHS and a shortage of skilled staff
available.
As a result of the Public Spending cuts in 2010, the division
saw the same trend within the NHS to move its flexible staffing
purchasing to National Framework contracted agencies and an
increase in the creation of Regional Purchasing hubs allowing
Trusts to collaborate to purchase goods and services. The result
was a decline in hospitals hiring staff from 'off contract'
agencies.
The division's response to the new market conditions was
affected by the lack of available compliant candidates necessary to
be placed within 'on contract' bookings.
Current Trading
A key project to migrate locums to Framework supply is well
underway, as we move to align ourselves with our customers'
requirements.
The division holds the National Framework Agreement contract and
regional hub contracts including London, Southern England and the
North West, providing an opportunity to increase volumes
significantly going forward.
Current trading is in line with plan and we are forecasting a
further slight decline in gross profit during H2, due to lower
margins not yet being compensated for by higher volumes.
nursing
2010 2009 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 7.8 2.1 27% 7.5 1.9 25%
Acquisitions 4.2 0.8 19% NA NA NA
-------- -------- ----- -------- -------- -----
12.0 2.9 24% 7.5 1.9 25%
-------- -------- ----- -------- -------- -----
2010 v 2009 -
Organic + 4% + 11%
H1/H2 split is
unaudited 2010 H2 2010 H1 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 3.3 1.0 30% 4.5 1.1 27%
Acquisitions 4.2 0.8 19% NA NA NA
-------- -------- ----- -------- -------- -----
7.5 1.8 24% 4.5 1.1 27%
-------- -------- ----- -------- -------- -----
H2 v H1 - Organic - 27% - 9%
2010 Performance
The Nursing division was formed in October 2010 following the
acquisition in July 2010 of Orion Locums Ltd and in August 2010 the
acquisition of the business and certain assets of Redwood Health
Ltd, including Montague Nursing Agency (based in London) and MPS
Healthcare based near Cardiff in Wales.
At the time of acquisition, Montague had the London Procurement
Programme contract for the supply of nurses to London and had
Service Level Agreements ('SLAs') with a number of NHS Trusts in
London. Orion's nursing division held (and continues to hold) the
National Framework agreement and the London Procurement Programme
contract. In October 2010 Orion's nursing division and Montague
Nursing Agency were amalgamated with Nurselink, an existing HCL
business operating 'off Framework'. These merged operations are
based in our London office.
MPS Healthcare successfully secured another place on the All
Wales Agency Project ('AWAP') contract in October 2010. This is a 2
year contract, with an option to extend for a further 2 years.
During the AWAP tender process, agencies were scored on quality and
price. MPS scored highest on quality and joint 10(th) on price.
In general, there is a shortage of candidates in the nursing
market; this is particularly acute for midwives and specialist
nurses. There is the same drive towards using nursing agencies on
framework. However, in areas such as Accident & Emergency,
Intensive Treatment Units and Paediatrics, opportunities remain to
supply outside of the agreements due to severe candidate
shortages.
The creation of the UK Nursing division provides HCL with the
critical mass from which to expand in a market which is forecast to
experience continuing supply shortages in the coming years.
Current Trading
Progress in the Nursing division has been very encouraging. We
have successfully increased both volumes and gross profit. However,
the market remains short of candidates and the main challenge that
we face is maintaining the pace of growth of our compliant nursing
database.
We have expanded our NHS coverage regionally, providing us
access to NHS Framework business in the North West, East and West
Midlands, Oxfordshire, Bucks and along the South Coast. MPS
Healthcare has consolidated its position as the leading supplier of
Nurses and experienced Health Care Support Workers on the All Wales
Agency Project, which has been achieved through a commitment to
quality and maintaining the highest standards of clinical
governance.
We have also successfully developed our capability to service
care packages and to provide nursing services which are not in a
hospital setting, such as Community Services where demand continues
to increase. The pressure on beds in the NHS presents the
opportunity to develop the scope of our Community Care Section to
include Hospital Admission Prevention Team, Discharge Support Team
and End of Life Teams. Such activities regularly use temporary
staff, as nurses are often only required for short periods of
time.
At present, the NHS represents over 90% of our revenues.
However, there are further opportunities to expand our non-NHS
client base. As and when waiting times within the NHS increase and
other cost cutting measures are implemented, private healthcare
service providers are expected to see an increase in demand. HCL
Nursing is well placed to meet this demand.
Permanent placements
2010 2010 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 4.6 4.6 100% 4.4 4.4 100%
Acquisitions NA NA NA NA NA NA
-------- -------- ----- -------- ------- ------
4.6 4.6 100% 4.4 4.4 100%
-------- -------- ----- -------- ------- ------
2010 v 2009 -
Organic + 5% + 5%
H1/H2 split is
unaudited 2010 H2 2010 H1 restated
Revenue Gross Profit Revenue Gross Profit
GBPm GBPm % GBPm GBPm %
Organic 1.7 1.7 100% 2.9 2.9 100%
Acquisitions 0.0 0.0 NA NA NA NA
-------- -------- ----- -------- ------- ------
1.7 1.7 100% 2.9 2.9 100%
-------- -------- ----- -------- ------- ------
H2 v H1 - Organic - 41% - 41%
2010 performance
The Permanent Placements division faced a number of significant
challenges during 2010. Candidate sourcing operations in South
Korea and Abu Dhabi, set up in 2009, were closed down in 2010 H2,
having delivered limited revenue since inception. The North
American offices in New York and Toronto also generated minimal
revenues whilst incurring significant costs.
Following the UK General Election in May 2010, the tighter
immigration rules introduced by the Coalition Government
significantly reduced the scope to source candidates from outside
of the UK and the European Union, notwithstanding candidate
shortages for both nurses and doctors. The division addressed this
by focusing on attracting candidates into the UK from other EU
countries.
Current Trading
The business has been refocused on permanent placements in the
UK, particularly attracting international candidates into the UK
from European Union countries, as well as candidates based in
Australia and New Zealand through the working holiday visa scheme.
The loss making North American offices were closed in H1 2011.
We continue to supply highly skilled UK Social Workers into some
of Australia's remote areas and are actively engaged in expanding
this offering in other parts of Australia.
The total headcount in this division has been reduced from 80 at
31 December 2010 to 30 at 30 June 2011. This provides a solid
foundation from which the division can grow as and when market
conditions improve. Indeed there have been some early indications
that NHS Trusts may now be able to secure higher numbers of
Certificates of Sponsorship for critical areas. HCL remains well
placed to deliver global sourcing projects to its clients.
australiA
Performance of the two Australian acquisitions made during 2010
from the date of acquisition to 31 December 2010 may be summarised
as follows:
Consideration
Acquired * Turnover Gross Profit
GBPm GBPm GBPm %
Last Minute
Locums 01 August 2010 6.1 1.5 1.0 67%
Healthcare 20 December
Australia 2010 83.3 9.7 2.0 21%
-------------- --------- -------- -----
89.4 11.2 3.0 27%
-------------- --------- -------- -----
* Includes Contingent and Deferred consideration
Strategic rationale
On 1 August 2010 the Group acquired the business and assets of
Last Minute Locums Pty Ltd ("LML"), a Sydney based medical staffing
business with a database of over 3,500 qualified doctors and
operating primarily across New South Wales.
On 20 December 2010, the Group completed the acquisition of 100%
of the issued share capital of Healthcare Australia Holdings Pty
Ltd (HCA). The acquisition was a key step in the Group's previously
stated strategy to pursue international acquisitions which will
generate additional revenue outside of the UK.
Importantly the acquisition of HCA significantly enhances HCL's
international capability; the Board expects Australia* will deliver
around half of the Group's* Gross Profit in 2011.
* excluding the Homecare division, which was sold in July
2011.
HCA's business, management and financial performance
Business: HCA was established in 2004 and is a leading provider
of nursing agency staff to public and private health institutions
in Australia;. HCA has grown rapidly by acquisition and is the
largest national nursing agency in Australia, with operations in
all States and Territories and with a database of approximately
6,300 active nurses,
Prior to the sale of the Homecare division in July 2011, the
Group's business in Australia comprised three principal
divisions:
% of Revenue
Division Activity *
Provider of nursing agency
Nursing Agency staff 77%
Last Minute Locums Provider of locum doctors 3%
Provider of professional
nursing, health and support
services to individuals
Homecare division in their homes 20%
100%
-------------
* estimated for year ended 31 December 2010
HCA and LML's principal customers include the State Departments
of Health, Private Hospital Groups, and the Department for
Defence.
Management: The Board considers that HCA has a strong
operational management team and other than the senior management
synergies implemented immediately on completion of the acquisition,
all senior management remain with the business, reporting to Andy
McRae who was appointed Managing Director of HCA on 10 January
2011.
HCA Financial Performance
As detailed in Note 14 of the Financial Statements, HCA was
acquired on 20 December 2010.
The following shows the results of this business for the full
year including the period prior to acquisition.
Year to 30 June 6 months to 31 December
2010 2009 2010 2009
AUD $m AUD $m AUD $m AUD $m
Revenue 223.6 265.9 111.3 117.4
Adjusted EBITDA * 17.2 20.0 7.6 8.6
EBITDA post abnormals - - 2.0 -
Profit before Tax 1.7 0.9 (6.3) 1.1
Net assets - at period
end 36.4 35.1 102.1 35.9
* Adjusted EBITDA is before non-recurring items.
Note: All periods prior to acquisition (including the 2009
results) have been taken from the unaudited management
accounts.
The EBITDA adjusted for non-recurring items was AUD$17.2m (2009:
AUD$20.0m). Therefore the acquisition price represented a multiple
of 7.1x adjusted historic EBITDA.
The main reason behind the fall in turnover and EBITDA in the
year to 30 June 2010 was the decline in billable nursing agency
hours due to the shortage of available agency nurses. As at 30 June
2010, HCA had net assets of AUD$36.4m (2009: AUD$35.1m).
For information, the AUD$ exchange rate as at the date of
acquisition of HCA was AUD$ 1.57/GBP1 as against the year-end rate
of AUD$ 1.53/GBP1. The average rate for the period post-acquisition
period was AUD$ 1.55/GBP1.
Market & Opportunities
The nursing agency market in Australia is highly fragmented and
is estimated to be worth approximately AUD$ 1billion in size. HCA
is significantly larger than any other company operating in the
agency nursing market in Australia and the only company with a
truly national geographic footprint. Companies wishing to supply to
the Public Health system in Australia are required to be appointed
to approved "Panel" supplier lists under contracts of between three
and five years duration. HCA is an approved supplier in all States
and Territories and thus well positioned to grow its agency nursing
business.
The Private Hospital sector in Australia is significant in size
and HCA has a number of national exclusive and preferred supplier
agreements and state based preferred supplier agreements in
place.
Demand for nursing staff in Australia exceeds HCA's present
ability to supply although much of this unfilled demand is due to
the lack of investment undertaken by HCA's previous Private Equity
owners in candidate generation marketing activities. It is hoped
that once marketing activity is increased that HCA will be able to
increase nurse supply, both domestically and internationally. The
largest Australian urban centres in New South Wales, Victoria and
Queensland account for some 75% of the total Australian population
and yet HCA is underweight in revenue terms in these states. This
represents an exciting growth opportunity for the business. LML
presently operates primarily in New South Wales and the opportunity
exists to expand to all other states in which HCA operates using
the existing office network.
It is also the Board's intention to develop an Allied Health
division within HCA which will create a broadly based business,
very similar to HCL in the UK.
Current Trading
Our Australian business continues to trade in line with the
Board's plans.
Under previous ownership, there had been a lack of investment in
the central services and infrastructure of HCA with the result that
the business was ill equipped to take advantage of growth
opportunities on a speedy basis. Accordingly, we have made a number
of key appointments during the first half of 2011 in sales,
marketing and HR which we believe will help drive future growth of
the HCA business and have also invested in increasing our candidate
generation activities that will commence in the second half of the
year. It is hoped that this will help increase nurse supply to meet
current unmet demand.
Since the start of the year we have launched a permanent
recruitment division in Australia, focusing initially on domestic
recruitment into permanent roles of doctors and nurses and we are
working closely with the UK to ensure that we capitalise fully on
the opportunities to utilize the pipeline of candidates in the UK
and Europe that wish to consider working in Australia. Whilst in
its infancy the early signs for this division are encouraging.
We are also seeking to leverage existing client relationships
within the nursing agency business of HCA to accelerate the growth
of LML into other states in Australia other than New South
Wales.
Principal Risks & Uncertainties
The Group has identified potential principal risks and
uncertainties which could have a material impact on its short
and/or long term performance.
In order to achieve its business objectives and to enable it to
deliver value to all stakeholders, the Board endeavours to mitigate
these risks, where possible.
It is not, however, possible to fully mitigate all risks that
the Group encounters.
Information on Contingent Assets and Liabilities is provided in
Note 25 to the Financial Statements.
During 2011 the Board will be seeking to ensure that risk
management is embedded in the strategic planning processes,
including a three-year Plan, annual budgeting and forecasting
processes and operational practices. This will include establishing
risk management procedures, involving the identification and
monitoring of strategic and operational risks at various levels of
management, including a risk register.
The Board regularly reviews material risks identified.
In addition to market risk, credit risk and liquidity risk
(which are covered under Group financial risk management in Note 22
to the Financial Statements) and Contingent assets and liabilities
set out in Note 25 to the Financial Statements, the Principal Risks
and Uncertainties for the Group have been assessed by the Board as
follows:
1. Importance of passing the Refinancing Resolutions to complete
the Refinancing
In the event that the Refinancing resolutions set out in the
Chairman's Statement are not passed at the General Meeting and the
Refinancing is not implemented, then the Group will be unable to
satisfy its existing financial covenants and/or service its
existing borrowings or meet its ongoing funding requirements
without further support from the Lenders. In such event, the Group
would be in default under the existing facilities. Such a default
under the existing facilities, in addition to any default which may
subsist under the representations made under the terms of the
existing facilities at the time they were entered into, would
entitle the lenders to demand repayment of all outstanding amounts
and to cancel the facilities. Further, if the Refinancing does not
proceed, the banks have informed the Company that they will only
continue to support the business on the basis that a sale of all or
part of the Group is pursued. This would be likely to involve
formal insolvency proceedings for all or part of the Group. This
would, in the Board's opinion, result in Shareholders receiving no
value for their current shareholdings.
2. Customer relations
UK
In the UK, contracts governed by Framework Agreements (or "FAs")
represent a considerable element of the NHS market. A large
proportion of the services that the Group provides to the NHS is
pursuant to FAs. Services provided under FAs are subject to the NHS
terms and conditions. Any material breach of those terms and
conditions, or the terms of FAs would enable the NHS to terminate
the Group's ability to provide services under the FAs. A loss by
the Group of its ability to tender for contracts under the FAs
would have a material adverse impact on the business.
In response to the findings of the internal investigation, Grant
Thornton was engaged in April 2011. Grant Thornton confirmed the
principal findings of the Group's internal investigation. They also
investigated certain other issues and identified that historically
there were specific transactions which suggest that the Company was
not fully complying with the NHS terms and conditions and the terms
set out in the Framework Agreements.
The current Board has not had sufficient time to undertake an
entire review of the practices within the Group and has therefore
focused on the specific areas which have been highlighted by
customer complaints or specific issues identified internally. It is
possible that there will be further instances of non-compliance
with NHS terms and conditions and the terms of FAs which could have
a material impact on the business. The Board has committed
significant resource to uncovering potential historical breaches of
the terms of Framework Agreements and taking appropriate remedial
action in relation to any such breaches. The Group is currently in
discussion with certain NHS trusts to resolve issues they have
raised. Should further issues be raised by customers, the Board
will seek to resolve them promptly.
It is possible nevertheless that the NHS may consider that it is
in a position to terminate the Group's ability to provide services
under the FAs on the basis of the Group's historical performance of
those contracts. Alternatively, for the same reasons, it is
possible that the NHS may bring proceedings against the Group for
breach of contract, or seek to move business away from the Group in
the future by procuring services from providers outside the Group.
In each case, this could have a material adverse impact on the
business. See risk 3 below in relation to dependence on key
clients.
Australia
In Australia, the Group is a significant provider of agency
nurses to the public and private sectors. In this regard the Group
is an approved "Panel" supplier of agency nurses to the public
health system in all States and Territories in Australia. These
contracts may be terminated immediately in the event of a breach or
by notice. The termination of these contracts would have a material
adverse impact on the business.
Further, the Group also has exclusive or preferred supplier
agreements on either a National or State basis with private sector
health providers in Australia. Several agreements contain Key
Performance Indicators (KPI) targets. Failure to achieve the KPI
targets could result in those contracts being terminated which
would have a material adverse impact on the business.
General
More generally, there is a risk that in some cases customers'
willingness to trade with the Group may be adversely affected by
the impact which the circumstances giving rise to the investigation
- as reported in the Chairman's Statement - may have on the Group's
reputation or by the current state of the Group's finances, which
the Refinancing is intended to address.
3. Dependence on key clients
Significant exposure to one or a few clients (such as the NHS in
the UK or the various State and Territory health systems in
Australia) is an area of risk. In the event that any such clients
cease to procure services from the Group, or do not pay for
services provided by the Group in a timely manner, this may have a
material adverse effect on the Group's cash flow and prospects.
4. Litigation and Claims
All current significant litigation against the Company and
possible claims that the Company may be able to bring are
summarised or referred to in Note 25 of the Financial
Statements.
The Group has dismissed a number of employees in the recent
past, following the investigations that have taken place in the UK.
It is possible that the dismissal of employees may lead to claims
being brought by those employees, although the Company is not aware
of any such claims being threatened (other than claims disclosed to
in Note 25 of the Financial Statements).
The current Board is not aware of any other significant
litigation or threatened significant litigation against the Group,
other than disclosed in Note 25 of the Financial Statements).
However, in light of the circumstances giving rise to the
investigation referred to in the Chairman's Statement, it is
possible that further significant litigation may be commenced by
parties who consider that they have claims against the Company
arising out of the financial irregularities. Litigation is time
consuming and can be expensive. Litigation against the Group could
have a material adverse impact on the business, its reputation and
the financial condition of the Group.
The Company is listed on AIM. In light of the accounting
irregularities that have come to light, referred to in the
Chairman's Statement, it is possible that regulatory bodies may
carry out an investigation or investigations into the Company. In
the event that any such investigation finds that the Company is
culpable, it may give rise to a liability on the Company to pay
compensation to those affected, or a fine. Any such finding could
have a material adverse impact on the business, reputation and
financial condition of the Group.
5. Integrity of compliance controls
In the UK under FAs the Group has an obligation to provide
agency workers to the NHS that are compliant in respect of all
categories listed in the relevant FA, NHS terms and conditions or
service level agreement. Under the current Board the Group makes
every effort to provide only compliant agency workers to the NHS.
To the extent that the Group has complied with FAs, the FAs provide
that the Group will not be liable for any damages resulting from
clinical negligence attributable to an agency worker. Any such
liability would fall on the relevant NHS trust, and there is a NHS
clinical negligence insurance scheme in place.
If the Group were to provide an agency worker to the NHS under a
FA, but not compliant with the FA, and that agency worker was
negligent in a manner related to the non-compliance, then not only
would the Group have breached the FA, and be susceptible to
termination of the FA by the NHS, but the Group could incur a
substantial liability and suffer reputational risks. To date no
such claims have ever been pursued or notified against the Group.
The Group does not hold insurance for this type of liability.
Similar issues arise for the Group under its contracts with
other customers as well as the NHS.
Any such uninsured claim or claims could have a material adverse
effect on the Group's business, financial condition and results of
operations. In addition, claims, regardless of their merit or
eventual outcome, may have a material adverse effect on the
Company's reputation.
6. New business plan
In light of the historical issues that arose in the UK under the
previous management, and as a part of the restructuring currently
taking place, the Group's intention is to implement a new three
year business plan which involves a re-focusing of the Group's UK
business. As with any new business plan, there is execution risk.
There is a risk that the new business plan will not succeed, or may
take longer to achieve than planned, and its ability to gain market
share in the FA market is not successful. This could have a
material adverse impact on the business.
7. Board recently appointed
The current Board were appointed between February and May this
year. There is a risk that, notwithstanding the review which the
Board has so far been able to undertake of the practices within the
Group, other matters may come to light of which the Board is not
currently aware, and which may have a material adverse impact on
the business.
8. Self-employed staff
In the UK the Group makes significant use of self-employed
staff. HMRC could seek to challenge that self-employed status and
recover income tax through the Pay As You Earn system and National
Insurance Contributions (and any associated interest and penalties)
from the Group. This could have a material adverse impact on the
business. The Group takes all steps to minimise these risks.
9. Umbrella Companies and Managed Service Companies
In the UK the Group makes significant use of umbrella companies
for the purpose of supplying agency workers. Whilst steps are taken
to ensure those umbrella companies are not Managed Service
Companies as defined in section 61B Income Tax (Earnings and
Pensions) Act 2003, if HMRC were able to assert successfully that
such companies were Managed Service Companies there could be a
liability to HMRC.
Additionally because the use of Managed Service Companies is
forbidden under the FAs, if any of the agency workers recruited
through any such companies had been provided to the NHS under FAs,
the Group could be exposed to claims of damages for breach of
contract and the risk that the NHS might terminate the contracts
under the FAs.
Where the new Board has identified a specific concern about any
individual umbrella company on which it has not been able to
satisfy itself it has taken steps to cease to use that company to
supply agency workers.
10. A change in treatment of flexible staff for UK tax,
employment and benefits purposes could result in increased
costs.
When the UK government introduces legislation to implement the
Temporary Agency Workers Directive there will be a requirement to
give agency workers engaged for a period of more than 12 weeks at
least the same basic working and employment conditions as other
employees of the client or the same basic working and employment
conditions that they would have received had they been recruited
directly by the client. This may make the use of agency workers
less attractive to the Group's customers.
The Pensions Act 2008 is to be phased in over a number of years
and is likely to result in the Group having to contribute a minimum
of 3% of the agency workers' qualifying earnings by way of a
pension contribution. This will be an additional cost to the Group
and it is not yet clear whether, or the extent to which, the Group
will be able to recover that cost from its customers. If the Group
is not able to recover that costs from its customers, there may be
a material adverse impact on the Group's profit and growth
margins.
Any other changes in the treatment of flexible staff for tax,
employment and benefits purposes in the UK or Australia could
result in increased costs for the business.
11. Technology systems
The successful operation of the Group's business depends upon
maintaining the integrity of the Group's IT systems, which
currently suffer from underinvestment. However, these systems and
operations are vulnerable to damage, breakdown or interruption from
events which are beyond the Company's control, such as fire, flood
and other natural disasters; power loss or telecommunications or
data network failures; improper or negligent operation of the
Group's system by employees or unauthorised physical or electronic
access; and interruptions to internet system integrity generally as
a result of attacks by computer hackers or viruses or other types
of security breaches. Any such damage or interruption could cause
significant disruption to the operations of the Group. This could
be harmful to the Group's business, financial condition or
operating results and reputation and could deter current or
potential customers from using its services.
There can be no guarantee that the Group's security measures in
relation to its computer, communication and information systems
technology will protect it from all potential breaches of security,
and any such breach of security could have an adverse effect on the
Group's business, financial condition or operating results.
Immediately following completion of the Refinancing the Board
will need to implement a review and upgrade of the Group's existing
IT systems in both the UK and Australia. This may cause some
disruption to the business while the review and upgrade is taking
place, but when complete should among other things result in a
material enhancement of the Group's existing disaster recovery
capability beyond its current limited capability.
12. VAT
The First Tier Tax Tribunal held, in the case of Reed Employment
Limited v H.M. Revenue & Customs, that supplies for VAT
purposes by a particular recruitment business to its clients were
supplies of introductory and ancillary services and not supplies of
staff. The case suggests that other employment businesses may,
historically, have incorrectly charged VAT to their customers. This
is because many employment businesses, including the UK Company,
have charged VAT not only by reference to the amount of their
commission but also on the value of all the payments related to the
worker supplied including remuneration, Pay as You Earn (PAYE) and
National Insurance Contributions. The Tribunal stated that VAT was
chargeable only on the commission element of the supply. The effect
of the decision is that the UK Company's clients may seek repayment
of VAT charged by the UK Company on any amounts other than the UK
Company's commission. The Company may not be able to fully recover
this VAT from HMRC.
13. Changes in government spending and policy
Any change of government spending, policy or change of
administration could have an adverse affect on the financial
prospects of the Group in the UK and in Australia. In addition, NHS
funding in the UK, or public health funding in Australia, may
become more dependent upon private funding including compulsory
company or private insurance schemes. It is not possible to foresee
what the impact of such a change may have on the prospects of the
business. The NHS is under pressure to realise a considerable
improvement in its financial performance. This could result in the
reduced usage of Agency staff.
The business is dependent upon NHS trusts and its customers in
Australia continuing to use agency staff. If these customers are
not sufficiently funded there is a risk that they will reduce the
use of agency staff which may have an adverse impact on the
Group.
14. Dependence on retention and recruitment of key personnel
The success of the Group and its business strategy are dependent
on its ability to retain and attract management, and key sales,
marketing and other operating personnel with the relevant expertise
and experience. As the Group expands, the Group will need to
recruit and integrate additional personnel. In a period of high
growth, the loss of the services of one or more members of the
management group or the inability to recruit and effectively
integrate additional personnel as needed could have an adverse
effect on the Group's its business, financial condition and
results. One of the execution risks related to the three-year
business plan (see risk 6) is the retention and recruitment of key
personnel.
15. Shortage of candidates and skills
The Group's clients often require large numbers of staff, both
contract and permanent. To meet this demand, the Group has
developed increasingly sophisticated and flexible recruitment
services. The quality and size of the Group's database of locums is
key to the success of the Group. However, it cannot guarantee that
it will be able to supply sufficient numbers of, or suitably
skilled, locums and other candidates to meet the future demand of
its clients. This may adversely affect the Group's business. One of
the execution risks related to the three year business plan (see
section 6 above) is the retention and recruitment of locums.
16. Outsourced services
The Group's UK business is dependent for the delivery of a
number of its services on outsourcing contracts, some of which are
performed outside of the UK. As a result the Group does not have
management control of a number of the operations that are critical
to the efficient running of its business and could potentially
suffer service failures or IT or other technical failures. Although
in these cases the Group may be entitled to change supplier, its
ability to do so and the cost of doing so would be dependent on the
terms of the individual contracts and there would be a risk in any
event of the Group suffering material business disruption in making
any such change.
17. Exposure of the Group to economic conditions
Demand for the Group's services may be significantly affected by
the general level of economic activity and economic conditions in
the regions and sectors in which the Group operates. If there is an
actual or perceived threat of economic downturn, many companies
hire fewer employees. Therefore, an actual or perceived economic
downturn, especially in regions where the Group's operations are
more focused, could have a material adverse effect on the Group's
business and financial results. In addition, there may be a delay
between the emergence of an actual or perceived threat of economic
downturn and the impact this could have on the Group's financial
results.
18. Changes in regulatory environment
Changes in employment law and working time regulations may have
an adverse impact on the Group's business in the UK and in
Australia. In addition, regulation governing the use of staff from
abroad may impact on the Group's ability to source staff from some
of its current overseas partners.
19. Competitive environment
In the UK and Australia, the markets for the provision of
permanent, temporary and flexible staff are highly competitive and
fragmented. In these well developed markets, competitor risk
manifests itself in continued competition for clients and
candidates and in pricing pressures. Competitors range from large
multi-national organisations to small privately-owned local
businesses. In all of the Group's markets, it is continually
subject to both existing and new competitors.
20. Investment in new sectors and geographical markets
Failure to expand into new markets could result in a business
growing to saturation point within a specific sector, thereby
impairing the potential for growth in that sector.
21. Financing
In addition to the matters which have given rise to the
Refinancing, as a more general matter a failure to secure adequate
financing, whether to fund expansion, to finance the slowing of
payment terms or financing bad debt, would have a material effect
on results of the Group.
22. Adequacy of insurance coverage
A failure to hold sufficient insurance cover could result in the
Group having to fund uninsured losses.
The Group's insurance policies are generally subject to
exclusions, so if an event occurs which falls within any such
exclusion the Group would be unable to claim under the applicable
policy.
23. Integrity of financial controls
Since it was formed earlier in 2011, the new Board has sought to
ensure that appropriate measures have been taken and new systems
put in place so that management accounts can be relied upon in the
future. However, a failure to maintain sufficient financial
controls may lead to reputational damage and financial loss or to
incorrect and/or incomplete financial information used to manage
the business.
24. Exchange rate risk
Exchange rate fluctuations may affect the cash flow that the
Group will realisefrom its operations. The Group's revenues and
costs are incurred primarily in British pounds and Australian
dollars. Fluctuations in exchange rates between currencies in which
the Group operates may cause fluctuations in its financial results
which are not necessarily related to the Group's underlying
operations.
25. Interest rate risk
The Group is exposed to the risk that a rise in interest rates
will increase the interest payments of the Group, principally
through increases in the interest payable under the Amended and
Restated Facilities Agreement and any other borrowings of the Group
which are variable. The Group has entered into interest rate swaps
and interest rate caps to seek to mitigate this risk.
26. Credit risk
The Group has implemented policies that require appropriate
credit checks on potential customers to be made before sales are
made. Procedures have been put in place to seek to ensure that
customers pay on a timely basis. However, a failure of a major
customer to meet its contractual obligations may adversely affect
the Group's business.
On behalf of the Board
Peter Sullivan
Chairman
19 August 2011
Healthcare Locums PLC
Company number: 04736913
Consolidated Statement of Comprehensive Income
Year ended
Year ended 31 December
31 December 2009
Note 2010 (Restated)
----- ------------- -------------
GBP'000 GBP'000
Revenue 2 157,159 167,477
Cost of sales (115,932) (117,030)
------------------------------------- ----- ------------- -------------
Gross profit 2 41,227 50,447
Administrative expenses (44,202) (36,762)
Highlighted items:
Goodwill impairment 13 (45,972) -
Other operating income 5 4,232 2,707
Other operating expenses 5 (7,384) (8,499)
------------------------------------- ----- ------------- -------------
(Loss)/Profit from operations 5 (52,099) 7,893
Foreign exchange gains, net 5 1,542 -
Finance income 8 522 107
Finance expense 8 (6,440) (2,138)
------------------------------------- ----- ------------- -------------
(Loss)/Profit before taxation (56,475) 5,862
Tax benefit/(expense) 9 2,112 (2,826)
------------------------------------- ----- ------------- -------------
(Loss)/Profit for the year (54,363) 3,036
------------------------------------- ----- ------------- -------------
Other comprehensive income:
Cash flow hedges:
Gains recognised directly in equity - 66
Release of deferred losses on
cash flow hedges 672 230
Tax relating to cash flow hedge
reserve (270) 270
Translation adjustment (198) -
------------------------------------- ----- ------------- -------------
Total other comprehensive income 204 566
------------------------------------- ----- ------------- -------------
Total comprehensive (loss)/income
for the year (54,159) 3,602
------------------------------------- ----- ------------- -------------
(Loss)/earnings per share for
(loss)/profit attributable to
the owners of the parent
Basic (pence) 10 (50.0) 2.9
Diluted (pence) 10 (50.0) 2.8
------------------------------------- ----- ------------- -------------
The Notes are an integral part of these Financial
Statements.
Healthcare Locums PLC
Consolidated Statement of Changes in Equity
Amounts are in GBP'000s
Called Cash
up flow Share
share Share hedge option Translation Retained
Note capital premium reserve reserve reserve earnings Total
------------------ ----- -------- -------- -------- -------- ------------ --------- ---------
Balance at 1
January 2009 (as
previously
reported)
Restatement due
to errors and
change in
accounting
policies
Reclassification
to conform to 10,427 34,324 (968) - - 12,275 56,058
2010 - - - - - (7,507) (7,507)
presentation 1 - - - 615 5 (620) -
------------------ ----- -------- -------- -------- -------- ------------ --------- ---------
Balance at 1
January 2009
(restated) 1 10,427 34,324 (968) 615 5 4,148 48,551
Profit for the
year - - - - - 3,036 3,036
Other
comprehensive
income for the
year - - 296 - - 270 566
Dividends 11 - - - - - (3,754) (3,754)
Issue of share
capital 23 40 193 - - - - 233
Deferred tax
recognised on
share based
payment - - - - - 886 886
Credit in respect
of share scheme
charges 29 - - - 464 - - 464
------------------ ----- -------- -------- -------- -------- ------------ --------- ---------
Balance at 31
December 2009
(restated) 1 10,467 34,517 (672) 1,079 5 4,586 49,982
------------------ ----- -------- -------- -------- -------- ------------ --------- ---------
Balance at 31
December 2009 (as
previously
reported)
Restatement due
to errors and
change in
accounting
policies
Reclassification
to conform to 10,467 34,517 (672) - - 22,936 67,248
2010 - - - - - (17,266) (17,266)
presentation 1 - - - 1,079 5 (1,084) -
------------------ ----- -------- -------- -------- -------- ------------ --------- ---------
Balance at 31
December 2009
(restated) 1 10,467 34,517 (672) 1,079 5 4,586 49,982
Loss for the year - - - - (54,363) (54,363)
Other
comprehensive
income for the
year - - 672 - (198) (270) 204
Dividends 11 - - - - - (3,581) (3,581)
Issue of share
capital 23 867 10,801 - - - - 11,668
Deferred tax
recognised on
share based
payment - - - - - (886) (886)
Warrants issued
during the year 19 - - - 2,970 - - 2,970
Credit in respect
of share scheme
charges 29 - - - 586 - - 586
------------------ ----- -------- -------- -------- -------- ------------ --------- ---------
Balance at 31
December 2010 11,334 45,318 - 4,635 (193) (54,514) 6,580
------------------ ----- -------- -------- -------- -------- ------------ --------- ---------
The Notes are an integral part of these Financial Statements.
Healthcare Locums PLC
Company number: 04736913
Consolidated Statement of Financial Position
As at 31 As at 31 As at 1
December December January
Note 2010 2009 2009
-----
(Restated) (Restated)
GBP'000 GBP'000 GBP'000
Assets
Non-current assets
Property, plant and equipment 12 2,776 958 1,163
Goodwill 13 41,376 60,289 60,318
Other intangible assets 15 77,014 3,550 8,188
Deferred tax asset 21 5,117 1,665 -
-----------
126,283 66,462 69,669
---------- ----------- -----------
Current assets
Trade and other receivables 16 36,333 27,305 26,489
Cash and cash equivalents
(excluding short-term
borrowings) 10,546 4,102 481
46,879 31,407 26,970
---------- ----------- -----------
Total assets 173,162 97,869 96,639
Liabilities
Non-current liabilities
Long term borrowings 19 (467) (5,482) (11,518)
Deferred tax liability 21 (8,839) (1,665) (1,643)
Long term provisions 20 (2,109) - -
-----------
(11,415) (7,147) (13,161)
---------- ----------- -----------
Current liabilities
Trade and other payables 17 (33,456) (18,407) (13,465)
Short term borrowings 18 (53) (11,570) (11,594)
Current portion of long-term
borrowings 19 (114,444) (4,343) (4,300)
Current tax payable (528) (5,622) (3,380)
Short term provisions 20 (4,960) - (1,220)
Derivative financial liabilities 22 (1,726) (798) (968)
-----------
(155,167) (40,740) (34,927)
---------- ----------- -----------
Total liabilities (166,582) (47,887) (48,088)
---------- ----------- -----------
Total net assets 6,580 49,982 48,551
--------------------------------- ----- ---------- ----------- -----------
Issued capital and reserves
attributable to the owners
of the parent
Share capital 23 11,334 10,467 10,427
Share premium reserve 24 45,318 34,517 34,324
Cash flow hedge reserve 24 - (672) (968)
Share option reserve 24 4,635 1,079 615
Translation reserve (193) 5 5
Retained earnings 24 (54,514) 4,586 4,148
---------- ----------- -----------
Total Equity 6,580 49,982 48,551
--------------------------------- ----- ---------- ----------- -----------
The Financial Statements were approved and authorised for issue
by the Board of Directors on 19 August 2011 and were signed on its
behalf by:
David Henderson Colin Whipp
Director Director
The Notes are an integral part of these Financial
Statements.
Healthcare Locums PLC
Consolidated Statement of Cash Flows
Year ended
31
Year ended December
31 December 2009
Note 2010 (Restated)
GBP'000 GBP'000
Cash flows from operating activities
(Loss)/Profit for the year (54,363) 3,036
Adjustments for:
Gain on fair value changes in
contingent consideration 5 (4,232) -
Depreciation of property, plant and
equipment 12 594 556
Amortisation of intangible assets 15 1,693 958
Goodwill impairment 13 45,972 -
Impairment of property plant and
equipment 12 401 -
Impairment of other intangible assets 15 1,296 5,252
Finance income 8 (522) (107)
Finance expense 8 6,440 2,138
Loss on disposal of property plant
and equipment and other intangible
assets 46 -
Share based payments charges 29 586 464
Corporation tax expense 9 (2,112) 2,826
Cash flows from operating activities
before changes in working capital (4,201) 15,123
Changes in receivables 10,322 (726)
Changes in payables (1,044) 4,939
Cash generated from operations 5,077 19,336
Corporation tax paid (4,034) (1,076)
Net cash flows from operating activities 1,043 18,260
------------------------------------------ ----- ------------- ------------
Investing activities
Acquisition of subsidiaries, net of
cash acquired 14 (89,739) -
Disposal of property, plant and equipment 12 - 36
Contingent consideration paid 20 - (1,191)
Acquisition of property, plant and
equipment 12 (1,327) (387)
Acquisition of intangible assets 15 (512) (1,572)
Net cash used in investing activities (91,578) (3,114)
------------------------------------------ ----- ------------- ------------
Financing activities
Issue of ordinary shares 23 11,668 233
New loans acquired 140,524 81
Interest and similar expenses paid (4,674) (1,905)
Loan fees 19 (7,700) -
Repayment of borrowings (24,948) (6,156)
Dividends paid to the owners of the
parent 11 (3,581) (3,754)
Net cash provided by/(used in) financing
activities 111,289 (11,501)
------------------------------------------ ----- ------------- ------------
Net increase in cash and cash equivalents 20,754 3,645
Cash and cash equivalents (including
short-term borrowings) at the beginning
of the year (7,468) (11,113)
Effect of exchange rates on cash and
cash equivalents (2,793) -
Cash and cash equivalents (including
short-term borrowings) at the end
of the year 10,493 (7,468)
------------------------------------------ ----- ------------- ------------
The Notes are an integral part of these Financial
Statements.
Healthcare Locums PLC
Notes to the Financial Statements
The financial information set out in these final results does
not constitute the company's statutory accounts for years ended 31
December 2008, 2009 or 2010. Statutory accounts for the years ended
31 December 2010, 31 December 2009 and 31 December 2008 have been
reported on by the Independent Auditors.
Statutory accounts for the years ended 31 December 2008 and 31
December 2009 have been filed with the Registrar of Companies. The
statutory accounts for the year ended 31 December 2010 will be
delivered to the Registrar in due course.
The Independent Auditors' Report on the Annual accounts for the
year ended:
-- 31 December 2008 was unqualified, did not draw attention to
any matters by way of emphasis, and did not contain a statement
under 237(2) or 237(3) of the Companies Act 1985.
-- 31 December 2009 was unqualified, did not draw attention to
any matters by way of emphasis, and did not contain a statement
under 498(2) or 498(3) of the Companies Act 2006.
-- 31 December 2010 was qualified by way of a limitation of
scope, and included references to matters which the auditors drew
attention to by way of two emphases. Additionally, the audit report
contained statements under both section 498(2) of the Companies Act
2006 concerning the adequacy of accounting records and 498(3) of
the Companies Act 2006 concerning the failure to obtain all
necessary information and explanations. These qualifications were
in respect of a limitation of scope over the Consolidated Statement
of Comprehensive Income for the year ended 31 December 2010 and the
comparative figures for both the Consolidated Statement of
Comprehensive Income and the Consolidated Statement of Financial
Position.
The financial information set out in these final results has
been prepared using the recognition and measurement principles of
International Accounting Standards, International Financial
Reporting Standards and Interpretations adopted for use in the
European Union (collectively Adopted IFRSs). The accounting
policies adopted in these final results have been consistently
applied to all the years presented and are consistent with the
policies used in the preparation of the statutory accounts for the
period ended 31 December 2010 as described below.
Statement of significant accounting policies
The accounting policies set out below, unless otherwise stated,
have been applied consistently to all periods presented in these
Financial Statements.
Basis of preparation
The consolidated financial statements of Healthcare Locums Plc
have been prepared in accordance with International Financial
Reporting Standards as adopted by the EU ("adopted IFRS"), and
under the historical cost accounting rules, except for derivative
financial instruments, which are stated at their fair value.
Previous year amounts have been reclassified to conform to the
current year presentation where necessary. Principal
reclassifications are in various components of the Statement of
Changes in Equity, Employee costs (Note 3), Directors and key
management remuneration (Note 4), Reorganisation costs (Note 7),
Trade and other receivables (Note 16) and Trade and other payables
(Note 17). These reclassifications do not have any impact on the
previously reported profit or total equity.
All amounts are presented in Pounds Sterling (GBP) except
indicated otherwise.
Going concern
The Consolidated Financial Statements have been prepared on a
going concern basis, which assumes that the Group will continue to
be able to meet its liabilities as they fall due for the
foreseeable future.
In forming their opinion that going concern is an appropriate
basis, the Directors have reviewed forecasts for the period to 31
December 2012, which have been drawn up with appropriate regard for
the current macroeconomic environment and the particular
circumstances in which the Group operates. These were prepared with
reference to historic and current industry knowledge, taking into
account the Board's strategy for the Group.
The Directors have taken into account conditions which could
indicate the existence of material uncertainties which may cast
significant doubt over the Group's ability to continue as a Going
Concern.
The following conditions were of material relevance in forming
the Board's opinion:
1. On 25 January 2011, the Company announced the suspension of
its shares following the discovery of serious accounting
irregularities leading the Directors to believe that the financial
results would be significantly below market expectations.
In the 2010 Annual Report the Company has restated previously
published audited financial statements for 2009 and earlier years
and restated the unaudited interim results for the six months
ending 30 June 2010. The Board is confident that, in presenting the
2010 Financial Statements, the Group has adopted appropriate
accounting policies with which it has complied. This provides a
sound foundation from which to prepare business plans and
forecasts.
2. Subsequent to 25 January 2011, the Directors commenced
discussions with the Group's lending banks concerning the impact of
the irregularities referred to above and the revised trading
results on the lending facilities available to the Group. The Board
believes that it is probable that at 31 December 2010 the Group was
in default under the Senior Facilities Agreement ('SFA') and
Mezzanine Facility Agreement ('MFA') with its lending banks. The
lending banks have reserved their rights in relation to any
defaults that may subsist and have not waived any defaults that may
subsist. If a default does subsist the lending banks would, on
service of a notice, have the right, among other things, to require
the loans under the SFA and MFA to be repaid immediately.
In these specific circumstances the Board consider it
appropriate to classify all the Group's loans as current
liabilities at 31 December 2010.
3. The Board has sought to partly address the Group's financing
challenges by selling its Australian Homecare Division to KinCare
Health Services Pty Limited for A$34 million (approximately GBP22.2
million) before expenses. The sale was completed on 18 July 2011
and the net cash proceeds used to reduce the Group's debt. Further
information is provided in Note 30 to the Financial Statements.
As well as the Homecare disposal referred to above, the Board
has further sought to address the Group's financing challenges by
way of a proposed Refinancing. The Chairman's Statement sets out
the key terms of the proposed Refinancing, which is conditional
upon the approval of Shareholders at the General Meeting to be held
on DD September 2011.
In the event that the Refinancing Resolutions are not passed at
the General Meeting and the refinancing is not implemented, then
the Group will be unable to satisfy its existing financial
covenants and/or service its existing borrowings or meet its
ongoing funding requirements without further support from the
lending banks. In such event, the Group would be in default under
the existing facilities.
Such a default under the existing facilities, in addition to any
default which may subsist under the representations made under the
terms of the existing facilities at the time they were entered
into, would entitle the lending banks to demand repayment of all
outstanding amounts and to cancel the facilities.
Further, if the Refinancing does not proceed, the lending banks
have informed the Group that they will only continue to support the
business on the basis that a sale of all or part of the Group is
pursued. This would be likely to involve the insolvency of all or
part of the Group. This would, in the Board's opinion, result in
shareholders receiving no value for their current shareholdings and
would require adjustments to be made to the Financial
Statements.
There is also a risk that the independent shareholders (being
the shareholders other than Toscafund Asset Management LLP and its
concert parties) fail to approve the waiver of Rule 9 granted by
the Panel on Takeovers and Mergers.
Finally, if the suspension of trading in the Company's
securities on AIM was not lifted or Admission not taking place,
then there is a risk that the Refinancing will not be
successful.
4. The Group faces a number of Principal Risks and
Uncertainties, as set out in the Principal Risks and Uncertainties
section.
In determining the Group's capital requirements for the period
to 31 December 2012, the Board has sought to take a measured
assessment of each and all the risks in reviewing the
forecasts.
Not withstanding the above uncertainties, including the need to
obtain approval from shareholders for the Refinancing, obtain
approval for the waiver under Rule 9 and the relisting on AIM, the
Directors are confident that the proposed Refinancing will be
successful. On this basis, they have prepared the Consolidated
Financial Statements on a going concern basis.
The Consolidated Financial Statements do not contain the
adjustments that would be necessary were the Group unable to
continue as a going concern.
Although the Directors believe the going concern basis is the
most appropriate basis on which to prepare the Consolidated
Financial Statements, the risks noted above constitutes a specific
material uncertainty that may cast significant doubt over the
Group's ability to continue as a Going Concern, and, therefore,
that it may be unable to realise its assets and discharge its
liabilities in the normal course of business.
Given the inherent uncertainty about future events and as with
all business forecasts, the Directors' statement cannot guarantee
that the Going Concern basis will remain appropriate.
Basis of consolidation
Subsidiaries are fully consolidated from the date on which the
power to control is transferred to the Group. All intra-group
transactions, balances, income and expenses are eliminated on
consolidation. Accounting policies of subsidiaries have been
changed where necessary to ensure consistency with the policies
adopted by the Group.
Business combinations
The Group uses the acquisition method of accounting to account
for business combinations in accordance with IFRS 3 (revised)
"Business combinations". The consideration transferred for the
acquisition of a subsidiary is the fair values of the assets
transferred, the liabilities incurred and the equity interests
issued by the Group. The consideration transferred includes the
fair value of any asset or liability resulting from a contingent
consideration arrangement. Acquisition-related costs are expensed
as incurred. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition
date.
Goodwill is recorded as the excess of the consideration
transferred, the amount of any non-controlling interest in the
acquiree and the acquisition-date fair value of any previous equity
interest in the acquiree as compared to the fair value of the
Group's share of the identifiable net assets acquired. If this is
less than the fair value of the net assets of the subsidiary
acquired in the case of a bargain purchase, the difference is
recognised directly in the Statement of Comprehensive Income.
Revenue recognition
Revenue represents sales to external customers at invoiced
amounts less value added tax or local taxes on sales. These consist
of:
-- Revenue from temporary placements which represents amounts
billed for the services of temporary staff. This is recognised when
the services have been provided. These include the salary cost of
these staff unless they are paid directly by the client when the
commission only is billed; and
-- Revenue from permanent placements is recognised at the date
when a candidate commences work. Appropriate provision is made for
the expected cost of meeting obligations where employees do not
work for the specified contractual period.
All revenue relates to the rendering of services.
See Note 1 for the change in the accounting policy.
Foreign exchange
Revenues generated by the Group entities in a currency other
than the currency of the primary economic environment in which they
operate (their "functional currency") are recorded at the rates
ruling when the transactions occur. Foreign currency receivables
are retranslated at the rates ruling at each reporting date.
Exchange differences arising on the retranslation of unsettled
receivables are recognised immediately in the Statement of
Comprehensive Income.
On consolidation, the results of overseas operations are
translated into sterling at rates approximating to those ruling
when the transaction took place. All assets and liabilities of
overseas operations, including goodwill arising on the acquisition
of those operations, are translated at the rate ruling at the
reporting date. All exchange differences arising on translation are
recognised in the Statement of Comprehensive Income and accumulated
in the translation reserve.
Share based payment
The Group operates an equity-settled, share-based compensation
plan. When share options are awarded to employees a charge is made
to profit or loss recognising the fair value of the options issued
over the vesting period with a corresponding adjustment to the
share option reserve. The options vest after a specific period (3
years for options issued from 2006 onwards, 1 year for options
issued earlier). There are no other vesting conditions, other than
that the options lapse should the employee leave the Group. The
cumulative expense is adjusted for failure to achieve non-market
vesting conditions, such as an employee leaving.
Employee benefits
Contributions to the Group's defined contribution pension
schemes are charged to the Statement of Comprehensive Income in the
year in which they become payable.
The liability for long service leave in respect of employees in
Australia is recognised by way of a provision and measured at the
value of expected future payments to be made in respect of services
provided by employees up to the end of the reporting period.
Consideration is given to wage and salary levels, experience of
employee departures and periods of service.
The Group also carriers an estimate for long service leave o
cover any potential exposure relating to claims where the data is
not specific enough to determine the liability in accordance with
the above policy.
The liability for annual paid leave expected to be settled
within 12 months from the reporting date is recognised by way of a
provision in respect of employees' services up to the end of the
reporting period and are measured at the amounts expected to be
paid when liabilities are settled.
Highlighted items
Where certain expense or income items recorded in a period are
material by their size or incidence, the Group reflects such items
as highlighted items and these are shown separately in the
Statement of Comprehensive Income.
Taxation
The charge for current taxation is provided at rates of
corporation tax that have been enacted or substantively enacted by
the reporting date. Current tax is based on taxable profits for the
year and any adjustments to tax payable in respect of previous
years.
Deferred tax is provided, using the balance sheet liability
method, on all temporary differences which result in an obligation
at the reporting date to pay more tax, or a right to pay less tax,
at a future date, based on tax rates and tax laws that have been
enacted or substantively enacted at that date. Temporary
differences arise between the tax bases of assets and liabilities
and their carrying amounts in the financial statements. The
exceptions, where deferred tax assets are not recognised or
deferred tax liabilities are not provided, are:
-- At initial recognition of goodwill;
-- The initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of
the transaction, affects neither the accounting profit nor taxable
profit or loss; and
-- Taxable temporary differences associated with investments in
subsidiaries where the timing of the reversal of the temporary
difference can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow
all or part of the deferred income tax asset to be utilised.
Goodwill
Goodwill represents the excess of the cost of an acquisition of
a business over the fair value of the identifiable assets,
liabilities and contingent liabilities acquired. Goodwill is tested
annually for any impairment and carried at cost less accumulated
impairment losses. Any impairment charge is included in the
Statement of Comprehensive Income. Goodwill impairment charges are
not reversed. Gains and losses on the disposal of an entity are
calculated after including the carrying amount of goodwill relating
to the entity sold.
Goodwill is allocated to cash-generating units for the purpose
of impairment testing. The allocation is made to those
cash-generating units or groups of cash-generating units that are
expected to benefit from the business combination in which the
goodwill arose, typically identified according to operating
segment.
Other intangible assets - Brands/trademarks, Customer
Relationships, Computer Software and Acquired Candidate
Database
Intangible assets (other than goodwill) acquired by the Group as
part of a business combination are stated at fair value and are
amortised on a straight-line basis over their useful lives. The
amortisation is shown as part of Administrative Expenses within the
Statement of Comprehensive Income.
The estimated useful lives are as follows:
Brands/trademarks - 10 to 20 years
Customer relationships - Over the contractual term or 6 years in
the absence of a specified term
Computer software - 3 to 5 years
Acquired candidate database - 3 to 10 years
Knowledge database - 2 years
Non-compete agreements - 5 years
Intangible assets with finite lives, other than goodwill, are
subject to impairment tests whenever events or changes in
circumstances indicate that their carrying amount may not be
recoverable. When the carrying value of an asset exceeds its
recoverable amount the asset is written down accordingly.
Impairment of other intangible assets is included in other
operating expenses in the Statement of Comprehensive Income.
Property, plant and equipment
Items of property, plant and equipment are initially recognised
at cost. As well as the purchase price, cost includes directly
attributable costs. All items are carried at depreciated cost.
Depreciation is provided to write off the cost, less estimated
residual values, of all property, plant and equipment over their
expected useful lives. It is calculated at the following rates:
Improvements to leasehold buildings - Over the lease term
Motor vehicles - 4 years
Office and computer equipment - 2.5 to 13.33 years
An asset's carrying amount is written down immediately to its
recoverable amount if the carrying amount is greater than its
estimated recoverable amount.
Leased assets
Where substantially all of the risks and rewards incidental to
ownership of a leased asset have been transferred to the Group (a
'finance lease'), the asset is treated as if it had been purchased
outright. The amount initially recognised as an asset is the lower
of the fair value of the leased property and the present value of
the minimum lease payments payable over the term of the lease. The
corresponding lease commitment is shown as a liability. Lease
payments are analysed between capital and interest. The interest
element is charged to the Statement of Comprehensive Income over
the period of the lease and is calculated so that it represents a
constant proportion of the lease liability. The capital element
reduces the amount owed to the lessor.
Where substantially all of the risks and rewards incidental to
ownership are not transferred to the Group (an 'operating lease'),
the total rentals payable under the lease are charged to the
Statement of Comprehensive Income on a straight line basis over the
lease term. The aggregate benefit of lease incentives is recognised
as a reduction of the rental expense over the lease term on a
straight line basis.
The land and building elements of property leases are considered
separately for the purposes of lease classification.
Impairment of assets
Assets that have an indefinite useful life are not subject to
amortisation and are tested annually for impairment. An impairment
loss is recognised for the amount by which the asset's carrying
amount exceeds its recoverable amount. The recoverable amount is
the higher of an asset's fair value less costs to sell and its
value in use. For the purposes of assessing impairment, assets are
grouped at the lowest levels for which there are separately
identifiable cash flows (cash-generating units).
A financial asset is assessed at each reporting date to
determine whether there is any objective evidence that it is
impaired. A financial asset is considered to be impaired if
objective evidence indicates that one or more events has had a
negative effect on the estimated future cash flows of that asset.
For certain categories of financial assets, such as trade
receivables, assets that are assessed not to be impaired
individually are subsequently assessed for impairment on a
collective basis. Objective evidence of impairment for a portfolio
of receivables could include the Group's past experience of
collecting payments, an increase in the number of delayed payments
in the portfolio, as well as observable changes in national or
local economic conditions that correlate with default on
receivables.
The carrying amount of the financial asset is reduced by the
impairment loss directly for all financial assets with the
exception of trade receivables, where the carrying amount is
reduced through the use of an allowance account. When a trade
receivable is considered uncollectible, it is written off against
the allowance account. Subsequent recoveries of amounts previously
written off are credited against the allowance account. Changes in
the carrying amount of the allowance account are recognised in the
Statement of Comprehensive Income.
Financial instruments
The Group classifies its financial assets and liabilities into
one of the following categories, depending on the purpose for which
the asset or liability was acquired. The Group's accounting policy
for each category is as follows:
Financial assets:
Loans and receivables: These assets are non-derivative financial
assets with fixed or determinable payments that are not quoted in
an active market. They arise principally through the provision of
services to customers (trade receivables), but also incorporate
other types of contractual monetary asset. They are initially
recognised at fair value and subsequently at amortised cost.
Impairment provisions are recognised where there is evidence that
the Group will be unable to collect all of the amounts due under
the terms receivable. Trade receivables are reported net of
impairment provisions which, due to the nature of the customer
base, are not material. The Group's loans and receivables comprise
trade and other receivables and cash in the Statement of Financial
Position.
Derivative financial instruments and hedging activities:
Derivatives are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured
at their fair value through profit or loss unless the derivative is
designated in a hedging relationship.
The Group holds a number of interest rate instruments,
protecting a portion of the Group's borrowings against movements in
interest rates. Hedge accounting is applied to financial assets and
financial liabilities only where all of the following criteria are
met:
-- At the inception of the hedge there is a formal designation
and documentation of the hedging relationship and the Group's risk
management objective and strategy for undertaking the hedge.
-- For cash flow hedges, the hedged item in a forecast
transaction presents an exposure to variations in interest cash
flows that could ultimately affect profit or loss on their
scheduled payment dates.
-- The cumulative change in the value of the hedging instrument
is expected to be between 80-125% of the cumulative change in the
fair value or cash flows of the hedged item attributable to the
risk hedged (i.e. it is expected to be highly effective).
-- The effectiveness of the hedge can be reliably measured.
-- The hedge remains highly effective on each date it is tested.
The Group has chosen to test the effectiveness of its hedges on a
twice yearly basis.
The Group does not hold or issue derivative instruments for
speculative purposes.
Cash flow hedge: Effective hedges, which are used to manage cash
flow interest rate risk, are measured at fair value with changes in
fair value recognised directly in equity. The gain or loss relating
to any ineffective portion is recognised directly in the Statement
of Comprehensive Income within finance income or expense. When a
hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, hedge accounting is
stopped immediately and any cumulative gain or loss existing in
equity at that time remains in equity and is recognised when the
forecast transaction is ultimately recognised in the Statement of
Comprehensive Income. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported in
equity is immediately transferred to the Statement of Comprehensive
Income within finance income or expense.
There were no new financial instruments entered into during the
year ended 31 December 2010 that were effective hedges and
therefore hedge accounting was not applied.
Other financial liabilities:
Trade payables and other short-term monetary liabilities: These
are initially recognised at fair value and subsequently at
amortised cost.
Bank borrowings: These liabilities are initially recognised at
the amount advanced net of any transaction costs directly
attributable to the issue of the instrument. The costs of raising
the financing are offset against the loan amount and are amortised
over the term of the loan and are included within finance costs on
the face of the Statement of Comprehensive Income.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at
call with banks and include bank overdrafts and invoice discounting
facilities. Bank overdrafts and invoice discounting facilities are
shown within current liabilities on the Statement of Financial
Position, and are included within cash and cash equivalents for the
purposes of the Statement of Cash Flows.
Share capital
Financial instruments issued by the Group are treated as equity
only to the extent that they do not meet the definition of a
financial liability. The Group's ordinary shares are classified as
equity instruments.
Dividends
Final dividends are recognised as a liability in the year in
which they are declared and approved by the Company's shareholders
in the annual general meeting. Interim dividends are recognised
when they are paid.
Parent company
The financial statements of the parent company Healthcare Locums
Plc have been prepared in accordance with UK GAAP. The Company
financial statements are presented separately.
The principal subsidiaries of the parent company are listed in
the above accounts. The ultimate parent company of the Group is
Healthcare Locums Plc, a company incorporated in England and listed
on the Alternative Investment Market of the London Stock
Exchange.
Critical accounting estimates and judgements
The Group makes estimates and assumptions regarding the future.
Estimates and judgements are continually evaluated based on
historical experience and other factors, including expectations of
future events that are believed to be reasonable under the
circumstances. In the future, actual experience may differ from
these estimates and assumptions. 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
financial year are discussed below.
-- Measurement of intangible assets and contingent consideration
on acquisition - The allocation of the purchase price and valuation
of contingent consideration requires management to make significant
estimates in determining fair values, especially with respect to
intangible assets and contingent consideration. These estimates are
based on historical experience, information obtained from the
management of the acquired companies, relevant market and industry
data and the forecasted performance of the acquired businesses.
These estimates can include, but are not limited to, the cash flows
that an asset is expected to generate in the future, the
appropriate discount rate, the useful lives of intangible assets
and probabilities of achievement of financial targets under
contingent consideration arrangements. These estimates are
inherently uncertain and unpredictable. In addition, unanticipated
events and circumstances may occur, which may affect the accuracy
or validity of such estimates.
-- Impairment of goodwill - The Group is required to test, on an
annual basis, whether goodwill has suffered any impairment. The
recoverable amount is determined based on value in use
calculations. The use of this method requires the estimation of
future cash flows and the choice of a discount rate in order to
calculate the present value of the cash flows. Actual outcomes may
vary. More information on carrying values is included in Note
13.
-- Legal and regulatory contingencies - The Group conducts its
business principally in the UK and Australia and, accordingly,
legal claims or regulatory proceedings may arise. The Group
estimates and provides for potential losses that may arise out of
litigation and regulatory proceedings to the extent that such
losses are probable and can be estimated, in accordance with IAS 37
"Provisions, Contingent Liabilities and Contingent Assets".
Contingencies in respect of legal matters are subject to many
uncertainties and the outcome of individual matters is not
predictable with assurance. Significant judgment is required in
assessing probability and making estimates in respect of
contingencies, and the Group's final liability may ultimately be
materially different. The Group's total liability in respect of
litigation, arbitration and regulatory proceedings is determined on
a case-by-case basis and represents an estimate of probable losses
after considering, among other factors, the progress of each case,
the Group's experience and the experience of others in similar
cases and the opinions and views of legal counsel.
-- Uncertain tax positions - The Group conducts its business
principally in the UK and Australia and, accordingly uncertain tax
positions may arise where the Directors have had to make particular
judgements in relation to certain tax treatments. The Group
estimates and provides for potential losses that may arise from
uncertain income tax positions to the extent that such losses are
probable and can be estimated, in accordance with IAS 12 "Income
Taxes". Significant judgment is required in making these estimates
and the Group's final liabilities may ultimately be materially
different.
New standards, interpretations and amendments effective from 1
January 2010
IFRS 3 (revised) "Business combinations", and consequential
amendments to IAS 27 "Consolidated and separate financial
statements", IAS 28 "Investments in associates", and IAS 31
"Interests in joint ventures", are effective prospectively to
business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or
after 1 July 2009.
The revised standard continues to apply the acquisition method
to business combinations but with some significant changes compared
with IFRS 3. For example, all payments to purchase a business are
recorded at fair value at the acquisition date, with contingent
payments classified as debt subsequently remeasured through the
statement of comprehensive income. There is a choice on an
acquisition-by-acquisition basis to measure the non-controlling
interest in the acquiree either at fair value or at the
non-controlling interest's proportionate share of the acquiree's
net assets. All acquisition-related costs are expensed. The revised
standard was applied to all the acquisitions completed by the Group
during the year ended 31 December 2010. Acquisitions prior to 1
July 2009 have not been restated.
IAS 27 (revised) requires the effects of all transactions with
non-controlling interests to be recorded in equity if there is no
change in control and these transactions will no longer result in
goodwill or gains and losses. The standard also specifies the
accounting when control is lost. Any remaining interest in the
entity is re-measured to fair value, and a gain or loss is
recognised in profit or loss. IAS 27 (revised) has had no impact on
the current period, as none of the non-controlling interests have a
deficit balance; there have been no transactions whereby an
interest in an entity is retained after the loss of control of that
entity, and there have been no transactions with non-controlling
interests.
New standards, amendments and interpretations issued but not
effective for the financial year beginning 1 January 2010 and not
early adopted
The Group's and parent entity's assessment of the impact of
these new standards and interpretations is set out below.
-- IFRS 9 "Financial instruments" was issued in November 2009.
This standard is the first step in the process to replace IAS 39
"Financial instruments: recognition and measurement". IFRS 9
introduces new requirements for classifying and measuring financial
assets and is likely to affect the Group's accounting for its
financial assets. The standard is not applicable until 1 January
2013 but is available for early adoption. However, the standard has
not yet been endorsed by the EU. The Group is yet to assess IFRS
9's full impact.
-- Revised IAS 24 (revised) "Related party disclosures", issued
in November 2009. It supersedes IAS 24 "Related party disclosures",
issued in 2003. IAS 24 (revised) is mandatory for periods beginning
on or after 1 January 2011. Earlier application, in whole or in
part, is permitted.
The revised standard clarifies and simplifies the definition of
a related party and removes the requirement for government-related
entities to disclose details of all transactions with the
government and other government-related entities. The Group will
apply the revised standard from 1 January 2011. When the revised
standard is applied, the Group and the parent will need to disclose
any transactions between its subsidiaries and its associates. The
Group will review its list of related parties and the transactions
between them in 2011. It is, therefore, not possible at this stage
to disclose the impact, if any, of the revised standard on the
related party disclosures.
-- "Financial instruments: Presentation - Classification of
rights issues" (amendment to IAS 32). The amendment to IAS 32 was
made to allow rights, options or warrants to acquire a fixed number
of the entity's own equity instruments for a fixed amount of any
currency to be classified as equity instruments provided the entity
offers the rights, options or warrants pro rata to all of its
existing owners of the same class of its own non-derivative equity
instruments. The amendment is effective for annual periods
beginning 1 February 2010. The Group is yet to assess the impact of
this amendment.
-- IFRIC 19 'Extinguishing financial liabilities with equity
instruments'. The amendment clarifies the requirements of IFRSs
when an entity renegotiates the terms of a financial liability with
its creditor and the creditor agrees to accept the entity's shares
or other equity instruments to settle the financial liability fully
or partially. This amendment is effective for annual periods
beginning 1 July 2010. As noted in the post balance sheet events
note (Note 30) and the going concern discussion above, the Group
has been in discussions with their bankers to renegotiate the terms
of existing facilities and/or consider alternative funding
strategy. If the Group converts or settles its existing borrowings
by converting or issuing ordinary shares of the Company, any
difference between the carrying amounts of the financial
liabilities settled and the fair value of the shares issued will be
recognised in the Statement of Comprehensive Income. As the terms
of the Refinancing have not been agreed yet the impact, if any, is
not currently ascertainable.
New standards and amendments below are generally applicable for
annual periods beginning after 1 January 2011. The impact of these
standards and amendments on the Group and the parent company's
financial reporting in the future will be assessed closer to the
date of their respective effective dates unless otherwise
stated.
-- "Presentation of financial statements" (amendment to IAS 1).
This amendment clarifies that an entity will present an analysis of
other comprehensive income for each component of equity either in
statement of changes in equity or in the notes to the financial
statements. This amendment is to be applied retrospectively.
-- IFRS 10 "Consolidated financial statements". The IFRS
supersedes IAS 27 "Consolidated and Separate Financial Statements"
and SIC-12 "Consolidation-Special Purpose Entities".
This standard contains a:
o revised definition of control and related application guidance
so that a single control model can be applied to all entities.
o enhanced disclosures about consolidated and unconsolidated
entities to be published in a separate comprehensive disclosure
standard related to involvement with other entities.
This standard is effective for annual periods beginning on or
after 1 January 2013 with permission to early adopt but is yet
subject to be endorsed by the European Union (EU).
-- IFRS 12 "Disclosures of interest in other entities" - This is
a new and comprehensive standard on disclosure requirements for all
forms of interests in other entities, including joint arrangements,
associates, special purpose vehicles and other off balance sheet
vehicles. It is effective for periods on or beginning after 1
January 2013. Early adoption is permitted. The standard has not yet
been endorsed by the EU.
-- IFRS 13 "Fair value measurement" - The standard is effective
from 1 January 2013, defines fair value and sets out in a single
standard a framework for measuring fair value and requires
disclosures about fair value measurements. IFRS 13 does not
determine when an asset, a liability or an entity's own equity
instrument is measured at fair value. Rather, the measurement and
disclosure requirements of IFRS 13 apply when another IFRS requires
or permits the item to be measured at fair value (with limited
exceptions). The standard has not been endorsed by the EU yet.
Early adoption is permitted.
-- 'Financial Instruments' (amendments to IFRS 7). The
amendments will allow users of financial statements to improve
their understanding of transfer transactions of financial assets
(for example, securitisations), including understanding the
possible effects of any risks that may remain with the entity that
transferred the assets. The amendments also require additional
disclosures if a disproportionate amount of transfer transactions
are undertaken around the end of a reporting period. It is subject
to EU endorsement. Early adoption is permitted.
None of the other standards, interpretations, amendments and
revisions is either relevant or is considered to have a material
effect on the Group's and parent company's financial
statements.
Notes to the Financial Statements
1 Prior year adjustments and changes in accounting policies
The Board considers that the investigation referred to in the
Chairman's Statement revealed that previously reported results were
consistently overstated, both to shareholders in 2008, 2009 and in
the 2010 Interim Results and subsequently to the Board in the
internal management accounts in the second half of 2010.
The Board believes that this overall situation arose from the
aggregation of a number of consistently inappropriate practices
which led to an over-statement of performance, as described
below.
This approach may have been a contributory factor in the Board
not fully understanding the Group's trading position and cash flow
problems which the Group faced at the end of 2010 and into 2011,
where, for example, it was unable to meet its regulatory payments
to HM Revenue and Customs, and subsequently required renegotiation
of borrowing facilities.
The Board regards it as a top priority to provide a reassessment
of the trading position of the business by this comprehensive
restatement of previously reported results and net assets.
The Directors have substantially completed a review of the
Group's operational and accounting systems, processes and internal
controls and the Corporate Governance practices following the
departure after the year-end of the former Chief Financial Officer
and Executive Vice Chairman.
This review has identified some items which the Directors
believe had not been accounted for appropriately during 2009 and
earlier years. Additionally the Board believes that a change of
accounting policy is now appropriate. In accordance with IAS 8
"Accounting Policies, Changes in Estimates and Errors", these items
have been amended by way of prior period adjustments. The nature of
the adjustments and the impact on the financial items affected in
the Group Statement of Financial Position is stated below.
The impact of the prior year adjustments on previously reported
Net Equity may be summarised as follows:
1
31 December January
2009 2009
GBP'000 GBP'000
------------ ---------
Net equity as previously
reported 67,248 56,058
Restatement for accounting
errors
Candidate database write-off (4,779) (3,003)
Sales ledger credits (3,278) (1,823)
Computer software costs (5,419) (167)
Under-accrual of costs (1,794) (1,594)
(15,270) (6,587)
------------------------------ ------------ ---------
Restatement for change
in accounting policy
Accrued income adjustment (4,059) (920)
------------ ---------
(19,329) (7,507)
------------------------------ ------------ ---------
Impact of restatements
on taxation 2,063 -
Net equity as restated 49,982 48,551
------------------------------ ------------ ---------
The impact of the prior year adjustments on the previously
reported Group Statement of Financial Position as at 31 December
2009 may be summarised as follows:
As previously Impact of
reported restatements Restated
GBP'000 GBP'000 GBP'000
-------------- -------------- ---------
Property, plant and equipment 958 - 958
Other intangible assets 13,748 (10,198) 3,550
Deferred tax asset 1,454 213 1,667
Trade and other receivables 31,364 (4,059) 27,305
Deferred tax liability (2,321) 654 (1,667)
Trade and other payables (13,335) (5,072) (18,407)
Current tax payable (6,818) 1,196 (5,622)
------------------------------- -------------- -------------- ---------
The impact of the prior year adjustments on the previously
reported Group Statement of Financial Position as at 1 January 2009
may be summarised as follows:
As previously Impact of
reported restatements Restated
GBP'000 GBP'000 GBP'000
-------------- -------------- ---------
Property, plant and equipment 1,163 - 1,163
Other intangible assets 11,358 (3,170) 8,188
Deferred tax asset 161 (161) -
Trade and other receivables 27,409 (920) 26,489
Deferred tax liability (1,804) 161 (1,643)
Trade and other payables (10,048) (3,417) (13,465)
Current tax payable (3,380) - (3,380)
------------------------------- -------------- -------------- ---------
Impact of prior year adjustments on the reported revenue, profit
from operations and profit for the year ended 31 December 2009 is
summarised as follows:
Profit Profit for
Revenue from operations the year
GBP'000 GBP'000 GBP'000
-------- ----------------- -----------
As reported 172,071 19,715 12,795
Restatement for accounting
errors
Candidate database write-off - (1,776) (1,776)
Sales ledger credits (1,455) (1,455) (1,455)
Computer software costs - (5,252) (5,252)
Under-accrual of costs - (200) (200)
(1,455) (8,683) (8,683)
------------------------------ -------- ----------------- -----------
Restatement for change
in accounting policy
Accrued income adjustment (3,139) (3,139) (3,139)
-------- ----------------- -----------
(4,594) (11,822) (11,822)
------------------------------ -------- ----------------- -----------
Impact of restatements
on taxation - - 2,063
As restated 167,477 7,893 3,036
------------------------------ -------- ----------------- -----------
The prior year adjustments relating to errors are as
follows:
Candidate database write off
In previous years, the Group capitalised costs associated with
the development of an international candidate database. The
judgement surrounding the appropriateness of that treatment under
IAS 38 "Intangible assets" was disclosed as a 'critical judgement'
in prior Annual Reports. The costs capitalised included the costs
of collecting information in connection with identified candidates.
Following an approach by the Financial Reporting Review Panel
(FRRP), the Directors have reconsidered the previous judgements
made regarding whether these costs meet the definition of an
intangible asset under IAS 38. They have concluded that whilst the
costs of construction of the underlying database would result in an
intangible asset under IAS 38, the costs of collecting information
in connection with identified candidates do not in themselves
result in obtaining legal control over the individual candidates
and as such the costs are indistinguishable from the costs of
developing the business as a whole. Consequently, they have
concluded that a more appropriate judgement would have been to
write off such costs as incurred, rather than capitalise them. This
reassessment of judgement has been reflected in accordance with IAS
8 as a prior year adjustment to write off all such costs previously
capitalised.
The impact of this restatement is to reduce opening net assets
at 1 January 2009 by GBP3,003,000 and by GBP4,779,000 as at 31
December 2009; and to reduce reported 2009 profit before tax by
GBP1,776,000.
Sales ledger credits
These arise as a result of unintentional overpayments by
customers. The Group previously accounted for sales ledger credits
by reflecting a liability that represented the Directors'
assessment of the likely amount due to be returned to customers
based on historical levels of credits actually redeemed over a 12
month period. The remainder of the credits were released to income.
Following a review of the sales ledger credits released to income,
the Directors believe it would be more appropriate to reinstate
these amounts as liabilities of the Group and only to release such
credits to income after the Statute of Limitations (6 years)
renders the amount irredeemable or earlier only if appropriate to
derecognise in accordance with IAS 39 "Financial instruments:
Recognition and measurement".
The impact of this restatement, based on the Directors' review
noted above is to decrease net assets at 1 January 2009 by
GBP1,823,000, decrease net assets at 31 December 2009 by
GBP3,278,000 and to reduce reported 2009 profit before tax by
GBP1,455,000.
Computer software costs
In reporting results for 2009 and earlier years, the Group
capitalised costs incurred in respect of the development of front
office systems. Following a review of the capitalisation of such
expenses and potential benefit arising, the Directors have
determined that previously capitalised costs aggregating
GBP5,419,000 related to front office systems which were
subsequently decommissioned either in late 2009 or early 2010 and
therefore should have been impaired at 31 December 2009.
The impact of this restatement is to reduce opening net assets
at 1 January 2009 by GBP167,000 and by GBP5,419,000 as at 31
December 2009; and to reduce reported 2009 profit before tax by
GBP5,252,000.
Attention is drawn to the Independent Auditor's Report which is
qualified in relation to this issue.
Under-accrual of costs
The Directors have undertaken a review of the level of accruals
at 31 December 2008 and 31 December 2009, including where the Group
accounted for various costs for commissions and bonus expenses for
employees and Directors in the year in which they were paid, rather
than accruing them based upon the activities and performance of the
year for which the incentives arose. The Directors have reviewed
this practice and restated the prior year accounts by accruing
costs in the year to which they relate.
The impact of this restatement is to reduce opening net assets
at 1 January 2009 by GBP1,594,000 and by GBP1,794,000 as at 31
December 2009; and to reduce reported 2009 profit before tax by
GBP200,000.
The net impact of these corrections for errors before
considering any related tax adjustment is to reduce 2009 basic
earnings per share by 8.32p and 2009 diluted earnings per share by
8.11p.
The prior year adjustments relating to changes in accounting
policies are as follows:
Accrued income adjustment
In reporting results for earlier years the Group recognised
revenue of GBP920,000 in 2008 in relation to sales in the US,
although this was not yet invoiced. In 2009 a further GBP3,139,000
of revenue was recognised in advance of invoice date as the
Directors assessed that the appropriate milestones had been reached
to recognise revenue in accordance with IAS 18 "Revenue". None of
the revenue was invoiced in 2009. The Board have reviewed the
policy for revenue recognition in this area and determined that it
is more appropriate to recognise this revenue only when it is
invoiced. Accordingly, the policy has been revised for 2010.
The impact of this restatement is to reduce opening net assets
at 1 January 2009 by GBP920,000 and by GBP4,059,000 as at 31
December 2009; and to reduce 2009 profit before tax by
GBP3,139,000.
In the prior year, the impact of the restatement before related
tax adjustment is to reduce 2009 basic earnings per share by 3.01p
and 2009 diluted earnings per share by 2.93p.
The net impact of all of the adjustments including related tax
effect to the prior year is to reduce 2009 basic earnings per share
by 9.35p and 2009 diluted earnings per share by 9.12p.
As noted in accordance with IAS 1 (revised) "Presentation of
financial statements" a Statement of Financial Position as at the
date of the beginning of the earliest comparative period (1 January
2009) has been presented. Other notes have been restated where
relevant.
Impact of restatements on taxation
The tax impact of the prior year adjustments was to increase net
equity at 31 December 2009 by GBP2,063,000 from that previously
reported. Pending clarification of 2008 and the earlier years, no
potential tax benefit has been recognised for those years.
2 Segmental Analysis
The Group provides locum recruitment services for health and
social care staff, being Doctors, Qualified Social Workers (QSW)
and Allied Health Professionals (AHP). During the year, following
the acquisition of Redwood Health Limited, management started
reviewing separate segmental information for Nursing. The existing
Nursing business was included in Doctors, QSW and AHP in 2009 and
so these have been restated to present these components in line
with the 2010 segmental presentation below. Staff are also placed
in each of these sectors on a permanent basis which is identified
as a separate segment.
Following the acquisitions of Last Minute Locums Pty Ltd ("LML")
and Healthcare Australia Holdings Pty Ltd ("HCA"), management also
view Australia as a separate segment. The Group views these six as
its principal business segments and regularly reviews information
on the revenue, cost of sales and gross profits of each of these
business segments. It does not prepare segment information on the
costs below gross profit or on assets and liabilities by
segment.
Locum Qualified Locum Allied
Locum Doctors Social Workers Health Professionals Locum Nursing
--------------------- --------------------- ------------------------ ---------------------
Year ended 31 December
---------------------------------------------------------------------------------------------
2009 2009 2009 2009
2010 (Restated) 2010 (Restated) 2010 (Restated) 2010 (Restated)
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------- ----------- -------- ----------- -------- -------------- -------- -----------
Revenue 33,873 48,880 35,416 40,964 60,749 65,183 12,032 7,537
Segment
gross
profit 6,291 12,802 6,824 8,859 18,091 21,612 2,967 1,917
--------- -------- ----------- -------- ----------- -------- -------------- -------- -----------
Permanent Inter-segment
Placements and other reconciling
(Restated) Australia items Group
Year ended 31 December
------------------------------------------------------------------------------------------
2009 2009 2009
2010 (Restated) 2010 2009 2010 (Restated) 2010 (Restated)
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------- ----------- -------- -------- -------- ------------- --------- -----------
Revenue 4,573 4,386 11,186 - (670) 527 157,159 167,477
Segment gross
profit 4,573 4,379 2,953 - (471) 878 41,227 50,447
-------------------- --------- -----------
Unallocated
administrative
expense (44,202) (36,762)
Goodwill impairment (45,972) -
Other operating
income/(expenses),
net (3,152) (5,792)
(Loss)/Profit from
operations (52,099) 7,893
Foreign exchange
gains, net 1,542 -
Finance income 522 107
Finance expense (6,440) (2,138)
(Loss)/Profit
before taxation (56,475) 5,862
-------------------- -------- ----------- -------- -------- -------- ------------- --------- -----------
Inter-segment adjustments represent removal of the overlapping
commission revenue from placements recognised by two or more
segments and measurement differences between the basis used to
report invoiced transactions to the chief operating decision maker
and the basis used in the Consolidated Financial Statements.
Geographical distribution of total non-current assets of the
Group as at 31 December 2010 is as follows:
UK Australia Other Total
GBP'000 GBP'000 GBP'000 GBP'000
-------- ---------- -------- --------
Property, plant and
equipment 1,227 1,530 40 2,797
Goodwill 24,832 16,544 - 41,376
Other intangible
assets 7,138 69,876 - 77,014
--------------------- -------- ---------- -------- --------
Total 33,197 87,950 40 121,187
--------------------- -------- ---------- -------- --------
As at 31 December 2009, all assets of the Group were held in
UK.
Separate entities operating as registered NHS trusts in the UK
are considered a single customer by the Group. Of the total Group
revenue, NHS accounted for 66.1% (2009: 69.9%). There were no other
single customers contributing more than 10% to the Group revenue in
2010 or 2009.
3 Employees
Year ended
Year ended 31 December
31 December 2009
2010 (Restated)
------------- ---------------
GBP'000 GBP'000
Staff costs (including Directors)
comprise:
Wages and salaries 22,855 18,564
Social Security costs 2,435 1,534
Defined contribution pension
costs 125 36
Share based payment charge
(Note 29) 586 464
-------------
26,001 20,598
----------------------------------- ------------- ---------------
Year ended Year ended
31 December 31
2010 December 2009
------------- ---------------
The average number of employees
during the year was:
Administration Staff 442 381
----------------------------------- ------------- ---------------
4 Directors and key management
Year ended
Year ended 31 December
31 December 2009
2010 (Restated)
------------- -------------
GBP'000 GBP'000
Directors' remuneration
consists of:
Emoluments 993 2,329
Company contribution for
pension 13 13
Payments for loss of office - 560
Share based payment charge 177 257
------------- -------------
1,183 3,159
----------------------------- ------------- -------------
There was 1 Director (2009: 2 Directors) within the Group's
defined contribution pension scheme during 2010.
The total amount payable to the highest paid director in respect
of emoluments was GBP327,000 (2009 -- GBP746,000 restated). This
excludes any amounts payable under compromise agreements.
Further detail on Directors' remuneration and the interests of
the Directors over unissued ordinary shares pursuant to share
options granted by the Company are disclosed in the Report on
Remuneration in the full Annual Report.
5 Other Operating income and expenses
Year ended Year ended
31 December 31 December
2010 2009
GBP'000 GBP'000
------------- -------------
Other operating income:
Gain on fair value changes in contingent
consideration (Note 20) 4,232 -
Other income (Note 6) - 2,707
4,232 2,707
------------------------------------------ ------------- -------------
Other operating expenses:
Acquisition related transaction
costs (Note 14) 2,853 -
Reorganisation costs (Note 7) 2,834 1,855
Impairment of property, plant and
equipment (Note 12) 401 -
Impairment of other intangible
assets (Note 15) 1,296 5,252
Costs associated with other income
(Note 6) - 1,392
------------------------------------------ ------------- -------------
7,384 8,499
------------------------------------------ ------------- -------------
Other operating income/(expenses),
net (3,152) (5,792)
------------------------------------------ ------------- -------------
Profit/(loss) from operations for the year has been arrived at
after charging/(crediting) the following:
Year ended
Year ended 31 December
31 December 2009
2010 (Restated)
-------------------------------------------- ------------- -------------
GBP'000 GBP'000
Amortisation of other intangible
assets 1,693 958
Depreciation of property, plant
and equipment 594 556
Foreign exchange (gains)/losses (585) 142
Hire of other assets - operating
leases 881 1,116
Share scheme charges (Note 29) 586 464
Loss on disposal of property, plant
and equipment and other intangible
assets (Notes 12 and 15) 46 -
Fees payable to the Company's auditor
for:
- audit of the Company's annual
accounts 465 50
- audit of the Company's subsidiaries 197 120
- other services pursuant to legislation 7 7
- other services 136 -
-------------------------------------------- ------------- -------------
Foreign exchange gains/losses disclosed above do not include
GBP1,542,000 (2009: nil) arising on non-operating items comprising
principally of those arising on the re-translation of foreign
currency borrowings at the reporting date exchange rate.
Audit fees for the Company's subsidiaries include GBP77,000 for
the audit of certain subsidiaries in Australia.
Other than the items included above, administrative expenses
increased principally due to higher costs as a result of properties
taken over through acquisitions and rationalisation of the
portfolio.
6 Other income and associated costs
Other operating income, net for 2009 comprises GBP2,707,000
relating to the proceeds of various legal actions with which the
Group had been involved in during 2009. Legal costs of GBP1,392,000
were incurred in pursuing these legal actions. The net amount is
GBP1,315,000.
7 Reorganisation costs
Year ended
Year ended 31 December
31 December 2009
2010 (Restated)
------------- -------------
GBP'000 GBP'000
Staff costs 164 379
Directors' salary costs - 685
Professional service charges 1,479 540
Onerous leases 694 -
Relocation and dilapidation
costs 123 28
Others 374 223
2,834 1,855
------------------------------ ------------- -------------
The Directors have reviewed the definition of costs previously
designated as reorganisation costs. In the 2009 financial
statements, the full year-to-date costs including salary,
employment costs and redundancy or compensation payments of any
staff that were made redundant during the year were classified as
reorganisation costs. For 2010 financial statements, only the costs
directly associated with such terminations have been classified as
reorganisation costs and 2009 has been restated for
consistency.
The reorganisation costs principally include employee redundancy
costs, relocation of offices associated with the ongoing
off-shoring of back and middle office functions to India, legal and
professional fees and also the ongoing restructuring within the
qualified social workers division.
Directors' salary costs comprise amounts paid to ex-directors
for periods after they had ceased to work for the Group, including
payments for compensation for loss of office.
Of total Professional service charges GBP1,376,000 (2009:
GBP71,165) relate to fees paid to external consultants for services
in connection with potential disposal of the business to
trade/private acquirers.
Provisions for onerous lease contracts in 2010 were as a result
of lease liabilities acquired on the acquisitions of Orion and MJV,
for which the Group then decided to close the offices following the
acquisition.
Other costs in 2010 comprise integration expenses in connection
with the acquisition of HCA. Other costs in 2009 mainly comprise
property and office closure charges.
8 Finance income and expense
Year ended Year ended
31 December 31 December
Finance Income 2010 2009
------------------------------------------ ------------- -------------
GBP'000 GBP'000
Interest received on bank deposits 24 4
Gain on fair value changes in derivative
financial instruments 498 -
Change in fair value of derivative
instrument- ineffective portion - 103
------------- -------------
522 107
------------------------------------------ ------------- -------------
Year ended Year ended
31 December 31 December
Finance Expense 2010 2009
------------------------------------------ ------------- -------------
GBP'000 GBP'000
Bank loans, overdrafts and invoice
discounting facility 3,675 1,725
Finance lease interest 192 183
Loss on fair value changes in derivative
financial instruments 2,573 230
6,440 2,138
------------------------------------------ ------------- -------------
Finance expense relating to bank loans and overdraft includes
break costs of GBP1,011,000 (2009: nil) paid during the year for
early repayment of loans and GBP325,000 of transaction costs
relating to Lloyds bank loan facility taken and repaid during the
year.
In 2010, the Group did not apply cash flow hedge accounting in
respect of the derivative financial instruments previously
designated in a hedge relationship and to new instruments acquired
during the year. Accordingly, all fair value changes were
recognised in the Statement of Comprehensive Income. Gains and
losses recognised in other comprehensive income in prior years were
recycled to the Statement of Comprehensive Income upon settlement
of related hedging instruments in 2010.
9 Tax (benefit) / expense
Year ended
Year ended 31 December
31 December 2009
2010 (Restated)
GBP'000 GBP'000
------------- -------------
Domestic current year tax
UK corporation tax - 1,574
Foreign tax (38) 46
Adjustment in respect of prior years - 1,693
Carry back to prior year (1,073) -
--------------------------------------- ------------- -------------
Current tax charge (1,111) 3,313
--------------------------------------- ------------- -------------
Deferred tax
Origination and reversal of temporary
differences (1,001) (487)
--------------------------------------- ------------- -------------
Total tax (benefit)/expense (2,112) 2,826
--------------------------------------- ------------- -------------
The tax assessed for the period is lower than the standard rate
of corporation tax in the UK. The differences are explained
below:
Year ended Year ended
31 December 31 December
2010 2009
GBP'000 GBP'000
------------- -------------
(Loss)/profit before taxation (56,475) 5,862
----------------------------------------- ------------- -------------
Tax at the standard rate of corporation
tax in the UK of 28 % (2009 - 28%) (15,813) 1,641
Effects of:
Expenses not deductible for tax
purposes 10,672 (825)
(Over)/under provision in prior
years - 1,692
Unrecognised potential deferred
tax assets 3,047 561
Share based payments - (121)
Impact of marginal rate of tax - (2)
Impact of overseas tax (24) 2
Losses relieved outside of the period - (147)
Other differences 6 25
----------------------------------------- ------------- -------------
Total tax charge for the year (2,112) 2,826
----------------------------------------- ------------- -------------
10 Earnings per share
Year ended
Year ended 31 December
31 December 2009
2010 (Restated)
------------- -------------
Number '000 Number '000
Number of ordinary 10p shares
Weighted average number of shares 108,768 104,374
Dilution effect of share options - 2,658
-------------------------------------- ------------- -------------
Weighted average number of shares
used for diluted EPS 108,768 107,032
-------------------------------------- ------------- -------------
Adjusted earnings for the year GBP'000 GBP'000
(Loss)/Profit for the year (54,363) 3,036
-------------------------------------- ------------- -------------
Goodwill impairment 45,972 -
Other operating income (Note 5) (4,232) (2,707)
Other operating expenses (Note
5) 7,384 8,499
Net foreign exchange (gains)/losses
(non-operating) (1,542) -
47,582 5,792
-------------------------------------- ------------- -------------
Tax effect of above items (13,323) (1,622)
-------------------------------------- -------------
Adjusted earnings (20,104) 7,206
------------- -------------
Pence Pence
Basic earnings per ordinary share
of 10p (49.98) 2.91
Diluted earnings per ordinary
share of 10p (49.98) 2.84
Adjusted basic earnings per ordinary
share of 10p (18.48) 6.90
Adjusted diluted earnings per
ordinary share of 10p (18.48) 6.73
-------------------------------------- ------------- -------------
Adjusted earnings for the Group for 2009 has been restated to
conform to the highlighted items identified by the Directors for
2010 to be of an exceptional and non-recurring nature while
calculating the adjusted earnings for 2010.
At 31 December 2010, there were 4,019,281 (2009: 510,000
restated) potentially dilutive share options and 2,943,453 (2009:
nil) potentially dilutive warrants which have not been included
above as they do not affect EPS, on the basis that they are not
currently dilutive.
In the previous year, an error was made in calculating the 2009
diluted earnings per share figures. This error relates to the use
of an incorrect average share price for some options and omission
to remove some of the options forfeited during 2009. Accordingly,
the number of dilutive share options should have been 2,658,000
rather than 343,000 as originally stated. Consequently, the number
of anti-dilutive shares was also incorrectly stated; it should have
been 510,000 options rather than 4,216,266 as disclosed in the
financial statements.
11 Dividends
2010 2009
-------- --------
GBP'000 GBP'000
Interim dividend of 1.5p (2009
- 0.8p) per ordinary share paid
during the year relating to the
previous year's results 1,578 834
Final dividend of 1.9p (2009 -
1.2p) per ordinary share proposed
and paid during the year relating
to the previous year's results 2,003 1,251
Interim dividend of 1.8p (2009
- 0.8p) per ordinary share proposed
and paid during 2009 relating
to 2009 results - 1,669
--------
3,581 3,754
-------------------------------------- -------- --------
The Directors are not proposing a final dividend for 2010 (2009
- 1.9p, GBP2,003,000).
During 2010, the Company paid dividends of 1.5p per share (on 1
April 2010), 1.9p per share (on 25 June 2010) and declared a
dividend of 1.8p per share which was paid on 10 January 2011. At
the previous year end, parent company profit and loss reserves as
stated in the year-end financial statements showed reserves of
GBP3,576,000 which were sufficient to cover the first of the
dividends. Under the Companies Act 2006 (the "Act"), distributions
by the Company must not exceed the amount of the distributable
profits that are reported in the Company's last annual accounts
unless interim accounts demonstrate that there are sufficient
distributable profits. Such interim accounts are required to be
filed with Companies House before the dividend is paid.
It has come to the Directors' attention that interim accounts
were not prepared and filed and that the dividends paid in June
2010 and January 2011 were therefore potentially unlawful.
Furthermore, as the existence of the errors as discussed in Note
1 may not have been known at the time of declaration of previous
dividends, it may be possible that the Company did not have
sufficient distributable reserves at the time of declaring such
dividends. The Directors are seeking advice in relation to the
impact of the correction of errors, described in Note 1, in
relation to the dividends previously paid.
The Directors are also taking legal advice in relation to the
dividends previously paid and what steps would be required to
remedy any breach of the law.
12 Property, plant and equipment
Improvements Office
to leasehold and Computer Motor
buildings Equipment Vehicles Total
-------------- ---------- --------
Cost GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2010 879 1,382 45 2,306
Acquisition of
subsidiary 593 735 152 1,480
Additions 205 1,122 - 1,327
Disposals (239) (519) (44) (802)
Effect of movements in
foreign exchange 18 22 5 45
------------------------ -------------- -------------- ----------
At 31 December 2010 1,456 2,742 158 4,356
------------------------ -------------- -------------- ---------- --------
Depreciation
At 1 January 2010 553 755 40 1,348
Provided for the year 80 506 8 594
Impairment - 401 - 401
Disposals (196) (519) (44) (759)
Effect of movements in
foreign exchange (2) (2) - (4)
------------------------ -------------- -------------- ---------- --------
At 31 December 2010 435 1,141 4 1,580
------------------------ -------------- -------------- ---------- --------
Net book value
At 31 December 2010 1,021 1,601 154 2,776
------------------------ -------------- -------------- ---------- --------
At 31 December 2009 326 627 5 958
------------------------ -------------- -------------- ---------- --------
Cost
At 1 January 2009 896 1,901 45 2,842
Additions 19 368 - 387
Disposals (36) (887) - (923)
------------------------ -------------- -------------- ---------- --------
At 31 December 2009 879 1,382 45 2,306
------------------------ -------------- -------------- ---------- --------
Depreciation
At 1 January 2009 430 1,224 25 1,679
Provided for the year 123 418 15 556
Disposals - (887) - (887)
------------------------ -------------- -------------- ---------- --------
At 31 December 2009 553 755 40 1,348
------------------------ -------------- -------------- ---------- --------
Net book value
At 31 December 2009 326 627 5 958
-------------- -------------- ---------- --------
At 31 December 2008 466 677 20 1,163
------------------------ -------------- -------------- ---------- --------
Improvements Office
to leasehold and Computer Motor
buildings Equipment Vehicles Total
-------------- -------------- ---------- --------
GBP'000 GBP'000 GBP'000 GBP'000
Net book value of
assets held under
finance leases:
As at 31 December 2010 113 755 46 914
As at 31 December 2009 25 384 5 414
------------------------ -------------- -------------- ---------- --------
Depreciation charge on
assets held under
finance leases:
Year ended 31 December
2010 28 383 17 428
Year ended 31 December
2009 77 264 15 356
------------------------ -------------- -------------- ---------- --------
13 Goodwill
Goodwill as at 31 December 2009 as previously reported has been
reallocated between segments in 2010 on a more appropriate basis.
The reallocation was as follows:
As previously
reported Reallocated Restated
GBP'000 GBP'000 GBP'000
-------------- ------------ ---------
Locum Doctors 17,862 4,500 22,362
Locum Qualified Social Workers 20,007 566 20,573
Locum Allied Health Professionals 22,420 (5,066) 17,354
----------------------------------- -------------- ------------ ---------
60,289 - 60,289
----------------------------------- -------------- ------------ ---------
Movement in goodwill in 2010 and segment wise classification is
as follows:
At 1 At 31
January Foreign December
2010 Additions exchange Impairment 2010
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------ ---------- ---------- ----------- ----------
Locum Doctors 22,362 - - (22,362) -
Locum
Qualified
Social
Workers 20,573 - - (15,168) 5,405
Locum Allied
Health
Professionals 17,354 1,767 - (8,442) 10,679
Locum Nursing - 8,748 - - 8,748
Permanent
Placements - - - - -
Australia - 15,955 589 - 16,544
--------------- ------------ ---------- ---------- ----------- ----------
Total 60,289 26,470 589 (45,972) 41,376
--------------- ------------ ---------- ---------- ----------- ----------
Comparative information for 2009 is as follows:
Adjustment
in respect At 31
At 1 January of earn-out December
2009 (Note 20) 2009
GBP'000 GBP'000 GBP'000
------------- ------------- ----------
Goodwill 60,318 (29) 60,289
---------- ------------- ------------- ----------
Goodwill impairment
During the year the goodwill was tested for impairment. The
impairment charge reflects a revision in the assessment of the
future cash flows from the business due to reduced margins and
changes in the NHS procurement practices.
The recoverable amounts of all the above segments have been
determined from value in use calculations based on cash flow
projections from formally approved budgets for 2011 and 2012 and
estimates for subsequent years.
The key assumptions in the value in use calculations for 2010
and 2009 were:
-- Risk-free rate - 4.1% (2009: 3.96%)
-- Gearing - 20% (2009: 6%)
-- Equity market risk premium - 5% (2009: 5%)
-- Small stock premium - 4% to 6% (2009: 2%)
-- Debt margin - 2.3% (2009: 1.75%)
-- Expected long-term tax rate - 25% (2009: 28%)
-- The post-tax discount rate used was based on the estimated
weighted average cost of capital of 16.67% (2009: 15.22%)
-- Profit growth estimate 2% on 2011 budget (2009: 5% on 2010
budgets for 2012 to 2014 and 2.5% from 2014)
Locum Locum
Locum AHP Doctors Locum QSW Nursing
---------- --------- ---------- ---------
2010 2010 2010 2010
---------- --------- ---------- ---------
Discount rate (post-tax) 16.67% 16.67% 16.67% 16.67%
Profit growth rate 2.0% 2.0% 2.0% 2.0%
-------------------------- ---------- --------- ---------- ---------
2009 2009 2009 2009
---------- --------- ---------- ---------
Discount rate (post-tax) 15.22% 15.22% 15.22% 15.22%
2.5 - 2.5 -
Profit growth rate 2.5 - 5% 5% 2.5 - 5% 5%
-------------------------- ---------- --------- ---------- ---------
As the level of debt has increased significantly towards the end
of 2010, the weighted average cost of capital is determined by
comparing the discount rates used by HCL competitors in their own
valuations. In addition, independent professional advice was also
taken. The discount rate determined on this basis thus worked out
to be higher than in 2009.
If the discount rate used above was decreased or increased by
2%, the impairment amount would be lower by GBP2.7m or higher by
GBP2.0m, respectively.
14 Acquisitions
During 2010, the Group completed four acquisitions as
follows:
-- On 23 July 2010 the Company acquired 100% of the voting share
capital of Orion Locums Ltd ("Orion") for an initial cash
consideration of GBP3.2m and 100% of the voting share capital of
MJV Locums Ltd ("MJV") for an initial cash consideration of GBP0.5m
from a common shareholder who held 100% issued share capital of
both companies. The Group also agreed to pay a contingent
consideration in cash on these acquisitions of up to GBP5.6m for
Orion and GBP1.4m for MJV. Subsequent to the year-end, the total
contingent consideration was replaced by an aggregate of GBP5m of
deferred consideration following the signing of a variation
agreement. Orion is a leading nursing and healthcare staffing locum
business in the UK. MJV supplies off-contract pharmacists.
-- On 1 August 2010 HCL International Pty Ltd (a wholly owned
subsidiary of Healthcare Locums Plc) acquired the business and
assets of Last Minute Locums Pty Ltd ("LML") for an initial cash
consideration of A$7.85m (GBP4.8m) and a contingent consideration
of up to a maximum of A$5m. LML is an established Australian
medical staffing business with a database of over 3,500 qualified
doctors.
-- On 19 August 2010 Medical Technical Ltd (a wholly owned
subsidiary of Healthcare Locums Plc) acquired the business and
certain of the assets of Redwood Health Ltd for an initial cash
consideration of GBP5m. This was a related party transaction as set
out in Note 28. Contingent consideration is also payable in cash on
this acquisition up to a maximum of GBP1.65m. Subsequent to the
year-end, the contingent consideration was replaced by an aggregate
of GBP1.33m of deferred consideration of which GBP678,000 has
already been paid post year-end. Redwood Health Limited ("Redwood")
was a nursing locum placement provider.
-- On 20 December 2010 the Company acquired the entire share
capital of Healthcare Australia Holdings Pty Ltd ("HCA").The
acquisition, from certain CHAMP Private Equity funds and a small
number of private individuals, was completed for a total cash
consideration of A$131.23m (approximately GBP83.35m of which
GBP0.56m was deferred). HCA was established in 2004 and is a
leading provider of nursing agency staff to public and private
health institutions in Australia. Approximately 40% of healthcare
in Australia is provided by the private sector.
These acquisitions represented a significant step towards
implementing a stated strategy of the previous Board of: (a)
establishing a significant presence in the UK nursing recruitment
market and (b) to pursue international acquisitions which will
generate additional revenue outside of the UK. The completion of
these acquisitions significantly broadens HCL's international
operations.
In calculating the goodwill arising on these acquisitions, the
acquisition date fair value of the consideration and fair values of
assets and liabilities acquired have been assessed as follows:
Orion
and MJV LML Redwood HCA(1) Total
--------- -------- -------- --------- ---------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cash consideration 3,700 4,834 5,000 83,345 96,879
Contingent consideration
(at acquisition date
fair value) 4,780 1,232 1,650 - 7,662
------------------------- ---------
Total consideration 8,480 6,066 6,650 83,345 104,541
Fair value of assets and
liabilities acquired:
Intangible assets:
Customer relationships 1,019 1,300 1,204 23,909 27,432
Computer software - - - 599 599
Acquired candidate
database 948 - 1,249 10,925 13,122
Brands and trademarks 845 1,816 438 29,019 32,118
Non-compete agreements - 459 - - 459
------------------------- --------- -------- -------- --------- ---------
2,812 3,575 2,891 64,452 73,730
Cash/(invoice
discounting facility)
acquired (1,002) - - 7,580 6,578
Property plant and
equipment - - - 1,480 1,480
Trade and other
receivables 1,458 - 45 16,691 18,194
Deferred tax asset - - - 4,826 4,826
Trade and other payables (657) - - (13,776) (14,433)
Employee benefits
provision - - - (3,482) (3,482)
Current taxation (145) - - (163) (308)
Deferred tax liability (787) (528) - (7,199) (8,514)
Net assets / liabilities
acquired 1,679 3,047 2,936 70,409 78,071
------------------------- --------- -------- -------- --------- ---------
Goodwill 6,801 3,019 3,714 12,936 26,470
------------------------- --------- -------- -------- --------- ---------
(1 ) Of the total cash consideration,
GBP562,000 was paid in January 2011.
Orion and MJV Locums
Intangible assets acquired and fair valued include acquired
candidate databases, customer contracts and relationships and
brands/trademarks.
Contingent consideration in relation to the acquisition, as
originally agreed, was payable up to GBP7.0 million based on future
EBITDA of the acquired business meeting certain targets in the 2
years ended 31 December 2012. Subsequently, the Group agreed to pay
a deferred consideration of GBP5m in lieu of the contingent
consideration.
Acquired trade receivables were fair valued at GBP1.46m after
deducting approximately GBP0.01m not expected to be collected.
There were no significant contingent liabilities acquired.
None of the goodwill is expected to be tax deductible. Goodwill
represents the expected synergies arising from combining the
operations of the acquiree and acquirer including administrative
efficiencies and the value of the assembled workforce.
In assessing the acquisitions, the Directors have treated the
following as separate from the business combination:
-- Transaction costs paid to advisors of GBP0.23m have been
charged to the Statement of Comprehensive Income within
administration costs.
Orion and MJV Locums contributed GBP4.0m of revenue, GBP0.8m of
gross profit and GBP1.1m of loss before tax for the period between
the date of acquisition and the date of the Statement of Financial
Position. If the acquisition of Orion and MJV Locums had been
completed on 1 January 2010 the Group revenue for the year would
have been approximately GBP5.8m higher and gross profit would have
been approximately GBP1.1m higher than reported.
Last Minute Locums Pty Limited ("LML")
The exchange rate used at the acquisition date was A$1.73379:
GBP1.
Contingent consideration in relation to the acquisition is
payable up to a maximum of A$5m based on the future gross profit of
the acquired business meeting certain targets in the 36 month
period ending from the date of completion. Contingent consideration
is payable in tranches and in cash or by the issue of shares, at
the Group's option. None of the goodwill is expected to be tax
deductible.
In assessing the acquisitions, the Directors have treated the
following as separate from the business combination:
-- Transaction costs paid to advisors of GBP0.74m have been
charged to the Statement of Comprehensive Income within
administration expenses.
-- Discharge of all debts, liabilities and obligations incurred
after the completion of acquisition including undertaking that the
Group will assume liability for the rent in respect of lease for
office premises and licence fee for car space after the completion
date.
-- No contingent liabilities were acquired by the Group as part
of this acquisition.
LML contributed GBP1.5m of revenue, GBP1m of gross profit and
GBP0.67m of profit before tax for the period between the date of
acquisition and the date of the Statement of Financial Position. If
the acquisition of LML had been completed on 1 January 2010 the
Group revenue and gross profit for the year would have been higher
by GBP2.1m and GBP1.4m, respectively.
Redwood Health Limited
Contingent consideration in relation to the acquisition of
assets as originally agreed was payable up to GBP1.65 million based
on future EBITDA of the acquired business meeting certain targets
in the 3 months ended 31 March 2011. As discussed above, this was,
subsequent to the year-end, replaced by deferred consideration of
GBP1.33m.
There were no acquired trade receivables and there were no
contingent liabilities acquired.
Goodwill of GBP3.7m is expected to be tax deductible. Goodwill
represents the expected synergies arising from combining the
operations of the acquiree and acquirer including administrative
efficiencies and the value of the assembled workforce.
In assessing the acquisitions, the Directors have treated the
following as separate from the business combination:
-- Transaction costs paid to advisors of GBP0.2m have been
charged to the Statement of Comprehensive Income within
administration costs
Assets of Redwood Health Limited contributed GBP3.8m of revenue,
GBP0.7m of gross profit and GBP0.3m of profit before tax for the
period between the date of acquisition and the date of the
Statement of Financial Position. Based on pre-acquisition forecast,
if the acquisition of assets of Redwood Health had been completed
on 1 January 2010 the Group revenue for the period would have been
GBP6.8m higher with an increase in gross profit of GBP1.2m.
Healthcare Australia Holdings Pty Limited ("HCA")
The exchange rate used at the acquisition date was
A$1.5745:GBP1.
Acquired trade and other receivables were fair valued at
GBP16,691,000.
None of the goodwill is expected to be tax deductible. Goodwill
represents the expected synergies arising from combining the
operations of the acquiree and acquirer including administrative
efficiencies and the value of the assembled workforce.
In assessing the acquisitions, the Directors have treated the
following as separate from the business combination:
-- Transaction costs paid to advisors of GBP1.7m have been
charged to the Statement of Comprehensive Income within
administration costs
HCA contributed GBP9.7m of revenue, GBP2.0m of gross profit and
GBP0.1m of loss before tax for the period between the date of
acquisition and the date of the Statement of Financial Position. If
the acquisition of HCA had been completed on 1 January 2010 the
Group revenue for the period would have been GBP56.2m higher, gross
profit would have been GBP11.3m higher.
15 Other intangible assets
Acquired
Customer Computer candidate Brands and Knowledge Non-compete
relationships software database trademarks database agreements Total
-------------- --------- ---------- ----------- ---------- ------------ --------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------- --------- ---------- ----------- ---------- ------------ --------
Cost
At 1 January
2010
(restated) 3,953 7,550 - - 100 - 11,603
Acquisition
of
subsidiary 27,432 599 13,122 32,118 - 459 73,730
Additions - 512 - - - - 512
Effect of
movements in
foreign
exchange 819 19 337 1,010 - 29 2,214
Disposals - (549) - - - - (549)
--------------
At 31
December
2010 32,204 8,131 13,459 33,128 100 488 87,510
-------------- -------------- --------- ---------- ----------- ---------- ------------ --------
Amortisation
At 1 January
2010
(restated) 1,477 6,476 - - 100 - 8,053
Provided for
the year 778 458 272 148 - 37 1,693
Disposals - (546) - - - - (546)
Impairment 733 563 - - - - 1,296
--------------
At 31
December
2010 2,988 6,951 272 148 100 37 10,496
-------------- -------------- --------- ---------- ----------- ---------- ------------ --------
Net book
value
At 31
December
2010 29,216 1,180 13,187 32,980 - 451 77,014
-------------- -------------- --------- ---------- ----------- ---------- ------------ --------
At 31
December
2009
(restated) 2,476 1,074 - - - - 3,550
-------------- -------------- --------- ---------- ----------- ---------- ------------ --------
Computer Candidate
Customer software database Knowledge Total
relationships (Restated) (Restated) database (Restated)
-------------- ----------- ----------- ---------- -----------
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------- ----------- ----------- ---------- -----------
Cost
At 1 January
2009 3,953 6,094 - 100 10,147
Additions - 1,572 - - 1,572
Disposals - (116) - - (116)
At 31
December
2009 3,953 7,550 - 100 11,603
-------------- -------------- ----------- ----------- ---------- -----------
Amortisation
At 1 January
2009 1,038 821 - 100 1,959
Provided for
the year 439 519 - - 958
Impairment - 5,252 - - 5,252
Disposals - (116) - - (116)
-------------- -------------- ----------- ----------- ---------- -----------
At 31
December
2009 1,477 6,476 - 100 8,053
-----------
Net book
value
At 31
December
2009 2,476 1,074 - - 3,550
-------------- -------------- ----------- ----------- ---------- -----------
At 31
December
2008
(Restated) 2,915 5,273 - - 8,188
-------------- -------------- ----------- ----------- ---------- -----------
As discussed in Note 1 above, the Group wrote off the candidate
database costs brought forward as a correction of a prior year
error. The impact of this restatement is to reduce opening net
assets (at 1 January 2009) by GBP3,003,000; and to reduce reported
2009 profits by GBP1,776,000. The costs incurred during the year
ended 31 December 2010 on the candidate database were expensed as
administrative expenses.
At 31 December 2010, computer software did not include any
component that was under construction (2009: GBP0.6m). The Group
amortises intangible assets from the date the assets are ready to
use.
16 Trade and other receivables
31 December 1 January
31 December 2009 2009
2010 (Restated) (Restated)
------------ ------------ ------------
GBP'000 GBP'000 GBP'000
Trade receivables 28,624 17,594 19,526
Other receivables 2,299 5,053 1,913
Prepayments and accrued
income 5,410 4,658 5,050
------------ ------------
36,333 27,305 26,489
------------------------- ------------ ------------ ------------
All amounts shown under receivables fall due for payment within
one year. The ageing analysis of the trade receivables and the
amounts denominated in currencies other than sterling are set out
in Note 22. There are no differences between book value and fair
value of these trade and other receivables at either reporting
date.
Refer to Note 1 for an explanation of the change in accounting
policy.
17 Trade and other payables
31 December 1 January
31 December 2009 2009
2010 (Restated) (Restated)
------------ ------------ ------------
GBP'000 GBP'000 GBP'000
Trade creditors 6,565 2,130 1,731
Other taxes and social
security 7,648 5,816 3,888
Accruals and deferred income 10,810 5,185 5,025
Sales ledger credits 4,301 3,296 1,823
Other creditors 4,132 1,980 998
------------------------------ ------------
33,456 18,407 13,465
------------------------------ ------------ ------------ ------------
There are no differences between book value and fair value of
these trade and other payables at either reporting date.
18 Short term borrowings
31 December 31 December
2010 2009
------------ ------------
GBP'000 GBP'000
Bank overdraft 53 -
Invoice discounting facility - 11,570
------------------------------ ------------ ------------
53 11,570
------------------------------ ------------ ------------
The invoice discounting facility was secured on the approved
debtors within the trade receivables balance, the approved debtors
comprising those debts which are less than 120 days old. When a
debt reaches 120 days old any amount borrowed which has been
secured over these debtors is returned to the bank. The invoice
discounting facility was discontinued in December 2010.
19 Loans and long term borrowings
31 December 31 December
2010 2009
------------ ------------
GBP'000 GBP'000
Non-Current
Bank loans (secured) - 5,413
Obligations under finance leases
and hire purchase contracts 467 69
Total non-current borrowings 467 5,482
----------------------------------- ------------ ------------
Current portion of long-term debt
Bank loans (secured) (see note
below) 114,015 4,080
Obligations under finance leases
and hire purchase contracts 429 263
Total current borrowings 114,444 4,343
----------------------------------- ------------ ------------
Total borrowings 114,911 9,825
----------------------------------- ------------ ------------
The Board believes that it is probable that at 31 December 2010
the Group was in default under the Senior Facilities Agreement
('SFA') and Mezzanine Facility Agreement ('MFA') with its lending
banks. The lending banks have reserved their rights in relation to
any defaults that may subsist and have not waived any defaults that
may subsist.
If a default does subsist the lending banks would, on service of
a notice, have the right, among other things, to require the loans
under the SFA and MFA to be repaid immediately.
In these specific circumstances the Board considered it
appropriate to classify all of the Group's loans as current
liabilities.
There are no differences between the book value and fair value
of these loans and long term borrowings at either reporting date.
The bank loans are secured by a first charge over all assets of the
Company and its subsidiaries.
The borrowings are denominated in GBP sterling and Australian
Dollars (A$).
The term loans taken by the Group to finance the acquisitions
made in December 2010 and provide additional working capital in
Australia are with the Commonwealth Bank Australia and the National
Australia Bank with a mezzanine facility provided by Ares Capital
Europe ("Ares").
As per the terms of the mezzanine facility, the Company granted
Ares warrants over 2,493,453 shares in the Company representing
2.2% of the issued share capital. The warrants can be exercised
after 5 years, or earlier upon occurrence of certain events such as
sale or significant issuance of shares by the Company, change of
control etc., at an exercise price of 10.00p per share. The
warrants include an anti-dilution provision which entitles the
holder to maintain its 2.2% holding in the issued share capital to
the extent that ordinary shares are issued at a price below 85.00p.
In the event that further shares are issued at a price above 85.00p
per share, warrant holders will be issued additional warrants
representing 1.1% of the new ordinary shares. The fair value of
these warrants as at the date of issuance to Ares was determined to
be GBP2.97m by an independent firm of valuers and is being
amortised over the 5 year term of the mezzanine facility using the
effective interest method. Of this, GBP22,000 was amortised in
2010.
The Group paid total fees of GBP7.7m for the above loans taken
during the year. These fees are amortised using the effective
interest method over the term of the respective loans. In 2010, of
GBP7.7m the Group amortised GBP0.1m. The bank loans outstanding in
the table above are after reducing the unamortised fees of GBP7.6m
and unamortised fair value of warrants of GBP2.95m. If the Group
refinances these loans before their scheduled repayment date, any
unamortised fees as at the date of refinancing will be charged to
the Statement of Comprehensive Income immediately.
Other facilities with the Group's bankers, Barclays Bank Plc and
Allied Irish Banks Plc, originally repayable by instalments over
the period to April 2012 were repaid during the year. These loans
were secured by a floating charge over the assets of the Company
and its subsidiaries.
The Group also borrowed GBP15m from Lloyds TSB Bank during the
year. The facility partly funded some of the acquisitions during
the year and was partly used to repay other outstanding loans and
invoice discounting facility. The Lloyds facility was fully repaid
before the year-end from the proceeds of the Commonwealth Bank
Australia and National Australia Bank loans.
The hire purchase contracts and finance leases are secured on
the assets to which they relate. The carrying values of these
assets are disclosed in Note 12. Such assets are generally
classified as finance leases as the rental period amounts to the
estimated useful economic life of the assets concerned and often
the Group has the right to purchase the assets outright at the end
of the minimum lease period by paying a nominal amount.
Future lease payments are due as follows:
2010 (GBP'000)
-----------------------------------
Minimum lease Present
payments Interest value
-------------- --------- --------
Not later than one year 604 175 429
Later than one year and
not later than five years 631 164 467
Later than five years - - -
---------------------------- -------------- --------- --------
1,235 339 896
---------------------------- -------------- --------- --------
2009 (GBP'000)
-----------------------------------
Minimum lease Present
payments Interest value
-------------- --------- --------
Not later than one year 398 135 263
Later than one year and
not later than five years 97 28 69
Later than five years - - -
---------------------------- -------------- --------- --------
495 163 332
---------------------------- -------------- --------- --------
20 Provisions
31 December
31 December 2010 2009
------------------------------------- ---------------
Contingent Employee Contingent
consideration benefits Total consideration
---------------
GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1 January
On acquisition: - - - 1,220
Contingent
consideration 7,662 - 7,662 -
Employee benefits
(Note 14) - 3,482 3,482
Movement during the
year: -
Employee benefits - 80 80 -
Orion and MJV -
fair value (4,232) - (4,232) -
LML - movements in
foreign exchange 77 - 77 -
Fair value - - - (29)
(Paid) during the
year - - - (1,191)
---------------------- --------------- ---------- -------- ---------------
Balance at 31
December 3,507 3,562 7,069 -
---------------------- --------------- ---------- -------- ---------------
Of which:
Current 2,737 2,223 4,960 -
Non-current 770 1,339 2,109 -
---------------------- --------------- ---------- -------- ---------------
As noted in Note 14, the fair value of contingent consideration
as at the date of acquisition of Orion and MJV was GBP4,780,000.
Based on the post acquisition performance of Orion and MJV, the
fair value of this contingent consideration was determined to be
GBP548,000. This reduction is recognised as a gain in the Statement
of Comprehensive Income (see Note 5).
Other provisions above consist of the long service leave
benefits of GBP2,767,000 and provision for paid leave of GBP795,000
relating to the employees of HCA. For other employees, the paid
leave liability as at 31 December 2010 was not significant enough
to require a provision.
The liability for long service leave is recognised in the
provision of employee benefits and measured as the value of
expected future payments to be made in respect of services provided
by employees up to the end of the reporting period. Consideration
is given to salary levels, experience of employee departures and
periods of service. The provision includes an estimate for long
service leave to cover any potential exposure relating to claims
where the data is not specific enough to determine the liability in
accordance with the above policy.
Contingent consideration paid during 2009 arose on the
acquisition of Tempaid. The consideration was contingent on the
profitability of the business acquired.
21 Deferred Taxation
Deferred tax is calculated in full on temporary differences
under the liability method using a tax rate of 27% (2009 - 28%).
The movement on the deferred tax account is shown below:
2009
2010 (Restated)
GBP'000 GBP'000
-------- ------------
At 1 January - 1,643
Acquisition - -
Profit and loss charge/(credit) (1,001) (487)
Deferred tax on acquisitions
(Note 14) 3,688 -
Foreign exchange 115 -
Deferred tax movement recognised
through equity 1,156 (1,156)
Other (236) -
---------------------------------- -------- ------------
At 31 December 3,722 -
---------------------------------- -------- ------------
Represented by:
Deferred taxation asset (5,117) (1,665)
Deferred taxation liability 8,839 1,665
---------------------------------- -------- ------------
3,722 -
---------------------------------- -------- ------------
Details of the deferred tax account, amounts charged to the
Statement of Comprehensive Income and amounts charged to reserves
are as follows:
Deferred Charged/
(asset)/ Charged (Credited)
liability to income to reserves
----------- ----------- -------------
2010
---------------------------------------
GBP'000 GBP'000 GBP'000
----------- ----------- -------------
Accelerated capital allowances - 211 -
Deferred tax on recognition
of other intangible assets:
Orion 674 (114) -
Blue Group International 367 (326) -
LML 463 (48) -
HCA (asset) (5,117) - -
HCA liability 7,335 (50) -
Hedge accounting - 17 270
Other temporary differences - (973) -
Equity settled options - 282 886
-------------------------------- ----------- ----------- -------------
3,722 (1,001) 1,156
-------------------------------- ----------- ----------- -------------
Deferred Charged/ Charged/
(asset)/ (credited) (credited)
liability to income to reserves
----------- ------------ -------------
2009 (Restated)
----------------------------------------
GBP'000 GBP'000 GBP'000
----------- ------------ -------------
Accelerated capital allowances (212) (598) -
Hedge accounting (286) (17) (270)
Deferred tax on recognition
of customer relationships 693 26 -
Other temporary differences 972 271 -
Equity settled share options (1,167) (120) (886)
Prior year adjustment - (49) -
-------------------------------- ----------- ------------ -------------
- (487) (1,156)
-------------------------------- ----------- ------------ -------------
Deferred tax assets are recognised to the extent that the
realisation of the related tax benefit through future taxable
profits is probable.
The Group did not recognise deferred tax assets:
(i) Of GBP4,922,000 (2009: GBP916,000) in respect of losses
amounting to GBP18,230,000 (2009: GBP3,271,000) that can be carried
forward against future taxable income; and
(ii) Of GBP4,516,000 (2009: GBP434,000) in respect of items
other than tax losses.
22 Financial instruments
The Group's financial instruments comprise bank term loans,
mezzanine facility, bank overdraft facilities, invoice discounting
facilities, cash and interest rate swap instruments and trade and
other receivables and payables. Balances as at the year-end for
these financial instruments were as follows:
Loans and receivables
------------------------
2010 2009
----------- -----------
GBP'000 GBP'000
Current financial assets
Trade and other receivables 36,333 27,305
Cash and cash equivalents
(excluding short-term borrowings) 10,546 4,102
------------------------------------ ----------- -----------
Total current financial assets 46,879 31,407
------------------------------------ ----------- -----------
Financial liabilities
measured at amortised
cost
-------------------------
2010 2009
------------ -----------
GBP'000 GBP'000
Current financial liabilities
Trade and other payables 33,456 18,407
Short term borrowings 53 11,570
Current portion of long term
borrowings 114,444 4,343
------------------------------------- ------------ -----------
Total current financial liabilities 147,953 34,320
------------------------------------- ------------ -----------
Non-current financial liabilities
Long term borrowings 467 5,482
-------------------------------------
Total non-current financial
liabilities 467 5,482
------------------------------------- ------------ -----------
Derivative financial
Derivative financial liability held at
liability in an eligible fair value through
hedge relationship profit or loss
---------------------------- -----------------------
2010 2009 2010 2009
------------- ------------- ----------- ----------
GBP'000 GBP'000 GBP'000 GBP'000
Derivative financial
liabilities - 300 1,726 498
----------------------- ------------- ------------- ----------- ----------
The Group's bank loans, A$62.3m (approximately GBP41m) and
GBP74m as at 31 December 2010 (2009 - GBP9.5m) are based upon LIBOR
plus a margin. The invoice discounting facility was repaid during
2010. As at 31 December 2009, the amount outstanding was GBP11.6m
which was at a floating rate linked to the base rate plus a
margin.
It is, and has been throughout the period under review, the
Group's policy that no trading in financial instruments shall be
undertaken.
The Group's activities expose it to a variety of financial
risks: market risk (including currency risk, fair value interest
rate risk and cash flow interest risk), credit risk and liquidity
risk. The Board reviews and agrees policies for managing each of
these risks and they are summarised below.
(a) Market risk
(i) Foreign exchange risk
The Group had a term loan in A$ outstanding as at 31 December
2010 that exposes the Group to currency risk. The A$ exchange rate
as at the date of acquisition of HCA was A$1.5745/GBP1 as against
the year-end rate of A$1.5274/GBP1. The average rate for the period
post-acquisition period was A$1.5510/GBP1.
Further, the Group has agreed a number of contracts with
customers for the provision of staff for permanent placements where
the revenue derived under the contract is in US dollars. Also, due
to the acquisitions of the subsidiaries outside the UK during the
year, at 31 December 2010, 42% (2009: 1%) of the trade receivables
were denominated in foreign currencies.
As at 31 December 2010 59% (2009: 0.17%) of the total assets of
the Group were held in subsidiary companies in countries outside of
the UK and denominated in currencies other than sterling;
principally in A$. Only in exceptional circumstances will the Group
consider hedging its net investments in overseas operations as
generally it does not consider that the reduction in foreign
currency exposure warrants the cash flow risk created from such
hedging techniques.
At 31 December 2010, if sterling had weakened/strengthened by
10% against the US dollar with all variables held constant, it
would have had an insignificant impact on the Group loss for the
year. If sterling had weakened/strengthened by 10% against the A$
with all variables held constant, post tax loss for the year would
have been GBP5.1m (2009: no exposure) higher/lower, mainly as a
result of foreign exchange gains/losses on translation of trade
receivables, foreign currency denominated borrowings and cash and
cash equivalents.
(ii) Cash flow and fair value interest rate risk
Market risk also arises from the Group's use of interest bearing
financial instruments, which expose the Group to interest rate
risk. The Group finances its operations through a mixture of equity
and bank borrowings. Interest rate risk arising due to the Group's
borrowings in sterling and A$ at floating rates of interest is
mitigated by interest rate instruments that generate a desired
interest profile to manage the Group's exposure to interest rate
fluctuations. The interest rate instruments entered into by the
Group as at 31 December 2010 are not accounted for using cash flow
hedge accounting principles however these are intended to
economically hedge the exposure due to variable interest rates.
Under the terms of the loan facilities of the Group taken out in
December 2010 the Group is exposed to interest rate risks from any
movements in the LIBOR rate with respect to sterling denominated
loans and the Australian base rate for A$ denominated loans.
Interest rate risk is managed through interest rate derivatives
which cap the Group's exposure to interest rate increases. The
Group purchased interest rate swaps with Commonwealth Bank
Australia and National Australia Bank in December 2010 that
protected GBP33.2m and A$44.9m of borrowings (reducing across the
lifetime of the loans in line with loan repayments) with fixed
interest rate of 3.305% in the case of sterling loans and 6.14% in
the case of A$ loans.
These interest rate instruments are measured at fair value
through profit or loss and a debit of GBP1.7m has been made to the
Statement of Comprehensive Income to reflect the movement in the
fair value of these instruments from the dates these were purchased
through to the year end. At 31 December 2010 no instruments (2009:
GBP300,000) were recorded in equity.
The fair value of the interest rate swaps at 31 December 2010
was a liability of GBP1.7m (2009: GBP0.8m).
As at the year end, the Group's total term loans and mezzanine
facility amounted to GBP130m (including letters of credit) before
deducting the unamortised loan fees and fair value of warrants.
GBP96m of these borrowings, representing 74% of the Group's
borrowings, were covered by these financial instruments. A further
GBP33.8m of borrowings were covered by management through similar
instruments subsequent to the date of the Statement of Financial
Position thus extending the cover to all of the total long term
borrowings held by the Group as at 31 December 2010.
At 31 December 2010, if the interest rates on floating rate
borrowings increased or decreased by 100 basis points with all
other variables held constant, loss for the year would have been
GBP11,000 lower or higher, respectively mainly as a result of
higher/lower interest expense on these borrowings.
(b) Credit risk
Credit risk arises principally from the Group's trade
receivables and is the risk that the customer fails to discharge
its obligations in respect of the instrument. The Group's exposure
to credit risk is considered to be insignificant due to the heavy
weighting of its customer base towards NHS trusts, Local
Authorities and other Government institutions. Private sector
customers are subject to credit checking procedures prior to
commencing to trade with them. The public sector organisations
comprised 68% (2009: 80%) of the total UK trade receivables and 42%
(2009: nil) of the Australia trade receivables as at 31 December
2010. The quality, and therefore the low risk, of the customer base
is also shown by the small amounts of overdue debt. None of the
overdue balances of the Group are considered impaired.
1 month 2 months >=3 months
Current overdue overdue overdue
----------------------- -------- --------- --------- -----------
% of trade debt per
ageing category - 31
December 2010 75% 15% 6% 5%
----------------------- -------- --------- --------- -----------
% of trade debt per
ageing category - 31
December 2009 76% 18% 4% 2%
----------------------- -------- --------- --------- -----------
(c) Liquidity risk
Liquidity risk arises from the Group's management of working
capital and the finance charges and principal repayments on its
debt instruments. The Board receives regular cash flow
projections.
At the date of issuing the financial statements, these
projections indicated that the Group will need to raise further
capital or borrowings to have sufficient liquid resources to meet
its obligations under all reasonably expected circumstances.
Further information is set out under 'going concern' in the
Statement of Significant Accounting Policies.
Gross undiscounted cash flows are due as follows:
Due within Due in 1 Due in 2
On demand 1 year to 2 years to 5 years
---------- ----------- ------------ ------------
GBP'000 GBP'000 GBP'000 GBP'000
2010
Non derivative financial
instruments - outflows
Long and short term
borrowings(1) 53 16,605 19,516 120,452
Finance leases - 429 467 -
Trade and other payables - 33,456 - -
Contingent consideration - 2,737 440 330
----------- ------------
53 53,227 20,423 120,782
Derivative financial
instruments - net
outflows - 1,183 1,183 2,367
Total 53 54,410 21,606 123,149
----------- ------------
2009
Non derivative financial
instruments - outflows
Long and short term
borrowings 11,570 4,424 4,822 860
Finance leases - 263 69 -
Trade and other payables - 18,407 - -
11,570 23,094 4,891 860
Derivative financial
instruments - net
outflows - 707 226 12
----------- ------------
Total 11,570 23,801 5,117 872
----------- ------------
(1 ) Cash flows in respect of bank loans are included based
on their contractual maturities and do not reflect the classification
of these loans as current due to breach of covenants as discussed
in Note 19.
This table summarises undiscounted cash flows based on the
financial liabilities outstanding at the year-end and assuming no
changes in interest rates from the year end rates.
Fair value estimation
The carrying value of the assets and liabilities of the Group
approximate their fair values. As noted above, the only financial
instruments that are measured at fair value through profit or loss
are interest rate swaps. There are no other financial assets or
liabilities held for trading purposes or any investments classified
as available-for-sale.
The fair value of interest rate swaps is based on information
derived from respective bankers' quotes and as such they fall into
Level 2 of the Fair Value Hierarchy.
Capital risk management
The Group considers its capital to comprise its ordinary share
capital, share premium and accumulated retained earnings. In
managing its capital the Group's primary objective is to ensure its
continued ability to provide a growing return for its equity
shareholders through a combination of capital growth and
distributions. In order to achieve this objective the Board seeks
to establish and maintain a gearing ratio that balances risks and
returns at an acceptable level and also to maintain a sufficient
funding base to enable the Group to meet its working capital and
strategic investment needs. The Group's gearing ratio at the
reporting date is shown below:
2009
2010 (Restated)
GBP'000 GBP'000
Invoice discounting facility - 11,570
Bank overdraft 53 -
Bank loans 114,015 9,493
Obligations under finance
leases and hire purchase
contracts 896 332
-----------
Total borrowings 114,964 21,395
Less: Cash in hand (10,546) (4,102)
Net borrowings 104,418 17,293
-----------
Share capital 11,334 10,467
Share premium 45,318 34,517
Cash flow hedge reserve - (672)
Share option reserve 4,635 1,079
Translation reserve (193) 5
Retained earnings (54,514) 4,586
-----------
Total capital 6,580 49,982
-----------
Gearing ratio 1,587% 35%
-----------
The increase in gearing is principally due to the bank loans and
mezzanine facility taken by the Group to finance the acquisitions
in December 2010, to meet the working capital requirements and the
losses arising during the year. As reported in the Basis of
Preparation note under "Going Concern", the Group intends to
significantly reduce this gearing ratio as soon as possible.
As a first major step in reducing the Group's debt levels, on 18
July 2011 the Directors were pleased to announce that the Company's
wholly owned Australian subsidiary, Healthcare Australia Holdings
(Pty) Ltd ("HCA") had completed the sale of its Homecare Division.
The gross consideration (before estimated expenses of A$2 million)
was A$34 million (approximately GBP22.4 million). The sale was
completed on 18 July 2011 and the net proceeds of the sale have
been used to reduce the Group's debt.
The Group also intends to raise additional equity funding. More
detail is contained in the Post Balance Sheet Events note (Note 30)
and the Chairman's Statement.
23 Share capital
Authorised
31 December 31 December 31 December 31 December
2010 2009 2010 2009
Number '000 GBP'000
Equity share capital
Ordinary shares of
GBP0.10 each 200,000 200,000 20,000 20,000
Allotted, called up and fully
paid
31 December 31 December 31 December 31 December
2010 2009 2010 2009
Number '000 GBP'000
Equity share capital
Ordinary shares of
GBP0.10 each 113,338 104,667 11,334 10,467
The movements during the year in the authorised and the issued
share capital are as set out below.
Authorised share capital - Number and Nominal Value
Equity shares Equity shares
Ordinary Ordinary
shares of shares of
GBP0.10 GBP0.10
Number '000 GBP '000
As at 1 January 2010 and 31
December 2010 200,000 20,000
Issued share capital - Number and Nominal Value - 2010
Equity shares
Ordinary Ordinary
shares of shares of
GBP0.10 GBP0.10
Number '000 GBP'000
As at 1 January 2010 104,667 10,467
Shares issued following exercise of share
options granted to employees and other
parties in:
27 January 2010 500 50
29 April 2010 250 25
20 September 2010 4 1
3 November 2010 584 58
New ordinary shares issued on 16 July
2010 7,333 733
As at 31 December
2010 113,338 11,334
The shares issued in January 2010 following the exercise of
share options granted to employees comprised 500,000 options that
were issued at the exercise price of 106p per share. The shares
issued in April 2010 following the exercise of share options
granted to employees comprised 250,000 options that were issued at
the exercise price of 112.5p per share. At the same exercise price,
4,000 shares were issued in September 2010.
In November 2010, 583,836 shares were issued to an external
adviser pursuant an option deed dated 4 November 2005 at the
exercise price of 55p per share.
On 16 July 2010, the Company issued 7,333,334 new 10p ordinary
shares at 150p per share raising a total of GBP11m. Transaction
costs of GBP469,000 were incurred in relation to this issue.
All the new shares issued during the year have the same rights,
preferences and restrictions as those relating to the ordinary
shares already in issue at the start of the year.
Issued share capital - Number and Nominal Value - 2009
Equity shares
Ordinary Ordinary
shares of shares of
GBP0.10 GBP0.10
Number '000 GBP'000
As at 1 January 2009 104,272 10,427
Shares issued following exercise of share
options granted to employees on 30 September
2009 395 40
As at 31 December 2009 104,667 10,467
The shares issued on 30 September 2009 following the exercise of
share options granted to employees comprised 394,700 that were
issued at the exercise price of 59.0p per share and 699 that were
exercised at 10.0p per share, therefore total consideration
amounted to GBP233,000.
All the new shares issued during 2009 have the same rights,
preferences and restrictions as those relating to the ordinary
shares already in issue at the start of the year.
24 Reserves
The share premium account represents amounts subscribed for
share capital in excess of nominal value.
The cash flow hedge reserve represents gains and losses arising
on recognising hedging instruments at fair value in a qualifying
cash flow hedge.
The share option reserve represents the fair value of the
warrants granted to Ares Capital Europe in connection with the
mezzanine facility taken out during 2010 and also the share options
granted to the employees.
The translation reserve comprises all foreign exchange
differences arising from the translation of the financial
statements of foreign operations that are integral to the
operations of the Group.
The retained earnings reserve represents the cumulative profit
or loss recognised in the Statement of Comprehensive Income.
25 Contingent assets and liabilities
Customer claims
Following claims from customers alleging that the Group had
invoiced for charges which were not fully compliant with contracts
or customer signed term sheets, the Board commissioned an external
investigation by Grant Thornton to identify other potential
instances of additional charges and/or charging locums at other
than pre-agreed rates. The investigation concluded that the levying
of the largest proportion of additional charges outside contractual
terms was primarily restricted to the activities of particular
consultants who have since been dismissed. We are working with
specific customers to resolve outstanding claims. A provision has
been included in the 2010 accounts where appropriate. Should there
be further claims from the customers the Board will seek to resolve
any such claims appropriately.
Dividends
The then existing Board declared on 27 September 2010 and on 10
January 2011 paid an Interim Dividend of 1.8p per share, a total
payment of GBP2,030,000. This followed dividend payments on 1 April
2010 and 25 June 2010 of GBP1,578,000 and GBP2,003,000
respectively.
The Board is currently taking professional advice on whether
there were sufficient distributable reserves at those times for the
dividends paid and what steps, if any would be required to remedy
any breach of the law.
Ms Kate Bleasdale
The former Executive Vice Chairman was dismissed as an employee
on 11 March 2011. She has, since that date, launched legal
proceedings against the Company for unfair dismissal, victimisation
and sex discrimination. The Company has taken legal advice and will
vigorously defend itself against these charges. Whilst the outcome
is currently uncertain, the Board believes the charges are
unfounded.
Taxation
The Group has restated financial statements for 2009 and earlier
years where the tax returns have already been filed and tax paid
where due. Following the restatement, tax returns for the relevant
accounting periods will be re-filed and claims be made for either
tax refunds or tax losses established for offset against future
taxable profits.
As set out in critical accounting estimates and judgements, the
Group conducts its business in a number of different tax
environments and accordingly uncertain tax positions may arise,
which once resolved could impact reported net equity.
The Administrator of Redwood Health Ltd
On 19 August 2010 Medical Technical Ltd (a wholly-owned
subsidiary) acquired the business and certain of the assets of
Redwood Health Ltd for an initial cash consideration of
GBP5,000,000. Contingent consideration is also payable in cash on
this acquisition up to a maximum of GBP1,650,000. Further
information about Redwood is provided under Related Parties in Note
28.
A claim has been asserted by the administrator of Redwood Health
Ltd in respect of the final payment of GBP678,194 due in respect of
the acquisition of the business and assets of Redwood Health Ltd by
Medical Technical Ltd.; the Company guaranteed the payment of the
consideration. The claim is being disputed by the Company which, if
successful, may result in some or all of the amount currently
provided for being released.
Managed service and Umbrella companies
The Board has taken external advice from Grant Thornton as to
whether any financial exposure might exist from sourcing locums
through "Umbrella" and/or Managed Service Companies. HCL has
recruited through three companies which Her Majesty's Revenue and
Customs ("HMRC") could seek to argue were Managed Service
Companies. If such arguments were successful, this could leave the
Group at risk of claims from HMRC for unpaid Income Tax and/or
National Insurance should a Managed Service Company become
insolvent with debts owing to HMRC in respect of locums who had
worked through HCL. Whilst the Board is unaware of any Umbrella
company being in arrears with payments to the HMRC in respect of
any locums provided from such companies, a residual risk
remains.
The Board has started to phase out the use of these
companies.
As well as the specific contingent assets and liabilities set
about above, the Group's principal risks and uncertainties are set
out in the statement above.
26 Pensions
The Groups operates a defined contribution pension scheme in the
UK and Australia. There were no outstanding or prepaid
contributions at either the beginning or end of the year.
27 Commitments under operating leases
As at 31 December 2010 the Group had total commitments under
non-cancellable operating leases as set out below:
31 December 31 December 31 December 31 December
2010 2009 2010 2009
Land and buildings
(GBP'000) Other (GBP'000)
Operating Lease
commitments payable:
Under 1 year 1,734 727 50 102
1 - 2 years 1,444 - 96 -
2 - 5 years 3,093 1,392 30 100
Over 5 years 291 404 1 -
6,562 2,523 177 202
The leases on the land and buildings range from six months to
ten years in length. The operating leases described as "other" are
mainly for cars and normally have a lifetime of three years.
28 Related party transactions
Year ended Year ended
31 December 31 December
2010 2009
Purchased Purchased
from/ (sold from/ (sold
to) to)
GBP'000 GBP'000
Trading transactions
MyWorkforce Ltd - 24
Nationwide Accreditation Bureau
Company Ltd 199 503
Montagu Nursing Agencies Ltd - (21)
Redwood Group Ltd* 200 (151)
Netengines Holdings Ltd (20) (17)
Total 379 338
* Redwood Group Limited's new name is Dalecorp
Ltd
31 December 31 December
2010 2009
Amounts owed Amounts owed
by/(to) related by/(to) related
parties parties
GBP'000 GBP'000
MyWorkforce Ltd - -
Nationwide Accreditation Bureau
Company Ltd (52) (46)
Montagu Nursing Agencies Ltd - -
Redwood Group Ltd (65) 211
Netengines Holdings Ltd - 13
Total (117) 178
MyWorkforce Limited, Nationwide Accreditation Bureau Company
Limited, Montagu Nursing Agencies Ltd, Redwood Group Ltd and
Netengines Holdings Ltd are related parties to the Group. One of
the former Directors and a significant shareholder of the Company
is a close family member of JS Cariss, who owns a majority of the
share capital of these companies. Redwood Group Ltd is also partly
owned by that Director.
During the year, as noted in the acquisitions note, the Group
purchased the trade and assets of Redwood Health Ltd from the
previous owners. Redwood Health Ltd's name has since been changed
to Dancorp Ltd. This transaction was subject to shareholder
approval as required under AIM rules and is currently being
reviewed by the Board, as explained below.
As noted in Note 14, the Company entered a Heads of terms dated
7 May 2010 to acquire certain assets from Redwood Health Ltd for a
total consideration of GBP6.65m. This consisted of GBP5m paid in
cash upon completion and a deferred earn-out of a maximum of
GBP1.65m. Redwood Health Ltd was owned by Cardale Investments Ltd,
a company controlled by Mr John Cariss and a former Director of the
Company. The Company understands that this former Director resigned
from Cardale Investments Ltd in June 2010. The Company believes
that this resignation was not declared to shareholders in the July
2010 Circular which supported the Redwood asset purchase.
Subsequently, early in 2011, the Company changed the terms of
the deferred earn-out purchase terms into a deferred consideration
sum payable in February and May 2011. The Board have been in
discussion over this final payment with the Administrator of
Redwood Health Ltd.
On the 20 August 2010 Healthcare Locums Plc was the beneficiary
of a GBP400,000 short term loan from Cardale Investments LLP, a
company controlled by Mr John Cariss. The loan was fully repaid on
6 September 2010 and was not subject to any interest or any other
cost.
Since the year end, on 24 January 2011 Healthcare Locums Plc
assigned the lease, which expires on 23 January 2020 of an office
in London to Cardale Investments LLP, a company controlled by Mr
John Cariss. There was a rent free period until 23 June included
within the transaction and the office' furniture, fixtures and
fittings, with a net book value of GBP20,000, that were owned by
Healthcare Locums Plc were transferred without charge to Cardale
Investments LLP.
29 Share option scheme
The Company has an employee share option scheme in place. The
share options in issue over ordinary shares of GBP0.10p as at 31
December 2010 were the following:
At 1 At 31 Exercise
January December price Expiry
2010 Granted Exercised Forfeited 2010 (Pence) date
No '000 No '000 No '000 No '000 No '000
Issued
Apr
2005 120 - - - 120 10.00 Apr 2015
Issued
Aug
2006 583 - - - 583 59.00 Aug 2016
Issued
Dec
2007 1,000 - - - 1,000 89.50 Dec 2017
Issued
May
2008 1,061 - (254) (41) 766 112.50 May 2018
Issued
June
2008 8 - - (8) - 105.00 Jun 2018
Issued
Sept
2008 1,000 - - - 1,000 124.00 Sep 2018
Issued
Nov
2008 500 - (500) - - 106.00 Nov 2018
Issued
Sept
2009 510 - - (60) 450 207.00 Sep 2019
Issued
Dec
2010 - 100 - - 100 98.50 Dec 2020
Total 4,782 100 (754) (109) 4,019
Non-employee share options in issue over the ordinary shares of
10p per share were the following:
At 1 At 31 Exercise
January December price Expiry
2010 Granted Exercised Forfeited 2010 (pence) date
No '000 No '000 No '000 No '000 No '000
Issued
Nov
2005 584 - (584) - - 55.00 Nov 2010
At 1 At 31 Exercise
January December price Expiry
2009 Granted Exercised Forfeited 2009 (pence) date
Issued
Nov
2005 584 - - - 584 55.00 Nov 2010
The vesting period for all employee share options issued during
2005 is one year. The vesting period for all share options issued
since 2006 is three years. None of the share options issued
contains any performance criteria parameters, and all are equity
settled.
The total number of employee share options exercisable at 31
December 2010 was 1,703,481 (2009: 703,481). The weighted average
exercise price for options exercisable as at 31 December 2010 was
73.44p (2009: 50.61p). The weighted average exercise price for all
options outstanding as at 31 December 2010 was 109.04p (2009:
110.39p).
For the share options exercised in 2010, the weighted average
share price at the date of exercise was 259.56p (2009: 58.91p). For
the share options granted in 2010, the weighted average share
exercise price was 98.5p (2009: 207.00p). For the share options
forfeited in 2010, the weighted average share price at the date of
forfeiture was 173.74p (2009: 66.21p).
For the remaining share options, the weighted average
contractual life of these options is 87 months (2009: 100
months).
In addition to the above employee share options, the Group has
also granted warrants to one of its lenders that grant the right to
the warrant holder to subscribe to the shares of the Company.
Please see Note 19 for details of these warrants.
Comparative information for 2009 for employee share options is
as follows:
At 1 At 31 Exercise
January December price Expiry
2009 Granted Exercised Forfeited 2009 (pence) date
No '000 No '000 No '000 No '000 No '000
Issued
Apr Apr
2005 121 - (1) - 120 10.00 2015
Issued
Aug Aug
2006 980 - (394) (3) 583 59.00 2016
Issued
Dec Dec
2007 1,000 - - - 1,000 89.50 2017
Issued
May May
2008 1,093 - - (32) 1,061 112.50 2018
Issued
June Jun
2008 8 - - - 8 105.00 2018
Issued
June Jun
2008 200 - - (200) - 59.00 2018
Issued
Sept Sep
2008 1,000 - - - 1,000 124.00 2018
Issued
Nov Nov
2008 500 - - - 500 106.00 2018
Issued
Sept Sep
2009 - 510 - - 510 207.00 2019
-------- --------- --------- -------- -------
Total 4,902 510 (395) (235) 4,782
-------- --------- --------- --------
In respect of these share based payments an expense has been
charged against the profits of the Group and the Company for the
year of GBP608,000 (2009: GBP464,000). Of this, GBP22,000 was
charged to finance expense as amortisation of fair value of
warrants issued to certain lender banks during the year. The fair
value of options granted during the year determined using the
Black-Scholes valuation model was GBP13,018 (2009: GBP449,200). The
significant inputs into the model were share prices of 98.63p
(2009: 230p), exercise price as in the table above, standard
deviation of expected share price of 47.3% (2009: 38.5%), option
life as disclosed in the table above, dividend yield of 2.82%
(2009: 1.22%), and annual risk-free interest rate of 2.25% (2009:
2%). The volatility measured at the annualised standard deviation
of daily changes in share price is based on statistical analysis of
daily share prices of comparable companies between November 2005
and December 2010 (2009: November 2005 and September 2009).
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR PLMATMBJBMJB
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