NETWORK GROUP HOLDINGS PLC
("NGH" or "the Company" or "the Group")
INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 MAY 2008
Network Group Holdings plc (AIM: NGH), the specialist recruitment and business
outsourcing group, today announces interim results for the six months ended 31
May 2008.
Highlights
Operational highlights
* Network is a diversified group of over 20 specialist recruitment and
outsourcing businesses.
* Two successful acquisitions of specialist recruitment businesses have been
made in the period.
* Acquisition of Pertemps People Development Group ("PPDG") for the sum of £
18.8m including costs, in April 2008.
* Today, we are announcing the disposal of PPDG for the sum of £22.6m,
together with a pre-completion dividend of £0.7m. NGH will retain £5.1m of
the proceeds, of which £1.6m will be used to discharge deferred
consideration and £0.8m to discharge costs.
* Strengthening of the Board, and in particular the appointment of Mr Tim
Watts as Chief Executive Officer.
Financial Highlights
* Revenues on a continuing basis of £29.2m of which £26.1m is derived from
specialist recruitment and £3.1m from business process outsourcing.
* Operating profits on a continuing basis of £0.9m.
* Earnings per share of 0.3p from continuing operations.
For further information please contact:
Network Group Holdings plc 01676 525 000
Christopher Ross, Chairman
www.networkgroupholdings.co.uk
Nominated Adviser 020 7492 4777
Dowgate Capital Advisers Limited
Tony Rawlinson / Simon Sacerdoti
Broker 020 7492 4799
Dowgate Capital Stockbrokers Limited
Dru Edmonstone, Head of Broking
CHAIRMAN'S STATEMENT
Overview
Good progress has been made by NGH in the six months to 31 May 2008 with the
broadening of our recruitment portfolio. Two new specialist recruitment
agencies were acquired in the period, R&L Executive Network Limited,
specialising in the placement of Sales and Marketing personnel into the fast
moving consumer goods market, and Cactus Search Limited, which places
individuals from a wide range of disciplines into the UK Call Centre market.
In the case of both of these acquisitions a 51% equity stake has been taken in
line with our partnering principles. In common with the rest of our recruitment
portfolio, the business leaders who hold the minority share interests are, in
the future, able to convert their share interests to shares in NGH according to
a pre-determined formula. We welcome our new partners to NGH.
Many of the businesses that NGH now owns came from the Pertemps Group of
Companies. The success of Pertemps was due in no small part to its partnering
principles that were overseen by Mr Tim Watts who I have recently welcomed to
this Board as our new Chief Executive Officer. Tim Watts first joined Pertemps
in 1970 and his considerable recruitment experience will be of benefit to the
business leaders of our operating companies, in what is now a more challenging
economic climate.
NGH carried out a major acquisition in April 2008 of Pertemps People
Development Group Limited ("PPDG"). The Board of NGH has today announced the
disposal of its interest in PPDG. The acquisition and disposal of the NGH
interest in PPDG is more fully described in the Chief Executive Officer's
statement included with this report. This includes information about why the
acquiror is better placed to take the PPDG business forward and the risks to us
of continued ownership. However, I detail below the financial benefit of sale
for NGH, as follows;
* The original acquisition contained an anti-embarrassment clause providing
that in the event of a sale of PPDG within a two year period the proceeds
of sale would be passed through to the original vendors and the shares
issued as part consideration bought back by NGH. In consideration for NGH
consenting to a sale within the two year period, NGH has received a sum of
£5.1m in cash. Set against this amount should be considered the sum of £
1.6m that will be payable by NGH as part of the original consideration on
the acquisition, and the costs of disposal estimated to be £0.8m. The £1.6m
will not be repayable until at least six months time and no interest will
accrue on this sum.
* The accounting profit for the disposal of NGH will be recorded in our full
year accounts to 30 November 2008. However at this stage the unaudited
profit is estimated to be £3.4m, before costs.
Interim Results
You will recollect in my first half yearly statement for the six months ended
30 June 2007 the difficulties with accounting comparatives for a group that was
re-structured in order to facilitate its admission to the AIM market on 17
September 2007. The interim results for the six month period to 31 May 2008
represent the start of the first period of reported trading where there has
been no re-organisation. However, we need to move away from reporting pro-forma
numbers and the comparatives that are included in accordance with the AIM rules
are the six months to 30 June 2007 (unaudited) and the eleven months to 30
November 2007 (audited). Whilst these comparatives are set out in compliance
with the AIM rules, they have not been referred to in either this statement or
that of the Chief Executive in the context of a comparison since the Board
believes that it provides no benefit to do so.
The comparative accounts included within these interim financial statements
have been re-stated to reflect the impact of the subsidiary shareholder
incentive schemes. Further details can be found at note 2 and note 7 to these
financial statements. The shareholder incentive schemes are fundamental to the
partnering principles upon which NGH was founded and the view of the Board is
that any equity conversions will benefit NGH, with it being highly probable
that such conversions will be discharged for NGH equity shares.
Since the audited financial statements for the eleven months to 30 November
2007 is one of the comparative statements, and includes earnings per share it
is worth re-iterating the comments made in my Chairman's statement for the 2007
annual review concerning earnings per share. The earnings per share for the
eleven months to 30 November 2007, as re-stated, is 5.5p, basic and 5.4p, fully
diluted, in relation to continuing activities. However, the results for that
period include exceptional profits from the disposal of subsidiary and
associated undertakings totalling £6.3m. Those exceptional profits were not
shown as discontinued activities since they relate to the disposal of
recruitment businesses (principally related to the pre-float re-construction),
and recruitment continues as one of our two core activities.
The six month income statement to 31 May 2008 is included with this report and
is split between continuing and discontinued operations. The discontinued
operations relate entirely to the results of PPDG. Whilst we will continue to
make acquisitions of specialist recruitment businesses on the shared equity
principles referred to above, I believe that the six month accounting period to
31 May 2008 provides a base period for which meaningful like for like
comparisons in underlying earnings can be made in the future.
A summary of the financial performance for the six months ended 31 May 2008, is
set out, as follows;
Revenue* £29.2m
Operating Profit* £0.9m
PBT* £0.6m
Additional profit arising on Discontinued Operations £0.4m
* The above amounts are based on the continuing operations of NGH.
Outlook
With just under three months remaining of our financial year, we remain
cautiously optimistic of continuing the progress throughout the second half and
into 2009. The challenging economic climate makes it difficult to predict with
certainty the outcome for the full year. However, we believe the NGH strategy
of a bias towards government funded revenues leaves us in a stronger position
than many of our peers.
Looking further ahead, we believe that the partnering principles upon which NGH
was founded, the businesses within our current portfolio, and the industry
experience of our Board, leads us to view the long term prospects positively.
With the UK economy still employing over 30m people and with long term
unemployment at only 820,000, these figures are substantially better than the
two previous economic downturns (only 26m employed in the last two economic
downturns), and leads us to believe in the resilience of our market sector.
Board Changes
In addition to welcoming Tim Watts to the Board, I welcome Nigel Bacon, who is
Finance Director of the Pertemps Group of Companies and who has replaced Paul
Doona as our Finance Director. Jon Smith has moved from the position of Chief
Executive Officer to Chief Operating Officer. Further details of these
appointments were made in our announcement of 26 June 2008. I also welcome Paul
Davis our Financial Controller and Nigel Dudley our Company Secretary to the
Board. Full details of these appointments were made in our announcements of 25
July 2008.
My thanks go to Colin Birchall the CEO of PPDG who leaves the Board today as a
consequence of the sale of PPDG.
I would like to thank all of our business leaders and staff for all of their
contributions.
Finally, I am delighted to have PPDG as an example of where the equity sharing
principles have come to fruition with management and employees sharing in 47.5%
of the proceeds in the form of cash and acquiror shares. It is examples such as
this that will attract growing businesses to join us in the future.
Christopher Ross
Chairman
CHIEF EXECUTIVE OFFICER'S STATEMENT
It gives me great pleasure to deliver my CEO statement following my appointment
to the Board.
It is with a feeling of déjà vu that I join the NGH Board since I have known
many of the business leaders of our operating companies for a considerable time
and I am privileged to once again work with them in the development of NGH.
Background
With today's announcement of the disposal of PPDG (our training and welfare to
work business) we have reverted back to being a diverse group of over 20
specialist recruitment and outsourcing businesses operating throughout the UK.
We continue to foster an entrepreneurial business style through our shared
equity model in the spirit of partnership, recognising the importance of our
people.
The financial benefit derived to NGH from the disposal of PPDG will help to
progress the strategy of developing NGH.
Financial and Operational Review
Overall the business performance of the continuing operations in the six months
to 31 May 2008 and the current performance, meets our expectations. I set out
below the turnover and operating profit for the six months ended 31 May 2008
for each of our two divisions. Further detail is provided concerning the
individual sectors of our recruitment division.
Six months ended 31 May 2008 Turnover % Operating
£000's profit
£000's
Professional recruitment 4,132 14.2 564
Technical recruitment 14,131 48.4 293
Public sector recruitment 7,617 26.1 18
Recruitment total 25,880 88.7 875
Business outsourcing 3,108 10.6 605
Head office 197 0.7 (537)
----------- ----------- -----------
Total 29,185 100.0 943
Note the total operating profit shown above of £943,000 excludes an
amortisation charge of £37,000. Operating profit is shown in the income
statement as £906,000.
Professional Recruitment Sector
Revenue for the six months ended 31 May 2008 was £4.1m representing 16.0% of
the recruitment division turnover and 14.2% of total turnover. The operating
profit for the same period was £0.6m, representing 38.1% of total operating
profit, before head office deficits.
The sales & marketing and health & safety market sectors have been buoyant.
However, the slowdown in the property market has impacted on the demand for
commercial and property lawyers, resulting in a below expectation performance
from our legal recruitment business. However, following a recent re-structuring
of our legal recruitment business we anticipate that it will, nevertheless,
meet our full year expectations.
The professional recruitment sector has benefited from our two recruitment
acquisitions in the period, referred to in the Chairman's statement. Both of
these acquisitions have been profitable since joining NGH and have been
successfully integrated.
Technical Recruitment Sector
Revenue for the six months ended 31 May 2008 was £14.1m representing 54.6% of
the recruitment division turnover and 48.4% of total turnover. The operating
profit for the same period was £0.3m, representing 19.8% of total operating
profit, before head office deficits.
The businesses comprising the technical recruitment sector operate in diverse
markets, with a strong bias towards temporary and contract placements. Our
businesses specialising in rail and IT sectors have performed well. However,
the professional construction market has proved more challenging, with a
collapse in demand for professionals associated with the housing industry.
Nevertheless, some success has been achieved in recruiting for consulting firms
involved in rail and infrastructure projects such as the forthcoming London
Olympics, and also in overseas placements.
Public Sector Recruitment
Revenue for the six months ended 31 May 2008 was £7.6m representing 29.4% of
the recruitment division turnover and 26.1% of total turnover. The operating
profit for the same period was £0.02m, representing 1.2% of total operating
profit, before head office deficits.
Profitability from this sector has been below expectations. This reduced
profitability has in part been reduced by investment in new locations for our
Healthcare business that has begun to show sustained profitability, following
significant growth in its turnover. In addition, the reduced profitability is
partly reflected by the investment in a new branch for our Education business.
The low profitability in this area reflects our focus on investment as part of
our deliberate strategy to engage in more Public Sector work. This has been
rewarded with some longer term Government funded contracts wins.
Business Process Outsourcing
Revenue for the six months ended 31 May 2008 was £3.1m representing 10.6% of
total turnover. The operating profit for the same period was £0.6m,
representing 40.9% of total operating profit, before head office deficits.
The return on our Business Process Outsourcing Division remains good, supported
to a large extent by the growing temporary recruitment revenues of its major
customer, and significant external contract wins.
The outsourcing division continues to invest in process improvements to support
and grow its customer base.
Head Office Costs
Following the admission to AIM in the second half of 2007, we have begun to
re-structure some of our overhead cost base. This has resulted in some one-off
costs in the region of £0.06m incurred during the six months ended 31 May 2008.
Funding
Following the disposal of PPDG, the group has revised its facilities with its
financier, which will continue to provide the working capital for the group.
Acquisition and Post Period Disposal of PPDG
An announcement will follow later today with full details of the PPDG disposal.
This will address the acquisition of PPDG and why the Board has subsequently
decided to dispose of its interests and for the anti-embarrassment clause to be
invoked. The announcement deals with financial effects on NGH and, in
particular, the effect on earnings per share since the mechanism to give effect
to the anti-embarrassment clause will involve NGH buying back approximately 44%
of its own shares that were provided as part consideration in the PPDG
acquisition.
Group Strategy
Following the disposal of PPDG the group remains focussed upon the growth of
its specialist recruitment businesses, both organically and by acquisitions. In
addition, we see an expanding market for outsourcing focussed on the SME
sector, where clients seek to drive profit through cost reduction in an
economic climate where top line growth becomes increasingly difficult.
I anticipate that in the current economic climate we will be presented with
further opportunities from growing businesses that relate to our equity sharing
model. The disposal of PPDG means that we are ready to embrace situations where
vendors are looking to take a mixture of cash and shares to assist them with
the next stage of growing their business.
Finally I would like to extend my thanks to all the employees of NGH. The PPDG
example where some 50 employees and management have benefited in the disposal
and rollover of their interests into the acquiror confirms the strengths of the
principles under which we operate that will continue to attract growing
businesses to join us.
In 1999, I backed Colin Birchall to form as a start up, what is now PPDG.
Today, we see it moving to the next stage of its development at a consideration
of £22.6m for 52.5% of the business. I wish Colin, and all of his staff, the
very best for the future.
Tim Watts
Chief Executive Officer
INDEPENDENT REVIEW REPORT TO NETWORK GROUP HOLDINGS PLC
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 31 May
2008 which comprises the income statement, the balance sheet, the statement of
changes in equity, the cash flow statement and related notes 1 to 10. We have
read the other information contained in the half-yearly financial report and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of financial
statements.
This report is made solely to the company in accordance with International
Standard on Review Engagements 2410 issued by the Auditing Practices Board. Our
work has been undertaken so that we might state to the company those matters we
are required to state to them in an independent review report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing the
half-yearly financial report in accordance with the AIM Rules of the London
Stock Exchange.
As disclosed in note 2, the annual financial statements of the group are
prepared in accordance with IFRSs as adopted by the European Union. The
condensed set of financial statements included in this half-yearly financial
report have been prepared in accordance with the accounting policies the group
intends to use in preparing its next annual financial statements.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 May 2008 is not prepared, in all
material respects, in accordance with the AIM Rules of the London Stock
Exchange.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditor
16 September 2008
Birmingham, UK
CONSOLIDATED INCOME STATEMENT
For the six months ended 31 May 2008
Note Unaudited 6 Unaudited 6 Audited 11
months months months
ended 31 ended 30 ended 30
May 2008 June 2007 November
£000 (restated - 2007
note 2) £000
£000
Continuing Operations
Revenues 29,185 26,218 51,660
Cost of sales (17,384) (14,633) (29,559)
---------- ---------- ----------
GROSS PROFIT 11,801 11,585 22,101
Administrative expenses (10,918) (11,074) (23,759)
Impairment of goodwill arising on - - (39)
associates
Profit on partial disposal of - - 252
subsidiaries
Profit on disposal of subsidiary - - 4,980
undertakings
Profit on disposal of associate - - 1,046
undertakings
Share based payment costs (14) - (80)
---------- ---------- ----------
Total administrative expenses (10,932) (11,074) (17,600)
Share of results of associates 37 158 72
---------- ---------- ----------
OPERATING PROFIT 906 669 4,573
Investment revenues 26 9 46
Finance expenses (333) (600) (993)
---------- ---------- ----------
PROFIT BEFORE TAX 599 78 3,626
Tax on profit on ordinary (266) (123) (288)
activities
---------- ---------- ----------
PROFIT / (LOSS) FOR THE PERIOD 333 (45) 3,338
FROM CONTINUING OPERATIONS
Discontinued Operations
Profit for the period from 3 393 1,166 3,360
discontinued operations
---------- ---------- ----------
PROFIT FOR THE PERIOD 726 1,121 6,698
---------- ---------- ----------
Attributable to:
Equity holders of the parent 455 1,206 6,321
Minority interest 271 (85) 377
---------- ---------- ----------
726 1,121 6,698
---------- ---------- ----------
Earnings per share (pence) 5
From continuing operations
Basic 0.3p 0.1p 5.5p
Diluted 0.3p 0.1p 5.4p
From continuing and discontinued
operations
Basic 0.6p 2.2p 11.6p
Diluted 0.6p 2.2p 11.5p
CONSOLIDATED BALANCE SHEET
As at 31 May 2008
Unaudited Unaudited Audited as
as at 31 as at 30 at 30
May 2008 June 2007 November
£000 (restated - 2007
note 2) (restated -
£000 note 2)
£000
Note
ASSETS
NON-CURRENT ASSETS
Goodwill 3,589 3,269 2,305
Other intangible assets 178 261 148
Property, plant and equipment 605 644 656
Interest in associates 114 82 -
Deferred tax asset 70 36 70
---------- ---------- ----------
4,556 4,292 3,179
---------- ---------- ----------
CURRENT ASSETS
Trade and other receivables 12,720 21,441 12,758
Cash and cash equivalents 1,419 576 1,603
Assets held for sale 3 28,515 - -
---------- ---------- ----------
42,654 22,017 14,361
---------- ---------- ----------
TOTAL ASSETS 47,210 26,309 17,540
---------- ---------- ----------
LIABILITIES & EQUITY
CURRENT LIABILITIES
Trade and other payables (7,203) (12,940) (7,379)
Current tax liabilities (399) (277) (405)
Obligations under finance - (4) -
leases
Bank overdrafts and loans (15) (18,203) (30)
Financial liabilities 7 (2,523) - (2,115)
Liabilities directly associated 3 (8,941) - -
with assets classified as held
for sale
---------- ---------- ----------
(19,081) (31,424) (9,929)
NON-CURRENT LIABILITIES
Bank loans (11,032) (45) (9,539)
Other loans (1,600) - -
Financial liabilities 7 (8,240) - (1,884)
Obligations under finance - (10) -
leases
---------- ---------- ----------
(20,872) (55) (11,423)
EQUITY
Share capital (105) (54) (57)
Share premium (16,691) - (128)
Share based payment reserve (109) - (80)
Merger reserve (1,001) (502) (743)
Retained earnings 874 5,965 1,091
---------- ---------- ----------
(17,032) 5,409 83
Minority interest (988) (239) (270)
Other reserve 10,763 - 3,999
---------- ---------- ----------
Total minority interest 9,775 (239) 3,729
---------- ---------- ----------
TOTAL LIABILITIES & EQUITY (47,210) (26,309) (17,540)
---------- ---------- ----------
CONSOLIDATED CASHFLOW STATEMENT
For the six months ended 31 May 2008
Note Unaudited 6 Unaudited 6 Audited 11
months months months ended
ended 31 ended 30 30 November
May 2008 June 2007 2007
£000 £000 £000
NET CASH (USED IN) / GENERATED BY 9 (403) (1,703) 6,817
OPERATING ACTIVITIES
INVESTING ACTIVITIES
Interest received 26 23 61
Dividends received from - 61 61
associates
Proceeds on disposal of assets - 88 112
held for resale
Proceeds on disposal of - - 1,000
investment in associate
undertakings
Proceeds from disposal of - 1,770 1,864
subsidiary undertakings
Proceeds on disposal of property, - - 16
plant and equipment
Purchases of property, plant and (149) (177) (439)
equipment
Acquisition of subsidiary (1,087) (50) (378)
undertakings
Investment in associate - - (50)
undertakings
---------- ---------- ----------
NET CASH (USED IN) / FROM (1,210) 1,715 2,247
INVESTING ACTIVITIES
---------- ---------- ----------
FINANCING ACTIVITIES
Dividends paid to minority (49) - (240)
interests
Repayments of obligations under - (2) (16)
finance leases
Repayments of borrowings (7) (1,526) (3,063)
New bank loans raised 1,500 430 9,930
(Decrease) / increase in bank (15) 1,108 (15,541)
overdrafts
Proceeds on issue of shares - - 915
---------- ---------- ----------
NET CASH FROM / (USED IN) 1,429 10 (8,015)
FINANCING ACTIVITIES
---------- ---------- ----------
NET (DECREASE) / INCREASE IN CASH (184) 22 1,049
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT 1,603 554 554
BEGINNING OF PERIOD
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END 1,419 576 1,603
OF PERIOD
---------- ---------- ----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the six months ended 31 May 2008
Unaudited 6 Unaudited 6 Audited 11
months months months ended
ended ended 30 30 November
June 2007 2007
31 May 2008 £000 (restated -
£000 note 2)
£000
Opening equity (83) (6,615) (6,615)
New shares issued 16,611 - 915
Expenses of issue of shares - - (784)
Share based payment costs 49 - 80
Profit for period 455 1,206 6,321
---------- ---------- ----------
Closing equity 17,032 (5,409) (83)
---------- ---------- ----------
MINORITY INTERESTS
Opening balance (3,729) 190 190
Equity conversion mechanism (see note (6,764) - (3,999)
7)
Share of profit / (loss) for the period 271 (85) 377
Other movements 447 134 (297)
---------- ---------- ----------
Closing balance (9,775) 239 (3,729)
---------- ---------- ----------
NOTES TO THE INTERIM REPORT
For the six months ended 31 May 2008
1. GENERAL INFORMATION
(a) The Interim Report and financial statements were approved by the Board
of Directors on 16 September 2008.
(b) A copy of the Interim Statement is available for download from the
Company's website. Copies will also be sent to all shareholders and copies
are available for collection indefinitely from the Company's Registered
Office at the address below:
Network Group Holdings plc
Meriden Hall
Main Road
Meriden
Warwickshire
CV7 7PT
Telephone: +44 (0) 1676 525300
www.networkgroupholdings.co.uk
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The presentation of the balance sheet has been changed, to present liabilities
and equity in total, as the directors believe this presentation is more
appropriate to the business.
Restatement of prior year figures
The balance sheet as at 30 November 2007 has been restated to reflect the
impact of the group's equity conversion mechanism, which commenced in 2007. The
impact on the 30 November 2007 figures is to include a current liability of £
2,115,000 and non-current liability of £1,884,000 with a corresponding entry to
other reserves. There is no restatement of the 30 June 2007 figures in this
respect. For further information refer to note 7.
The income statement for the 6 months ended 30 June 2007 has been restated to
present the results of the Support (schools) and Software segments as
discontinued operations. These segments were presented as discontinued
operations in the audited financial statements as at 30 November 2007 and as
such there is no restatement required to the figures for the 11 months ended 30
November 2007.
The share premium, merger reserve and retained earnings as at 30 June 2007 have
been restated in line with the principles under which the comparative figures
were presented in the audited statutory financial statements as at 30 November
2007.
Basis of accounting
The consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs). The consolidated financial
statements have also been prepared in accordance with IFRSs adopted by the
European Union and therefore the Group financial statements comply with Article
4 of the EU IAS Regulation.
The consolidated financial statements have been prepared on the historical cost
basis. The principal accounting policies are set out below.
The financial information for the period ended 30 November 2007 does not
constitute statutory accounts as defined by s240 of the Companies Act 1985. A
copy of the statutory accounts for the period ended 30 November 2007, prepared
under IFRS, on which the auditors gave an unqualified opinion which did not
contain a statement made under s237(2) or s237(3) of the Companies Act 1985,
has been filed with the Registrar of Companies.
Basis of consolidation
The consolidated financial information includes the results, cash flows and
assets and liabilities of Network Group Holdings plc and the entities under its
control (its subsidiaries). Control is achieved where Network Group Holdings
plc has the power to govern the financial and operating policies of an investee
entity so as to obtain benefits from its activities.
Minority interests in the net assets of the consolidated subsidiaries are
identified separately from the Network Group Holdings plc equity therein.
Minority interests consist of the amount of those interests at the date of the
original business combination (see below) and the minority's share of changes
in equity since the date of the combination. Losses applicable to the minority
in excess of the minority's interest in the subsidiary's equity are allocated
against the interests of Network Group Holdings plc.
Accounting for business combinations
Network Ventures Limited was party to a demerger transaction in 2004, as a
result of which a merger reserve was created.
During 2007, Network Ventures Limited acquired the entire share capital of ESOS
Group Limited by way of a share for share exchange. Subsequently, Network Group
Holdings plc acquired the entire share capital of Network Ventures Limited by
way of a share for share exchange.
IFRS 3 `Business Combinations' does not apply to business combinations
involving entities under common control. In the opinion of the Directors, the
substance of both transactions is that of a Group reorganisation and that the
rights of the shareholders at the time were not affected by the transaction and
therefore the principles of merger accounting under UK GAAP and FRS 6
`Acquisitions and Mergers' have been applied in the absence of specific IFRS
guidance. The financial information has therefore been prepared to include the
results and cash flows of those companies that comprised the Group of Network
Group Holdings plc as if the Network Group Holdings plc group had been in
existence since 1 January 2007.
Except for the transactions described above, the acquisition of subsidiaries is
accounted for using the purchase method. The cost of the acquisition is
measured at the aggregate of fair values, at the date of exchange, of assets
given, liabilities incurred or assumed, and equity instruments issued by
Network Group Holdings plc in exchange for control of the acquired business,
plus any costs directly attributable to the business combination. The
acquiree's identifiable assets, liabilities and contingent liabilities that
meet the conditions for recognition under IFRS 3 `Business Combinations' are
recognised at their fair value at the acquisition date except for non-current
assets (or disposal Groups) that are classified as held for sale in accordance
with IFRS 5 `Non-current Assets Held for Sale and Discontinued Operations',
which are recognised and measured at fair value less costs to sell. Network
Group Holdings plc has elected not to apply IFRS 3 `Business Combinations' to
business combinations that took place before 1 January 2004.
Goodwill arising on acquisition is recognised as an asset and initially
measured at cost, being the excess of the cost of the business combination over
the Group's interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities recognised. If, after reassessment, the
Group's interest in net fair value of the acquiree's identifiable assets,
liabilities and contingent liabilities exceeds the cost of the business
combination, the excess is recognised immediately in the Income Statement.
The interest of minority shareholders in the acquiree is initially measured at
the minority's proportion of the net fair value of the assets, liabilities and
contingent liabilities recognised.
Non-current assets held for sale
Non-current assets (and disposal Groups) classified as held for sale are
measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and disposal Groups are classified as held for sale if their
carrying amount will be recovered through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale is
highly probable and the asset (or disposal Group) is available for immediate
sale in its present condition. Management must be committed to the sale which
should be expected to qualify for recognition as a completed sale within one
year from the date of classification.
Key sources of estimation uncertainty
In the application of the Group's accounting policies, the directors are
required to make judgements, estimates and assumptions about the carrying
amounts of assets and liabilities that are not readily apparent from other
sources. The estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant. Actual results
may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods. The key assumptions concerning the future, and other key
sources of estimation uncertainty at the balance sheet date, 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.
Equity conversion mechanism
The financial liability arising from the group's equity conversion mechanism is
calculated based on the latest actual profit figures representing the
directors' best estimate of the liability available for each relevant
subsidiary undertaking discounted back to present value for those options which
cannot be exercised within the next 12 months. At each balance sheet date the
fair value is recalculated based on the latest actual figures available.
3. SEGMENTAL ANALYSIS
Business Segments
For management purposes the Group is currently organised into the following
operating divisions - Recruitment Services and Business Process Outsourcing.
Since the balance sheet date, the Group has disposed of the subsidiary
undertakings that operated in the sector of Training and welfare to work (note
10). The results of this segment are presented as discontinued operations in
the income statement for the 6 months ended 31 May 2008 and as assets held for
sale and liabilities directly associated with assets classified as held for
sale in the balance sheet as at 31 May 2008. This segment was not part of the
Group in prior periods and therefore the discontinued operations of prior
periods do not include any results of this segment.
The profit from discontinued operations for the 6 months ended 30 June 2007 and
11 months ended 30 November 2007 represent the results of the Support (schools)
and Software segments both of which were disposed of in 2007.
Geographical Segments
The Group has not provided an analysis on a geographical basis as substantially
all turnover arose in the United Kingdom.
4. TAX
Income tax for the 6 months ended 31 May 2008 is charged at 29.3% (6 months
ended 30 June 2007: 30%, 11 months ended 30 November 2007: 30%), representing
the best estimate of the average annual income tax rate expected for the full
period, applied to the pre-tax income of the six month period.
5. EARNINGS PER ORDINARY SHARE
From continuing and discontinued operations
The calculation of the basic and diluted earnings per share is based on the
following data.
Unaudited 6 Unaudited 6 Audited 11
months ended months ended months ended
30 June 2007 30 November
31 May 2008 (restated - 2007
£000 note 2) £000
£000
Earnings
Earnings for the purpose of basic 455 1,206 6,321
earnings per share being net profit
attributable to equity holders of
the parent and Earnings for the
purposes of diluted earnings per
share
No. No. No.
Number of shares
Weighted average number of ordinary 72,736,000 53,800,000 54,376,000
shares for the purpose of basic
earnings per share
Effect of dilutive potential 362,000 - 464,000
ordinary shares - share options
Weighted average number of ordinary 73,098,000 53,800,000 54,840,000
shares for the purposes of diluted
earnings per share
The potential ordinary shares that would be issued under the equity conversion
mechanism described in note 7 have not been included in the diluted earnings
per share calculation due to the uncertainty over the number of shares that
would be issued and the timing of these shares being issued, in accordance with
IAS 33: Earnings per share.
From continuing operations
Unaudited 6 Unaudited 6 Audited 11
months ended months ended months ended
30 June 2007 30 November
31 May 2008 (restated - 2007
£000 note 2) £000
£000
Net profit attributable to equity 455 1,206 6,321
holders of the parent
Adjustments to exclude profit for (263) (1,155) (3,349)
the period from discontinued
operations
Earnings from continuing operations 192 51 2,972
for the purpose of basic earnings
per share excluding discontinued
operations and Earnings from
continuing operations for the
purpose of diluted earnings per
share excluding discontinued
operations
The profit for the period has been adjusted for minority interest.
The denominators used are the same as those detailed above for both basic and
diluted earnings per share from continuing and discontinued operations.
The earnings per share from continuing operations for the 11 months ended 30
November 2007 includes the profit on disposal of a number of recruitment
agencies sold as part of the pre-flotation restructuring.
From discontinued operations
Basic 0.3p 2.1p 6.1p
Diluted 0.3p 2.1p 6.1p
6. DIVIDENDS
The directors have not recommended the payment of a dividend in any period.
7. FINANCIAL LIABILITIES
The current liability of £2,523,000 (30 June 2007: £nil, 30 November 2007
restated: £2,115,000) and the non-current liability of £8,240,000 (30 June
2007: £nil, 30 November 2007 restated: £1,884,000) arise from the application
of IAS 39: Financial Instruments: Recognition and Measurement in respect of the
Group's equity conversion mechanism, whereby the minority shareholders of
subsidiary undertakings are able to transfer their minority shareholdings to
Network Group Holdings plc in exchange for equity NGH shares or cash. The
choice of consideration is at the discretion of the directors of Network Group
Holdings plc. It is the current intention of the directors to discharge the
liability in equity shares and not by way of payment in cash.
The liability is calculated based on a multiple of historical profits of the
relevant subsidiary undertaking, with the multiple no greater than the price
earnings ratio of Network Group Holdings plc at the time of conversion.
Included in financial liabilities at 31 May 2008 is £5,868,000 (30 June 2007: £
nil, 30 November 2007 restated: £nil) in non-current liabilities in respect of
Pertemps People Development Group Limited, which has been disposed of following
the balance sheet date. On disposal, the option to convert does not pass to the
purchaser, as it is not assignable. As such, this liability has been cancelled
against reserves following the balance sheet date.
Prior to 31 May 2008, notices were received from four individuals in respect of
the equity conversion mechanism. This resulted in the issue of 654,000 new NGH
shares at a value of £258,000 following the balance sheet date. This financial
liability is included in current liabilities at 31 May 2008.
If full conversion of all minority subsidiary shareholdings subject to these
arrangements into equity shares of Network Group Holdings plc had taken place
at the start of the period, the profit attributable to equity shareholders of
NGH would be increased.
8. NET ASSETS
At 31 May 2008, the net assets / (liabilities) of the group was £7,257,000 (30
June 2007: £(5,170,000), 30 November 2007 restated: £(3,812,000)).
The net assets at 31 May 2008 are impacted by a total liability of £10,763,000
(30 June 2007: £nil, 30 November 2007 restated: £3,999,000) in respect of the
equity conversion mechanism as described in note 7. The directors currently
expect this liability to be discharged by way of equity share capital, and not
through the payment of cash. Therefore, the directors believe it is appropriate
to also present the net assets / (liabilities) excluding this figure. The net
assets / (liabilities) at 31 May 2008, excluding the liability for the equity
conversion mechanism were £18,020,000 (30 June 2007: £(5,170,000), 30 November
2007 restated: £187,000)
If full conversion of all minority subsidiary shareholdings subject to the
arrangements into equity shares of Network Group Holdings plc had taken place
at the balance sheet date, net assets of the Group would have increased by a
minimum of £10,763,000 (30 June 2007: £nil, 30 November 2007 restated: £
3,999,000).
9. NOTES TO THE CONSOLIDATED CASHFLOW STATEMENT
10.
Unaudited 6 Unaudited 6 Audited 11
months ended months ended months ended
31 May 2008 30 June 2007 30 November
2007
£000 £000 £000
Operating activities
Operating profit from:
- Continuing operations 906 669 4,573
- Discontinued operations - 1,152 3,345
---------- ---------- ----------
906 1,821 7,918
Adjusted for:
Share of operating profit in (37) (158) (33)
associates including goodwill
impairment
Depreciation of property, plant and 189 222 378
equipment
Amortisation of intangible assets 37 140 217
Profit on partial disposal of - - (252)
subsidiaries
Profit on disposal of subsidiary - (1,307) (4,980)
undertakings
Profit of disposal of associate - - (1,046)
undertakings
Movement in assets held for sale 429 - -
Profit on disposal of discontinued - - (3,487)
operations
Share based payment costs 14 - 80
---------- ---------- ----------
Operating cash flows before 1,538 718 (1,205)
movements in working capital
Decrease / (increase) in receivables 51 (2,567) 5,334
(Decrease) / increase in payables (1,303) 570 3,832
---------- ---------- ----------
Cash generated by / (used in) 286 (1,279) 7,961
operations
Corporation tax (paid) / received (364) 138 (118)
Interest paid (325) (562) (1,026)
---------- ---------- ----------
Net cash (used in) / generated by (403) (1,703) 6,817
operating activities
---------- ---------- ----------
10. EVENTS AFTER THE BALANCE SHEET DATE
Following the balance sheet date, the group disposed of its shareholding in
Pertemps People Development Group Limited (PPDG) for £22.6m, consisting of £
14.9m of cash and £7.7m of shares in the acquiror, a private company in
Australia. This generated an estimated profit on disposal of £3.4m before
costs.
As part of the acquisition of PPDG in April 2008, an anti-embarrassment clause
existed which enables the original vendor shareholders to receive a significant
element of the consideration, in exchange for the 46,429,000 Network Group
Holdings plc shares issued on the acquisition. The directors are currently
investigating the most appropriate method for discharging the
anti-embarrassment clause.
Upon disposal, the anti-embarrassment clause results in a current liability of
approximately £18.2m with a corresponding debit to reserves.