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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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Healthcare Loc | LSE:HLO | London | Ordinary Share | GB00B0MD8242 | ORD 10P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.75 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
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0 | 0 | N/A | 0 |
TIDMHLO
RNS Number : 5482A
Healthcare Locums PLC
02 April 2012
Healthcare Locums plc ("HCL" or "the Company)
Group Unaudited Preliminary Results for the Year ended 31 December 2011
Healthcare Locums plc is today releasing its unaudited preliminary results for the year ended 31 December 2011.
Enquiries:
Healthcare Locums Stephen Burke, plc CEO 020 7451 1451 Sue Bygrave, CFO 020 7451 1451 Investec Gary Clarence 020 7597 5970 Patrick Robb 020 7597 5970 David Rydell Emma Kent Duncan Mayall Pelham Bell Pottinger Charlotte Offredi 020 7861 3232
Contents:
Chairman's Statement
Operational Review
Financial Review
Principal Risks and Uncertainties
Corporate Governance
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes
Chairman's Statement
Without doubt, 2011 has been the most challenging year in the history of Healthcare Locums plc.
In January, the Company announced the suspension of its shares following the discovery of serious accounting irregularities and that the financial performance of the UK business was well below the then market expectations. The UK business was not generating free cash and the business model had not been adapted sufficiently to accommodate changing market conditions. The investigation of the irregularities took several months to complete and led to the restatement of the 2009 accounts when the 2010 accounts were published in August. During the course of the investigations it became clear that the capital structure of the Group and the costs of servicing its debt were unsustainable. In July, the Board announced the disposal of the Homecare Division of Healthcare Australia ("Homecare") which raised approximately GBP20.3m in cash that was used to reduce Group debt. This was insufficient to restore financial viability and the Board sought a capital injection and re-negotiated bank facilities. The Refinancing was approved at a General Meeting of the Company in September following which the Company's shares were re-admitted to trading.
All of these issues had to be managed against a background of difficult market conditions, especially relating to supplies to the UK's major customer, the National Health Service ("NHS"), which was implementing its own stringent cost saving measures.
The sale of Homecare and the Refinancing completed in September re-structured the balance sheet and removed a major source of risk to the on-going financial viability of the Group. At 31 December 2011, the Group had bank and finance lease debt net of cash of GBP23.4m. In addition, the Group has a GBP10.2m zero-coupon loan note that is not repayable in normal circumstances until 30 September 2021. This is stated at GBP2.6m on the balance sheet at 31 December 2011.
Board and Governance
During the year, the entire Board was replaced. Alan Walker the Chairman, the Deputy Chairman Alasdair Liddell, the Executive Vice Chairman Kate Bleasdale, the Chief Financial Officer Diane Jarvis, and the Chief Operating Officer Mo Dedat had all been removed from or left the Board by the end of March. David Henderson and I were appointed to the Board in February and we were joined by Stephen Burke and Andy McRae as Group CEO and Managing Director of HCA in Australia respectively in May. Colin Whipp served as Interim Finance Director from May until September and Bill Jessup served in that capacity from October until March 2012. Mark Andrews, formerly a partner with law firm SNR Denton, joined the Board as a non-executive director in October and Sue Bygrave was appointed as the permanent Chief Financial Officer on 6 February 2012. We now have a settled and experienced Board comprising three executive directors and three non-executive directors. Martin Hughes was appointed as Company Secretary in March 2011.
Under the former Board, corporate governance had been extremely poor and an immediate action of the new Board has been to improve the policies and procedures relating to the governance of the Company. We aspire to have the sort of governance regime that would be found in a well run FTSE 250 company. We have not completed this programme yet but significant steps have been made.
The Board has appointed new auditors (Deloitte), lawyers (SNR Denton) and Nominated Advisor and Broker (Investec) and remuneration advisors (PwC) and now has a team of advisors that are well able to guide the Board and the Company in the future.
Strategy
Following the successful Refinancing the new team set about ensuring the stabilisation of the business after what had been a period of unprecedented disruption. In the UK, the transformation of the Company to one that puts the satisfaction of its customers' requirements at the heart of its business is well underway. Provision of Locums to the NHS through existing framework agreements is now the normal way of doing business. We believe that a quality led offering with pricing transparency is the best way of building a long-term relationship with the NHS and we have invested in people, processes and systems to promote that transparency and to improve standards of clinical compliance. We are also investing in software-led solutions - HCL Clarity - that will deliver significant savings to our customers by providing visibility and control to reduce the cost of agency spend and optimise the substantive workforce, without compromising the quality of care. In Australia, opportunities for organic growth exist, in particular, by the further development of our nursing agency business in the Eastern states and the roll out of the existing doctor locum business nationally. With the opportunities available in these two sectors we no longer see the allied health professionals market as a priority for expansion in Australia. We can now concentrate on executing the strategy to grow the business, both in the UK and Australia, and thereby generate acceptable financial returns for our shareholders.
The growth strategy will be underpinned by strong operational and cost control. During the latter part of 2011 we made some important appointments of senior leaders in UK business development, IT, talent and people management and the operating divisions in the UK and Australia. Although this has increased costs, it was essential to build a widely skilled management team that is capable of delivering the Company's strategic vision. During 2012 we will be rolling out a new UK front-office IT system capable of delivering real-time accurate management information and embedding operational and compliance controls. Once implemented, this system, known as Itris, is expected to make a meaningful impact on net margins.
Results for year ended 31 december 2011
The revenue for the year was GBP227.1m (2010: GBP154.9m) and the loss from continuing operations before tax was GBP12.9m (2010: GBP63.6m). The adjusted earnings, before interest, tax, depreciation, amortisation, highlighted items and share based charges or credits increased from a loss of GBP0.1m in 2010 to a profit of GBP5.9m in 2011.
The results for 2011 are analysed in full in the Financial Review. These include the first full-year contribution from our Australian businesses acquired in 2010. The results of the Homecare Division of Healthcare Australia have been shown as discontinued operations. Both 2011 and 2010 results include items that have been highlighted in the Consolidated Statement of Comprehensive Income to show the underlying performance of the business. There is a restatement of 2010 balance sheet in relation to HCA acquisition accounting and an impairment of the UK Social Care business. These are accounting restatements with no ongoing cash impact.
Dividends
Currently we are not able to pay dividends as we have negative distributable reserves and our banking arrangements prohibit us from declaring dividends until the outstanding amount under the Syndicated Facility Agreement has been reduced to less than GBP35m. Despite this, the Board recognises that dividends should form part of shareholders' investment returns and the Board will be working towards the reintroduction of dividend payments as soon as possible.
After taking legal and accounting advice, the Board has concluded that the dividend paid on 10 January 2011 was unlawful as the then Board should have known at the date that the dividends were approved and paid that the Company had insufficient reserves available to make the payment. The Board has been unable as yet to come to a definite conclusion about the legality of the dividends paid on 1 April and 25 June 2010. No action will be taken to recover unlawful dividends from shareholders in general. However, the Board is considering whether remedies are available against former directors to recover unlawful dividends paid to them and damages for breach of duty in authorising the relevant dividends.
Litigation and going concern
The Board has previously announced two major claims against the Company, one from the former Executive Vice Chairman and the other from a number of shareholders. These are described in Note 25. No provision has been made in these accounts for future legal costs or for any settlement or adverse determination arising from the litigation. While the Board continues to adopt the going concern basis, these claims and the other matters described in the going concern section of the Financial Review such as the narrow margin against banking covenants, give rise to a material uncertainty regarding the Group's ability to continue as a going concern.
People
2011 has been a tremendously turbulent year for our staff. There has been a complete change in the Board and extensive change in the senior leadership of the Group. Matters emerged during the course of investigations that were highly damaging to the
Company. During parts of the year, the future of the Company was in doubt and there were long periods when it was not possible to keep staff well informed because of the uncertainty of negotiations with third parties. At the same time, in the UK, there was also a significant change in strategy towards on-Framework business. Despite this, our staff have overwhelmingly stayed loyal to the Company and it is primarily through their personal commitment and their engagement with our customers that the Company has retained its market position. For this, and their unstinting efforts, especially during the period leading up to the re-financing, the Board and shareholders owe them a substantial debt of gratitude.
Outlook
Although there will be many risks and challenges ahead, we believe that 2011 saw the nadir in the Company's fortunes. The Group has been re-financed; a new leadership team has brought operational stability and is implementing new growth strategies to generate long-term improvements in financial performance. Despite all the issues of 2011, the Group remains a leading business in healthcare recruitment in both the UK and Australia. In the short-term we have the uncertainty regarding two major legal cases to deal with. Once legacy issues are addressed, the Board and I are confident that the Group can prosper.
Peter Sullivan
Chairman
Operational Review
Following the successful Refinancing of the Company on 12 Sept 2011, we have begun implementing the restructuring and re-engineering plans which we had previously outlined to shareholders and which we believe are key to generating sustainable growth. In the following paragraphs we describe how that strategy is being implemented and comment on trading in 2011. Although the balance of operations in the UK and Australia is different, there are common themes in the execution of the overall strategy.
UK
Customer Relationship Management
A significant part of the UK business's supply to the NHS had historically been outside of the purchasing Framework Agreements. Increased cost pressures on the NHS through 2010 and 2011 resulted in a key, and in the Board's view, irreversible shift to locum procurement through the Framework structures.
Having adopted a transparent Framework supply strategy across all divisions, we believe we have made considerable progress in repositioning HCL as a valued and trusted supplier, aligned to our customers' needs. Our market leading Managed Solution, HCL Clarity which is described in more detail below, demonstrates our understanding of and commitment to the Department of Health's Quality, Innovation, Productivity, Prevention ("QIPP") strategy which we believe will enable HCL to become a long-term partner to the NHS, private healthcare groups and Local Authorities in providing flexible workforce solutions.
We have restructured our UK Business Development function together with our Recruitment and Compliance supply chain, to mirror our clients' demands and to facilitate relationships at national, regional and local levels. The implementation of our new CRM recruitment system is explained in more detail below.
A UK Head of Clinical Governance and Compliance has been appointed who is responsible for testing the Group's compliance programme. The Group continues to supply to the NHS without restriction and has positively engaged with the NHS to improve the service which it provides.
Organic Growth and Operational Improvement
Former management had focused on an acquisitive strategy but had not operationally integrated the acquired businesses so it is not surprising that the UK business has been operating through a large number of brands and legal entities acquired over several years. This left the Company without a clear scalable business model, too many brands to support fully, overly complicated internal processes and a range of front office systems without the capability to share customer relationship data. From the customer's viewpoint and in particular for the NHS, the existence of multiple brands has at times caused confusion over our Framework and Direct Sales offerings.
The current Board's strategy is to integrate those acquisitions and grow the business organically with a key focus on cash generation to pay down debt and in time, return cash to shareholders.
We have made excellent progress to date:
-- Our detailed plan to rationalise the legal entities and brands has the support of the Government Procurement Service enabling us to agree the management of compliance processes through the transition stage.
HCL will become our key Framework brand, with category sub-brands for example HCL Nursing, HCL Doctors etc. A distinct Direct Sales brand will be supported in each of the health and social care markets with similar category sub-brands. We expect this plan will be implemented by end Q2 2012.
-- The creation of a simplified legal entity structure behind the brand rationalisation will enable us to standardise our back office processes and realise the resulting operational efficiencies. We expect to complete this reorganisation by end 2012 and would anticipate benefiting from the operational efficiencies in 2013.
-- We have completed a thorough review of market leading IT applications and have selected an integrated front office and compliance package with a proven track record within the healthcare staffing sector. The first divisional implementation has already taken place in Allied Health Professionals and the UK roll out is expected to take 15 months. Concurrently, the existing IT infrastructure will be upgraded to meet the demands of the UK business and to ensure robust business continuity across technology and telecoms.
Operationally we expect the new system to improve the efficiency of the compliance and recruitment processes and to drive productivity gains through the sharing of both client and candidate data across all UK businesses. Post implementation we will integrate the application with our back office functions and managed solution technology during 2013.
A number of changes have been made to the structure of the business that we believe will result in operational efficiencies and increase productivity through improved communication both internally and with our candidate and client populations.
-- The Business Development function has been reorganised to create accountability both at a national, pan-HCL level and at a regional divisional level. The team is also now responsible for the implementation of Contracts and targeted on fulfilment rates. Further investment has been made in the Bid Management team.
-- The Theatre and General Nursing businesses covering England, previously in separate locations in the South East and under different management, have been brought together in our London office under one management team.
-- Certain national Compliance roles previously supporting specific divisions are now managed centrally to provide cross-discipline support regionally.
-- The Allied Health disciplines have been relocated from Loughton in Essex to our London office and restructured to reflect a similar ratio of Resourcer to Recruitment Consultant roles as operated elsewhere in the UK business.
-- The UK Finance function has also been relocated from Loughton to the London office.
These changes were implemented during Q4 2011 and the early part of 2012 and we have been pleased with how the integrations have proceeded.
Managed Solutions - HCL Clarity
The Board believes that pressure to reduce costs within the NHS will result in opportunities for companies that are able to provide solutions which manage effectively the flexible workforce and result in significant and measureable savings to NHS Trusts and Commissioning Groups.
We have recently entered into a partnership and commercial agreement with Skillstream, a leading supplier of contingent workforce management software, enabling us to combine HCL's recruitment process and people expertise with software already proven to generate substantial and quantifiable cost-savings within the NHS.
Skillstream's software, which is well established and operational with a high quality blue chip customer base throughout the private sector (www.skillstream.co.uk), has been customised to meet the specific requirements of the NHS including Framework pricing matrices, Clinical Governance and compliance demands and its VAT regime. The software is fully functional in several NHS Trusts where it has generated significant savings very quickly following implementation. These are detailed in a case study from the Royal Free Hampstead NHS Trust which you can find at www.hclclarity.com.
HCL Clarity is a managed service powered by Skillstream, enabling significant cost savings by providing visibility and control to reduce the cost of agency spend and optimise the substantive workforce, without compromising the quality of care.
The early reaction from clients to this ground breaking proposition within the healthcare sector has been encouraging and we look forward to updating shareholders on our progress in selling this solution later in the year.
2011
The first half and second half performance in the UK is as follows:
Revenue Gross profit H1 H2 Year H1 H2 Year GBPm GBPm GBPm GBPm GBPm GBPm ----------- ----------- ----------- ------------- ------------- ------------- Locum allied health professionals (restated) 15.8 14.8 30.6 4.5 3.7 8.2 Locum doctors 13.7 11.8 25.5 2.1 1.6 3.7 Locum nursing (restated) 15.1 10.1 25.2 4.2 2.7 6.9 Locum qualified social workers 14.2 12.3 26.5 2.5 2.1 4.6 Permanent placements 1.4 1.2 2.6 1.4 1.2 2.6 Inter-segment (0.2) 0.1 (0.1) - ----------- ----------- ----------- ------------- ------------- ------------- Total 60.0 50.3 110.3 14.7 11.3 26.0 ----------- ----------- ----------- Administration expenses (14.5) (14.3) (28.8) ------------- ------------- ------------- Adjusted EBITDA 0.2 (3.0) (2.8) ------------- ------------- ------------- Gross profit % H1 H2 Year ------- ------- ------- Locum allied health professionals 28.5% 25.0% 26.8% Locum doctors 15.3% 13.6% 14.5% Locum nursing (restated) 27.8% 26.7% 27.4% Locum qualified social workers 17.6% 17.0% 17.4% Permanent placements 100.0% 100.0% 100.0% Total 24.5% 22.5% 23.6%
During 2011 placement of theatre nurses, which was previously in allied health professionals, was moved to the nursing segment. The information above has been restated to show the position had the move taken place on 1 January 2011.
As noted above the new Board have decided to pursue a different strategy to that followed by previous management in the Healthcare market and to re-engineer the business to focus its supply to the NHS through Framework contracts.
Engaged Framework suppliers earn lower gross margins but benefit from significantly increased volume opportunities. We will continue to maintain a discreet and transparent brand for non-Framework business which will continue to provide flexible supply on demand to the NHS as required and to a range of private sector organisations.
Although 2011 was an uncertain period for the Company, the macro issues facing our clients did not materially change. A combination of pressures within the NHS, not only cost-related but on-going concerns about the quality of care, are driving NHS strategies such as QIPP creating opportunities for suppliers capable of providing value for money solutions in the area of flexible workforce management. We believe that we have a market leading offering in this space.
At a Gross Margin level, the short term impact of this strategy has required the business to accept generally lower margins whilst continuing to build the critical mass of contractually compliant supply required, for the business to benefit from the volume opportunities available.
Allied Health Professionals - representing 31.5% of UK's continuing Gross Profit in 2011
Comparing H2 2011 to H1 2011, the move of the NHS business onto Framework supply resulted in a reduction in gross margin to 25.0% from 28.5% with revenues slipping by 6% over the same period.
Locum Doctors - representing 14.2% of UK's continuing Gross Profit in 2011
As this business completed its transition to Framework supply, margins slipped from 15.3% in H1 to 13.6% in H2. Further we experienced unusually slow demand post the September rotation and consequently revenues reduced by 14% in the second half compared to the first.
Nursing- representing 26.5% of UK's continuing Gross Profit in 2011
During H2 2011 we relocated the Theatre Nursing business physically and operationally under the responsibility of the Managing Director of the London based Nursing division. Historically it had been managed within the Allied Health Professionals Division and therefore for segmental reporting has appeared there previously.
The reduction in Gross Profit in H2 compared to H1, is due to the move of the Theatre Nursing business on to the Framework during the course of H2 2011.
Qualified Social Workers - representing 17.7% of UK's continuing Gross Profit in 2011
As we reported in the 2011 Interim Report, we reduced our consultant headcount in the market for Qualified Social Workers around the half year which inevitably resulted in a reduction in Gross Profit in H2 versus H1 but did achieve the intended increase in revenue per head in H2 compared to H1 and has provided a solid platform on which to build.
The market remains tight with Local Authorities under budget pressure. The gross margin slipped to 17.0% in the second half from 17.6% in H1 due to margin pressure within the Managed Vendor contracts and fewer off-contract bookings available.
Permanent Placements - representing 10.0% of UK's continuing Gross Profit in 2011
As previously reported, the headcount in this area was reduced from 80 at 31 December 2010 to 30 at 30 June 2011 and the structure of the division has been altered to create greater focus by discipline and provide a solid foundation from which to grow. As expected this did result in a decrease in revenue (from GBP1.4m in H1 to GBP1.2m in H2) but revenue per head increased.
Australia
Customer Relationship Management
In Australia, HCA has been and remains a well established and trusted Panel (Tier 1) supplier to the State Health Authorities and to a number of private healthcare organisations in Australia.
As the largest national nursing agency and with a strong medical locum business in New South Wales, we believe that we are well placed to grow the business organically leveraging existing relationships and infrastructure. As planned, the national expansion of the medical locum business will begin in 2012. The development of our managed solution, HCA Clarity, closely aligns our service proposition with our clients' objectives and provides a platform for us to strengthen further our supply relationships.
Organic Growth and Operational Improvement
As in the UK, HCA has grown through a number of acquisitions and when the business was brought into the Group in December 2010, there were a number of individual brands operating across Australia which were not linked to the HCA brand. During 2011 we began the process of consolidating the multiple brands and this is now complete with all operating brands having been modernised and linked explicitly to HCA.
This has helped us make good progress in improving the effectiveness of our candidate generation marketing and we have seen a positive upward trend in nurses and doctors registering with HCA as a result of our clearer branding and a move towards more online marketing. This has also led to a reduction in the acquisition cost per candidate.
HCA's nursing agency business has a nationally recognised Registered Training Organisation ("RTO") that has historically provided accredited training and development courses for nurses based in the state of South Australia (SA). We believe that the ability to provide nurses with access to CPD training courses is a key factor behind the success of our nursing agency business in SA where it is the market leader with a significant market share.
Given that the biggest constraint on growth within the nursing agency market in Australia is the supply of nurses, a key part of our strategy is to extend the reach of the RTO nationally as we believe that this will both attract more nurses to HCA as well as improve our retention levels.
We have rebranded the RTO as "NursEd" and are presently reconfiguring all of our offices across Australia to include a well equipped training room with a view to every State and Territory being able to offer nurses access to relevant CPD training courses and other professional and development training.
As well as demonstrating a real commitment to investing in our nurses' education, we are also able to assure our clients that all nurses working with HCA are fully compliant with all professionally required and mandated core competencies.
A key initiative within the nursing agency business, our locum doctor business and the newly established permanent nurse recruitment business has been to increase the supply of suitably qualified nurses and doctors into Australia from overseas.
We have made good progress in this respect and have established a team based in the Group's London office, responsible for sourcing candidates wishing to relocate to Australia on a permanent basis, along with nurses looking to work in Australia under the Working Holiday Visa programme.
We have also established a small office in Auckland, New Zealand, that is focused solely on sourcing candidates wishing to work in Australia on a permanent, agency or locum basis.
Another key part of our strategy for Australia is to drive operating efficiencies in the business through implementing standardised, national processes, where relevant as well as using technology where we believe costs can be reduced or eliminated or where we believe that we may improve our competitiveness in the market place.
We are presently undertaking a review of business processes nationally within the nursing agency and the results of this analysis will assist in determining areas of priority. Similarly, we are planning to invest in upgrading the technology platforms in use within the business and, by partnering with a global technology company, will look to pass some of the risks of hardware and technology obsolescence to a third party.
Managed Solutions - HCA Clarity
As in the UK, we believe that the pressure to reduce agency staffing costs amongst our clients in both the public and private health sectors in Australia will result in growth opportunities for those companies that are able to provide proven solutions which result in significant and measureable savings whilst at the same time improving management information.
As Skillstream have an established physical presence and several major clients in Australia, we are confident in their ability to support HCA's development as a workforce solutions provider. We were therefore delighted to extend our partnership agreement with them into Australia. This was formally agreed in February 2012.
We believe that HCA Clarity will be a market leading solution in Australia and during 2012 we will be refining our go to market proposition and prioritising those clients with whom we believe we will generate the best return. Early reactions from clients to this development have been very positive.
2011
The first half and second half performance in Australia is as follows:
H1 H2 Year GBPm GBPm GBPm ----------- ----------- ------------ Revenue 56.8 60.0 116.8 Gross profit 11.6 12.1 23.7 Administration expenses (8.1) (6.9) (15.0) ----------- ----------- ------------ Adjusted EBITDA 3.5 5.2 8.7 ----------- ----------- ------------ Gross profit % 20.4% 20.2% 20.3%
The continuing business of Healthcare Australia ("HCA") comprises the nursing agency, Last Minute Locums ("LML"), the locum doctor business and the permanent recruitment division.
We have invested in a number of senior management appointments in the sales, key account management, marketing and HR functions in order to provide the necessary support platform to drive future growth within HCA.
During 2011, we successfully rebranded HCA, including the launch of a new interactive HCA website and significantly increased online marketing activities, the results of which have been very encouraging, with record numbers of candidate registrations across all divisions. We will be further upgrading the website during 2012. During the year we also increased our online social media presence on Facebook and Twitter and our weekly followers have increased steadily.
Our efforts to focus on the proactive management of national and key accounts was rewarded with the renewal of a panel contract with one of the State based Public Health systems for a five year period to end June 2016. In addition, we have also been successful in securing preferred supplier status contracts within the Aged Care sector in Australia.
In November, we achieved successful recertification under ISO9001 for a further three year period.
Nursing Agency - representing 87% of HCA's continuing Gross Profit in 2011
Notwithstanding a challenging start to the year in Queensland due to widespread floods that caused a short-term down turn in demand, market conditions nationally remained positive during the year within both the public and private health sectors.
Demand for nursing staff in Australia presently exceeds our ability to supply and we have therefore been investing in our marketing activities to attract more nurses to register and work with HCA and developing innovative ways to increase the level of nurse productivity once registered with HCA.
Whilst the nurse supply shortage is a national issue, we have been focusing our efforts on the Eastern seaboard states of Queensland, New South Wales and Victoria, where the HCA nursing agency is underweight relative to the overall market opportunity in this part of Australia.
As the largest nursing agency in Australia and the only company with a truly national network, we believe that we are able to offer our nurses the best choice of work opportunities, whether in the Public or Private sectors, in the large metropolitan centres, regional cities or in remote and rural Australia. Furthermore, we are the only nursing agency to have its own Registered Training Organisation ("RTO"). Branded as NursEd, we are able to ensure that all of our nurses meet mandatory competency requirements as well as supporting our nurses with CPD training required as part of their professional registration requirements.
NursEd has been very successful in attracting nurses historically in South Australia and consequently we took the decision in H2 2011 to expand nationally and the early signs are encouraging.
During 2011, we continued to make progress in increasing our penetration of the Aged Care nursing sector, which remains a key part of our growth strategy.
Locum doctors - representing 11% of HCA's continuing Gross Profit in 2011
The market for the provision of locum doctors remains positive and a key growth opportunity for LML is to secure its standing as an approved panel supplier in all States and Territories. In this regard, towards the end of the year we commenced plans to broaden the geographic reach of the business throughout Australia through the appointment of recruitment consultants in Western Australia, South Australia, Victoria and Queensland.
Having been acquired in August 2010, the operational and financial integration of LML into HCA was completed during 2011 and during the second half, we made progress in leveraging the extensive client list within the nursing agency to develop new clients for LML.
The physical co-location of LML within the Sydney office of HCA took place at the end of the first quarter of 2012.
Permanent recruitment - representing 2% of HCA's continuing Gross Profit in 2011
During 2011 we launched a permanent recruitment division in Australia, focusing initially on the recruitment of doctors and nurses. The permanent nurse recruitment business was branded Nurse Jobs Australia ("NJA") whilst the doctor recruitment business was branded LML Medical Recruitment.
NJA traded in line with our plans in 2011 and has had a positive start to 2012.
However after a difficult few months trading for LML Medical Recruitment and recognising the significant growth opportunities within the permanent recruitment of nurses, we took the decision during Q4 to withdraw from the doctors business and concentrate our efforts on building NJA.
The Australian business works closely with the UK business, to ensure that we are able to properly exploit the candidate pipeline of nurses in the UK and Europe wishing to work in Australia, either on a permanent basis or also under the Working Holiday Visa scheme.
During 2011 we also opened a New Zealand resourcing office aimed at taking advantage on the Tran-Tasman agreement and sourcing doctors and nurses wishing to work in Australia on a locum or permanent basis.
People Development across the Group
There are many highly talented and committed individuals throughout the Group. However, little investment has been made historically in people development and we believe that the sustainable growth strategy for both the UK and Australian businesses needs to be underpinned by a Group People Plan. The key elements of this plan are to:
-- Develop a set of HCL corporate values - which will underpin what we need to do to build a strong brand and differentiate ourselves in the market. These values will shape our culture, defining the characteristics and behaviours that guide the way we work with our customers, our colleagues, our suppliers and other stakeholders. These behaviours will show us what we need to do to build a sustainable culture that will help us achieve our business goals and make HCL a great place to work.
-- Build a high performance workplace - where employees are clear on what they are expected to deliver and have development plans to develop key skills and competencies to deliver high performance.
-- Create a development culture - where employees have the opportunity to develop themselves and their careers as they grow the HCL business.
-- Build employee engagement - which in turn will deliver outstanding and consistent customer experience.
-- Enhance our change management agility - to reflect our customers' needs for solutions that deliver quality, cost efficiency and transparency, the changing healthcare environment and the requirement for scarce skills.
These five cornerstones of our People Plan will be underpinned by operational excellence in our core people processes to support the business as it restructures, transforms and develops propositions to meet our customer needs.
Current Trading
The key strategic change of direction in our supply provision to the NHS has inevitably impacted margins and gross profit levels in the short term but was an essential precursor to the Company being able to access the significant volumes available as a trusted Framework partner.
Despite the significant level of change that the business and our people have been asked to digest, our trading in the UK has remained stable from November through to the end of Q1 2012.
In Australia the year is starting well.
Notwithstanding the uncertainty that our clients are experiencing, we believe we will begin to see the benefits of our strategic and operational changes as 2012 develops.
Financial Review
Introduction
The Financial Statements for the year ended 31 December 2010 were prepared on a going concern basis, which depended on a successful Refinancing following the discovery of significant accounting errors and revisions to prior periods results as accounting policies were changed.
The Refinancing proposed by the Board received shareholder approval at the meeting on 12 September 2011. Detailed disclosures relating to the Refinancing are given in Note 23.
The 2011 unaudited preliminary Financial Statements have also been prepared on a going concern basis, but the Board is drawing attention to some material uncertainties, details of which are set out below and in Note 25.
Going Concern
The Group's business activities, together with factors likely to affect its future development, performance and position are set out in the Operational Review. The financial position and borrowing facilities are described in this Financial Review. In addition, Note 25 to the financial statements describes the Group's contingent liabilities.
The Group's budget for the year ending 31 December 2012 and its forecast for the following period indicate that the Group plans to operate within its current bank facilities and covenants albeit with a narrow margin for contingencies. The plans reflect a number of judgements made by the directors in respect of the risks and uncertainties described in the disclosure of Principal Risks and Uncertainties and in respect of the following material uncertainties:
-- These plans reflect the Board's growth focused strategy which is described in the Chairman's Statement and Operational Review and assume significant increases in revenues principally from gains in market share.
-- During the going concern review period a number of important Framework agreements and contracts in both the UK and Australia are to be renewed. While the Board has no information that the Group's position in relation to these Frameworks and contracts will not continue, there is a risk that if a combination of contracts were not renewed (as a result of compliance issues or otherwise) then the budgeted revenue would not be achieved.
-- The Board has considered several reasonably possible scenarios with lower levels of revenue or margin than included in the budgets and forecasts, some of which would require management action to contain costs in order for the Group to keep within existing banking covenants.
Whilst the directors consider their planned mitigating actions to be achievable and balanced responses to the matters outlined above, these circumstances create material uncertainties over future trading and cash flows.
In addition, the Group is party to legal action described in Note 25. The forecasts assume no liability and no cash outflows in respect of Kate Bleasdale (other than a reasonable estimate of the costs of defending this action) or the US litigation during the review period. Any material adverse judgement would require the Group to seek additional finance. The ultimate outcome of these matters cannot presently be determined.
Members of the Board meet regularly with the Group's banks and loan providers who receive regular information on the progress of the Group, its plans and forecasts and their risks. The Group's banks and loan providers have expressed their support for the new Board and the Group's plans.
The directors have concluded that the combination of these circumstances represents material uncertainty that casts significant doubt upon the Company's ability to continue as a going concern and that, therefore, the Company may be unable to realise its assets and discharge its liabilities in the normal course of business. The unaudited Preliminary Financial Statements do not include the adjustments that would result if the Company and the Group were unable to continue as a going concern. Nevertheless, after making enquiries and considering the uncertainties described above, as well as the mitigating actions available to them and the expression of support from the Group's bankers, the directors have a reasonable expectation that the Company will have access to adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
Prior Year Adjustments
During the preparation of the Unaudited Consolidated Financial Statements for the year ended 31 December 2011, it became apparent that the recognition of a deferred tax liability of GBP9.6m (A$15.1m converted at rates ruling on the acquisition dates), on trademarks and other intangible assets of GBP31.8m (A$50.1m) recognised on the acquisition of LML and HCA had been omitted. As a result a restatement is required in the acquisition balance sheets to recognise this liability on the dates of acquisition of 1 August 2010 and 20 December 2010 respectively, with goodwill increasing by GBP9.6m at the date of acquisition. In addition, an escrow amount of GBP0.8m (A$1.2m) from a prior acquisition by HCA had been omitted and has also been included in the restated receivables on the acquisition balance sheet, with goodwill reducing by GBP0.8m at the date of acquisition. In addition, when completing the accounts for the consolidated Australian tax group for the tax year to June 2011 it was determined that the deferred tax asset estimate in the acquisition balance sheet was understated by GBP1.1m (A$ 1.7m) and the estimate in the acquisition balance sheet has been corrected, with goodwill increasing by GBP1.1m at the date of acquisition. A summary of the restatement entries is as follows: Acquisition 31 December date Forex 2011 ------- ------------ ------ ------------ A$m GBPm GBPm GBPm ------- ------------ ------ ------------ Goodwill 15.6 9.9 0.3 10.2 Receivables 1.2 0.8 - 0.8 Deferred tax asset (1.7) (1.1) - (1.1) Deferred tax liability (15.1) (9.6) (0.3) (9.9)
Also during the preparation of the Unaudited Consolidated Financial Statements for the year ended 31 December 2011 a clerical error in the 2010 calculation of the value in use of the UK Social Care division was discovered which, had the error not occurred, would have meant the impairment of the goodwill and assets associated with that division would have increased by GBP7.1m. A prior year adjustment has been booked to correct this misstatement, reducing goodwill by GBP5.4m, other intangible assets by GBP1.4m, tangible fixed assets by GBP0.3m, deferred tax liability by GBP0.4m and retained earnings at 31 December 2010 by GBP6.7m.
The combined impact of the above prior year adjustments on the loss from operations and loss for the year ended 31 December 2010 was as follows:
Loss Loss from for the operations year GBPm GBPm ------------ --------- As reported for the year ended 31 December 2010 (52.1) (54.4) Goodwill and asset impairment of Social Care division (7.1) (7.1) Deferred tax - 0.4 As restated for the year ended 31 December 2010 (59.2) (61.1) ------------ ---------
The combined impact of the above prior year adjustments on the relevant figures in the Consolidated Statement of Financial Position at 31 December 2010 was as follows:
As previously Impact reported of restatements Restated GBPm GBPm GBPm -------------- ----------------- --------- Goodwill 41.4 4.8 46.2 Other intangible assets 77.0 (1.4) 75.6 Property, plant and equipment 2.8 (0.3) 2.5 Trade and other receivables 36.3 0.8 37.1 Deferred tax (3.7) (10.6) (14.3) -------------- ----------------- --------- Impact of restatements (6.7) ----------------- Profit and loss for the year (54.4) (6.7) (61.1) -------------- ----------------- --------- Profit and loss reserve (54.5) (6.7) (61.2) -------------- ----------------- ---------
The Group presents adjusted earnings per share in Note 10. The calculation for the year ended 31 December 2010 was misstated as detailed in that note.
The acquisition note for 2010 acquisitions has been restated in Note 15.
Critical Accounting Estimates and Judgements
The Group makes estimates and judgements regarding future events. Estimates and judgements are regularly 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 those estimates and judgements.
The critical accounting estimates and judgements are set out in more detail in Note 3(w).
Results Summary
The summarised unaudited results for the year ended 31 December 2011 are set out in the table below. The results of continuing operations in 2011 benefit significantly from the inclusion for a full year of the Australian businesses acquired in 2010. The Board believes that the figure that best illustrates the underlying performance of the business is earnings before depreciation, amortisation, interest and tax and before highlighted operating costs and share based charges or credits. This figure, defined below as Adjusted EBITDA increased to GBP5.9m for the year ended 31 December 2011, compared with a loss of GBP0.1m in 2010.
In addition to the prior year adjustments described above, the 2010 results in the table below have been restated to reflect the reclassification of the results of HCA's Homecare Division, disposed of in July 2011, into the line "Profit from discontinued items, net of tax."
Restated 2011 (1) 2010 Continuing operations: GBPm GBPm -------- ---------- Revenue 227.1 154.9 Cost of Sales (177.4) (114.2) -------- ---------- Gross Profit 49.7 40.7 Gross Profit % 21.9% 26.3% Administrative expenses (43.8) (40.8) -------- ---------- Adjusted EBITDA 5.9 (0.1) Depreciation of property, plant and equipment (1.1) (0.6) Amortisation of intangible assets (6.4) (1.7) Share scheme credits / (charges) 0.5 (0.6) -------- ---------- Loss from operations before highlighted items (1.1) (3.0) Highlighted items: Goodwill impairment - (51.4) Net exceptional operating expenses (9.6) (4.8) -------- ---------- Loss from operations (10.7) (59.2) Finance expense (net) (2.2) (4.4) -------- ---------- Loss before tax (12.9) (63.6) Taxation 2.6 2.5 -------- ---------- Loss after tax from continuing operations (10.3) (61.1) Profit from discontinued operations, net of tax 1.4 - -------- ---------- Loss for the year (8.9) (61.1) -------- ---------- Basic loss per share from continuing operations (3.1)p (56.2)p Adjusted basic loss per share from continuing operations (3.9)p (5.1)p ------------------------------------------- -------- ----------
(1) 2010 figures have been restated for the revised impairment of goodwill and other assets in the UK Social Care division (Note 1). In addition the amounts credited or charged in the various headings for the operations of the Homecare division have been moved to profit for the year from discontinued operations - a net GBPnil result - as the Homecare division was sold in 2011 (Note 9).
Depreciation, amortisation and share scheme credits (2010: charges) were GBP7.0m (2010: GBP2.9m). The majority of the increase represents amortisation of the intangible assets of HCA for a full year in 2011, offset by a share-based payment scheme credit due to the forfeiture of a large number of options held by former Directors.
Highlighted items in 2011 primarily related to the restructuring of the business, the investigation into and restatement of accounting irregularities, and a net charge for adjustments to deferred consideration on acquisitions. In 2010 the highlighted items were mainly the impairment of goodwill, property, plant and equipment and intangible assets, acquisition related costs and restructuring costs, offset by a gain on fair value changes in contingent consideration on an acquisition. The 2011 charge for the adjustments to deferred consideration on acquisitions and the 2010 credit on fair value changes in contingent consideration on an acquisition contained broadly matching, but opposite, amounts which had to be booked in separate years as an agreement was signed in early January 2011 which gave rise to the charge in 2011.
net exceptional operating expenses
Net exceptional operating expenses comprise:
Restated 2011 2010 GBPm GBPm ------ --------- Exceptional operating income/(expense): Reorganisation and refinancing costs: Restructuring costs (1.8) (0.3) Refinancing additional costs (0.7) - Australia - integration costs (0.6) (0.4) Onerous leases (0.7) (0.7) ------ --------- (3.8) (1.4) (Loss) / gain on fair value changes in contingent and deferred consideration (Note 15) (2.9) 4.2 Investigation and resolution of (2.9) - accounting irregularities Acquisition related transaction costs (Note 15) - (2.8) Costs related to advice concerning possible disposal of business - (1.4) Impairment of property, plant and equipment (Note 14) - (0.7) Impairment of other intangible assets (Note 13) - (2.7) ------------------------------------------- ------ --------- Net exceptional operating expenses (9.6) (4.8) ------------------------------------------- ------ ---------
finance expense (net)
In 2011 the net finance expense was GBP2.2m (2010: charge GBP4.4m). As a result of the refinancing during the year a number of large debits and credits passed through finance income and finance expense as the tables below illustrate:
2011 2010 Finance income GBPm GBPm ------ ------ Exceptional finance income: Refinancing - difference between - fair value of shares issued to Ares Lux and the mezzanine finance retired (Note 23c) 9.9 Fair value adjustment on Zero Coupon 7.7 - Loan Note (Note 23e) Foreign exchange on Refinancing 0.3 - Bank debt waived (Note 23f) 5.9 - Accrued interest payable written 0.6 - off in Refinancing (Note 23f) ------ ------ 24.4 - Interest received on bank deposits 0.1 - Foreign exchange gains 0.2 1.5 Gain on fair value changes in derivative financial instruments 0.1 0.5 24.8 2.0 ------------------------------------------- ------ ------ 2011 2010 Finance expense GBPm GBPm ------ ------ Exceptional finance expense: Bank fees relating to debt repaid 4.4 - written off (Note 23g) Professional fees of Banks' advisers 3.0 - (Note 23h) Advisers fees on the Refinancing 2.5 - (Note 23h) Warrant option written off (Note 2.6 - 19) Arrangement fee on ACE Limited facility 0.2 - (Note 23(b)(iv)) ------ ------ 12.7 - Bank loans and overdrafts 14.0 3.7 Loss on fair value changes in derivative financial instruments - 2.5 Finance lease interest 0.2 0.2 Imputed interest on Zero Coupon 0.1 - Loan Notes (Note 22) 27.0 6.4 ------------------------------------------- ------ ------
The Group has recognised exceptional finance income of GBP9.9m on the debt for equity swap with Ares Lux as disclosed in Note 23(c), GBP7.7m on the conversion of debt into Zero Coupon Loan Notes as reported in Note 23(e), GBP5.9m on bank debt waived as reported in Note 23(f) and GBP0.6m of accrued interest waived by the banks as reported in Note 23(f). Within finance expense the Group has recognised GBP5.5m of fees relating to the Refinancing and GBP4.4m of unamortised debt fees written off when debt was repaid early as part of the Refinancing. Ignoring these exceptional amounts the underlying expense was GBP14.3m (2010: GBP3.9m) reflecting the cost of ownership of HCA for a full year.
segmental analysis
2011 2011 2010 2010 Gross Gross Revenue profit Revenue profit GBPm GBPm GBPm GBPm ----------------------------- -------- -------- -------- -------- UK: Locum doctors 25.5 3.7 33.7 6.3 Locum qualified social workers 26.5 4.6 35.6 6.8 Locum allied health professionals (restated) 30.6 8.2 47.0 14.7 Locum nursing (restated) 25.2 6.9 26.3 7.0 Permanent placements 2.6 2.6 3.9 3.9 Inter-segment (0.1) - (0.6) (0.4) -------- -------- -------- -------- Total UK 110.3 26.0 145.9 38.3 Australia 116.8 23.7 9.0 2.4 -------- -------- -------- -------- Continuing operations 227.1 49.7 154.9 40.7 -------- -------- Operating expenses before highlighted items UK and corporate (29.8) (41.0) Australia (21.0) (2.7) Goodwill impairment - (51.4) Net exceptional operating expenses (9.6) (4.8) -------- -------- Loss from operations (10.7) (59.2) ----------------------------- -------- -------- -------- --------
During 2011, placement of theatre nurses, which was previously included within allied health professionals was moved to the nursing segment. Prior year segmental information has been restated to reflect the current reporting structure.
UK revenues and gross profits fell significantly in 2011 reflecting, inter alia, the reorganisation of the UK business and the change in strategy towards providing more locums through Framework agreements with lower margins but potentially much greater volumes. UK overheads were cut accordingly with UK headcount reducing from 570 in January to 387 in December 2011.
The table below separates the H1 and H2 performance:
Restated(1) H1 2011 H2 2011(2) Continuing operations: GBPm GBPm ------------- ----------- Revenue 116.8 110.3 Cost of Sales (90.5) (86.9) ------------- ----------- Gross Profit 26.3 23.4 Gross Profit % 22.5% 21.2% Administrative expenses (22.6) (21.2) ------------- ----------- Adjusted EBITDA 3.7 2.2 Depreciation of property, plant and equipment (0.5) (0.6) Amortisation of intangible assets (3.1) (3.3) Share scheme credits 0.5 - ------------- ----------- Adjusted profit / (loss) from operations 0.6 (1.7) Highlighted items: Net exceptional operating expenses (7.4) (2.2) ------------- ----------- Loss from operations (6.8) (3.9) Finance (expense) / income (net) (12.1) 9.9 ------------- ----------- (Loss) / profit before tax (18.9) 6.0 Taxation 1.2 1.4 ------------- ----------- (Loss) / profit after tax from continuing operations (17.7) 7.4 Profit from discontinued operation, net of tax 1.0 0.4 ------------------------------------------- ------------- ----------- Loss for the year (16.7) 7.8 ------------------------------------------- ------------- ----------- (1) Unaudited figures for H1 are taken from the Interim Results for the 6 months to June 2011 adjusted for: (a) depreciation and amortisation adjusted for the impact of impairing the assets of the Social Care business in the United Kingdom as a prior year adjustment as disclosed in more detail in Note 1. (b) analysis of exceptional costs and income reclassified to be consistent with the classification in this unaudited preliminary statements. (c) the results of the discontinued operation have been adjusted to cease depreciating assets at the time, 31 March 2011, the business was classifed as held for disposal. (2) Full year unaudited preliminary results less unaudited and restated H1.
The first half and second half performance is discussed in the Operational Review.
taxation
The tax benefit for the year ended 31 December 2011 is a credit of GBP2.6m (2010:GBP2.5m) comprising prior year UK corporation tax credit of GBP0.8m, group relief re Homecare of GBP0.4m and a deferred tax credit of GBP1.4m.
Acquisitions
There were no acquisitions during the year ended 31 December 2011. Details of the movements on contingent and deferred consideration amounts are given in Note 15 and Note 20.
Disposal
On 18 July 2011 the Company announced that the wholly owned Australian subsidiary, Healthcare Australia Holdings Pty. Ltd. had completed the sale of its Homecare division. The gross consideration was A$34m (GBP22.7m). The net proceeds after costs; adjustments relating to the net assets sold; and accounting for the cash within the Homecare Division at the time of disposal was A$30.5m (GBP20.3m) which was used to repay debt.
In the year ended 31 December 2010, based on unaudited management accounts, the Homecare division generated a turnover of A$44.7m (GBP28.1m, of which GBP2.3m was whilst a member of the Group)and a gross profit of A$12.2m (GBP7.6m, of which GBP0.6m was whilst a member of the Group).
The disposal generated a gain of GBP0.7m after expenses (Note 9). In calculating this gain account was taken of the fact that the Homecare Division was held for resale from 31 March 2011 and so for Group reporting purposes depreciation of fixed assets ceased on that date. The results of the Homecare division to the date of disposal, together with the profit on disposal, have been reported in the Unaudited Statement of Comprehensive Income in the line "Profit for the year from discontinued operations, net of tax". The prior year figures have been restated to show the Homecare division as discontinued, but the net profit after tax in the short period of ownership in the year ended 31 December 2010 was GBPnil.
Goodwill
Goodwill may be analysed as follows:
Prior Restated 31 December Year 31 December Foreign 31 December 2010 Adjustments 2010 Transfers Disposals Exchange 2011 GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------ ------------- ------------- ---------- ---------- ---------- ------------ Social Care 5.4 (5.4) - - - - - Allied Health Professionals 10.7 - 10.7 (2.7) - - 8.0 Nursing 8.8 - 8.8 2.7 - - 11.5 Australia 16.5 10.2 26.7 - (6.5) 0.1 20.3 ---------------- ------------ ------------- ------------- ---------- ---------- ---------- ------------ 41.4 4.8 46.2 - (6.5) 0.1 39.8 ---------------- ------------ ------------- ------------- ---------- ---------- ---------- ------------
As a result of the transfer of the theatre nurses operations from the allied health professionals segment to the nursing segment, GBP2.7m of associated goodwill was transferred between these segments during 2011.
The Group tests goodwill for possible impairment annually or on other occasions if there are indications of a possible impairment. The recoverable amounts have been determined from value in use calculations based on cash flow projections from formally approved budgets and forecasts for 2012, 2013 and 2014 and estimates for subsequent years. More details of the assumptions are given in Note 12.
Other Intangible Assets
As noted in the critical accounting estimates and judgements paragraphs, the measurement and subsequent valuation of Intangible Assets requires management to make significant estimates in determining fair values. Management make these estimates for material acquisitions with the assistance of independent expert valuers.
The Other Intangible Assets are analysed as follows:
2010 2011 Restated GBPm GBPm ----- ---------- Brands and trademarks 26.3 33.0 Customer relationships 18.0 27.9 Candidate database 8.8 13.2 Non-compete agreements 0.4 0.5 Computer software 0.4 1.0 53.9 75.6 ------------------------ ----- ----------
The main reasons for the decrease were the GBP15.9m of Intangible Assets of the Homecare division which were sold with that business in July 2011, and GBP6.4m of amortisation charged during the year.
Dividends
Dividends are discussed in the Chairman's Statement and in Note 11.
Cash Flow
The following table reconciles the loss for the year to the cash flow from operating activities:
2011 2010 GBPm GBPm ------ ------- Loss for the year (8.9) (61.1) Adjustments: Discontinued operations (1.4) - Loss/(gain) on fair value changes in contingent consideration 2.9 (4.2) Depreciation, amortisation and impairment 7.5 57.1 Finance expenses (net) 2.2 4.4 Share-based payments (credits) / charges (0.5) 0.6 Corporation tax expense (2.6) (2.5) ------ ------- Cash flows from operating activities before changes in working capital and provisions (0.8) (5.7) Change in working capital and provisions 1.4 9.3 ------ ------- Cash generated from operations 0.6 3.6 Corporation tax paid (2.5) (4.0) Cash flow from operating activities (1.9) (0.4) --------------------------------------------- ------ -------
Cash flows from operating, investing and financing are analysed as:
2011 2010 GBPm GBPm ------- ------- Cash flow from operating activities (1.9) (0.4) ------- ------- Investing activities: Interest received 0.1 1.5 Acquisitions of subsidiaries (net of cash acquired) - (89.8) Disposal of property, plant and equipment 0.1 - Disposal of Homecare division 20.3 - Contingent consideration paid (2.7) - Acquisition of tangible and intangible assets (1.1) (1.8) Net cash used in investing activities 16.7 (90.1) ------- ------- Financing activities: Issue of Ordinary Shares 56.2 11.7 New loans acquired 38.9 140.5 Loans repaid (83.9) (24.9) Interest and similar expenses paid (14.4) (4.7) Loan fees (5.7) (7.7) Dividends (2.1) (3.6) Net cash (used)/generated from financing activities (11.0) 111.3 ------- ------- Effect of exchange rate movements (0.1) (2.8) Movement in cash and cash equivalents 3.7 18.0 ------------------------------------------ ------- -------
Borrowings
Borrowings at 31 December are analysed in Notes 18 and 19. Net debt is analysed as follows:
2011 2010 GBPm GBPm ------- ------- Loans - principal amounts: Sterling denominated - 81.5 Australian Dollar denominated 39.5 43.0 Zero Coupon Loan Notes due 2021 (principal amount GBP10.2m) 2.6 - Unamortised loan fees (2.3) (7.6) Bank overdraft - 0.1 Fair value of warrants - (2.9) Obligations under finance leases 0.4 0.9 ------- ------- 40.2 115.0 Cash and cash equivalents (14.2) (10.6) Net debt 26.0 104.4 ---------------------------------- ------- -------
In the Financial Statements at 31 December 2010 all debt was treated as current debt as the Board believed it was probable that at that date the Group was in default under the Senior Facilities Agreement and the Mezzanine Facility Agreement with its lenders. The lenders never took any action based on that probable default. Following the Refinancing long-term debt is now classified within non-current liabilities.
The principal reasons for the reduction in borrowings during the year were the disposal of the Homecare division and the Refinancing which is explained in detail in Note 23
Key Performance Indicators
The key performance indicators monitored by management during 2011 were:
-- Revenue and gross margin, which are reviewed at a weekly sales meeting; and -- Days sales outstanding which is a measure of the efficiency of cash collection from clients
In future, management will also monitor conversion ratio, being the percentage of gross margin retained in the business after attributable operating costs are charged
Principal Risks and Uncertainties
The Board's assessment of the principal risks and uncertainties facing the business is set out below.
The attention of shareholders is also drawn to the contingent liabilities Note 25.
Principal Risks and Uncertainties
The Board is developing improved processes to identify and manage risk. A listing of principal risks and uncertainties was published in the 2010 Annual Report in August 2011.
Risks are reviewed formally by the whole Board during the annual budgeting cycle. Day-to-day management of risk is the responsibility of the executive directors. The effectiveness of risk management will be monitored by the Board.
The principal risks and uncertainties which are currently judged to have the largest potential impact on the Group's financial performance and reputational standing are described below.
Risk Mitigation ----------------------------------- ----------------------------------- Relationships with key customers The Board monitors relationships The Group has a number with key customers regularly. of key customers, particularly The CEO is responsible the NHS in the UK and for maintenance of good the various State and relationships with the Territory health systems NHS supported by the in Australia. Customer divisional managing relations and compliance directors and the UK with the terms of contracts business development are important as the team. absence of these activities could result in loss A UK Head of Clinical of contracts, thereby Governance and Compliance having an adverse effect has been appointed who on profits and cash is responsible for testing flow. the Group's compliance program. In 2011, 69% of UK revenue was from the NHS. In The Group continues the 2010 Accounts the to supply to the NHS Group has disclosed without restriction some non-compliance and has positively engaged issues against the compliance with the NHS to improve requirements of relevant the service which it framework agreements provides. covering the supply of locums to the NHS. The Group is responding As a result, the NHS to the needs of the could reduce or even NHS by offering new terminate the Group's solutions such as HCL ability to supply locums Clarity. under one or all of the Framework agreements. In prior periods, a substantial proportion of supplies to the NHS have been outside established Framework agreements. This is not preferred by the NHS and the Board The National and Key changed its policy during Account management team 2011 so that now as together with State many locums as possible and Territory based are supplied under the Client Service Managers Framework agreements. monitor performance against these contracts In Australia, the Group and regularly discuss is an approved "Panel" any performance issues supplier of agency nurses with clients. Contracts to the public health which impose targets system in all States on HCA will normally and Territories in Australia. include obligations These contracts may on the client such as be terminated immediately a limitation on the in the event of a breach number of shifts that or by notice. Several can be cancelled. agreements with private health providers contain Key Performance Indicator targets with termination rights if targets are not met. ----------------------------------- ----------------------------------- Potential impacts from past events, including The Board continues litigation to devote considerable The 2010 Annual Report time to addressing the included disclosure impacts from past events of several serious matters and receives regular including accounting reports from management irregularities, potential and where necessary illegal dividends, poor external legal counsel. corporate governance and potential issues The Board made provision and a number of claims in the 2010 financial relating to the supply statements for the probable of locums to the NHS. settlement of the number As a result of these of claims in respect matters, a number of of locums supply in disciplinary hearings the UK and continues were held with the outcome to work through the that certain previous open matters. directors and other staff were either dismissed or chose to resign. The Board reviews all Two significant legal material litigation cases have been brought in detail and takes against the Company, advice from the Group's which are described legal advisors. in Note 25. The first is a claim by Ms Bleasdale, The Board's policy is the former CEO, for only to take or defend GBP12m, where a hearing legal action when it is scheduled for 10 is highly confident April; the second, a of its position. claim by certain US investors has been filed in the State of New York and there is currently no scheduled hearing. The outcome of pending The Group's policy is litigation is uncertain to co-operate with all and an adverse ruling regulators including could result in a material the AADB investigation. loss and a shortage of liquidity for the The CEO and senior operational Group. management are actively engaged with customers In December 2011, the to ensure historical Accountancy and Actuarial issues are set in context. Disciplinary Board announced an investigation into The Board is actively the conduct of certain implementing higher former directors. standards of corporate governance. These historical issues may continue to have an adverse effect on the Group's reputation and until the historical issues are resolved, customers may be reluctant to work with the Group and potential new investors may be reluctant to invest. ----------------------------------- ----------------------------------- Availability of finance The Group is dependent The Board regularly on the continuing availability monitors current and of finance from its forecast compliance banks. The Group has with its obligations given undertakings, to the banks. Senior including financial executives meet representatives covenants, to which of the banks on a regular it must adhere. Should basis to keep them appraised it fail to meet these of the Group's performance undertakings, the banks and future plans. could demand early repayments of their loans. In addition, should an adverse judgment be awarded in the major litigation the Group would be forced to seek additional finance. ----------------------------------- ----------------------------------- IT systems and security The Group relies on The Board mitigates computer systems to the risks involved in deliver its services IT systems by the following: to customers. Any material disruption to these - review of personnel systems will impact in the group's IT function; revenues as lost time - regular monitoring for locum supplies cannot of progress on the implementation be replaced. of new IT systems; - regular reviews of IT security strategy In the UK, a new system and procedures; and to manage the candidate - reviews of disaster database and match candidates recovery arrangements to opportunities is at least annually. being implemented. Implementation of any new system carries certain risks, including risk of disruption. The Group is taking steps to enhance information The Group's IT systems security through the contain valuable information implementation of the such as the candidate new front-office system database. in the UK. ----------------------------------- ----------------------------------- Compliance The Group has obligations In the UK a Head of under contracts, and Clinical Compliance in some circumstances, and Governance was appointed under legislation to in October 2011, who supply locums to specified reports to the CFO to standards of clinical ensure independence capability and to make from operational management. checks before locums are placed in roles. The Board receives monthly Under some contracts, reports from the Head especially those with of Clinical Compliance the NHS, the compliance and Governance and reviews requirements are extensive. the ongoing implementation Failure to complete, of corrective measures. maintain and refresh those checks could lead to legal, financial and reputational consequences. These matters are not able to be insured. ----------------------------------- ----------------------------------- Availability of suitably qualified locums The Group has adopted The marketing departments a growth strategy and in the UK and Australia these growth plans assume are responsible for that it will be possible campaigns to attract to retain and expand new locums and retain a pool of locums of existing locums. Divisional sufficient skills and managing directors have in the right locations KPIs related to the to meet the needs of size of their locum customers. If sufficient pools and the proportion locums are not available that are working at then the Group's revenue any one time. In addition, targets will not be the Group operates a met. number of schemes to promote the retention of existing locums. ----------------------------------- ----------------------------------- Exchange rate The Group's operations The borrower of the are principally located Group's bank debt is in UK and Australia an Australian subsidiary and local revenues and and the debt is denominated costs are accounted in Australian Dollars. for in Sterling and The debt is approximately Australian Dollars. 50% of total Australian The reporting currency Dollar assets before of the Group is Sterling. debt denominated in Australian Dollars. The Sterling value of the Australian results This bank debt gives depends on the exchange a partial natural hedge rate used to translate against translation the results of overseas effects on profits and operations. net assets. The Group's bank debt is denominated in Australian Dollars and the Sterling value will fluctuate with the exchange rate to Sterling. Foreign exchange risk is described more fully in Note 22. The Board considers exchange rate translation to be a principle risk because of the relative size of the overseas operations in the Group results and the potential impact of fluctuating exchange rates on Group results. ----------------------------------- ----------------------------------- Other business model risks These risks are managed There are other inherent on a day today basis risks in the business by executive management model, such as risks and are a regular part relating to healthcare of Board discussions. locum market demand, recruitment and retention of consultants, availability of locums, and the associated taxation legislation risks of self employed staff and VAT and the use of umbrella companies for the supply of agency workers, ----------------------------------- -----------------------------------
Corporate Governance
As disclosed in the 2010 Annual Report, when the Chairman joined the Board it was evident that there were extremely poor levels of Corporate Governance under the previous Board. 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.
The Board is committed to maintaining high standards of Corporate Governance, managing the Group in an effective, entrepreneurial and ethical manner for the benefit of the 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. However, the Board is committed to apply the principles of good governance contained in the UK Corporate Code as appropriate for a company of this size and nature. Since the completion of the refinancing in September 2011, the Board has been progressively putting this policy into effect and the paragraphs below describe how the Board and its Committees are now operating.
The Board
During 2011 the Board met many times to ensure the survival of the Company through the reorganisation and refinancing of the Group. The matters which the Board considered are described in more detail elsewhere in this Annual Report but included the complete change in the membership of the Board, investigation of accounting irregularities, negotiation of emergency funding and the Refinancing package, the suspension and re-listing of the Company's shares, fundamental change in the Group's advisors, significant change in the UK management team, the sale of the Homecare division of HCA, and the management of important litigation and dealing with other legacy issues.
Since September 2011, the Board has been able to concentrate more on operational matters and now has the membership, structure and processes to ensure good oversight in the future.
The Board will hold routine monthly meetings (except in August) and at least one meeting per year will be in Australia. The Chairman and the Company Secretary work together to plan the agenda for each Board Meeting. Prior to the Board meetings, the Board is issued with supporting papers relevant to the meeting including monthly management accounts, briefing papers on commercial and operational matters and major capital projects as well as reports on relations with investors and updates on the implementation of key strategic plans. All directors also have access to the advice and services of the Company Secretary.
A formal schedule of matters reserved for the Board was approved on 27 February 2012. The matters reserved for the board include:
-- Monitoring and supervising the overall management and strategies of the Company; -- Reviewing changes to the Company's capital structure; -- Approving all annual budgets and financial statements; -- Ensuring maintenance of a sound system of control and risk management; -- Approving all acquisitions and disposals and all material contracts and capital projects;
-- Approving all resolutions and correspondence to shareholders in connection with general meetings; and
-- Undertaking reviews of its own performance and that of its sub-committees and directors.
Monitoring Performance of the Board
It is acknowledged that all Board members need the appropriate knowledge of the Company and access to its operations and staff to adequately supervise the management of the Company. Presentations and reports on commercial initiatives, the Company's industry and its competitive position are given periodically to the Board. In addition, from this year onwards, the Company will hold Board meetings away from the head office, normally at least twice a year, to provide the non-executive directors with opportunities to meet the different divisions of the business and their operations.
During 2011, the Board received regular updates and advice from the Company Secretary, its insurers and insurance brokers, its legal advisors SNR Denton LLP, Manches LLP, its nominated advisors and brokers, Hawkpoint financial services and other external advisers.
Upon the successful completion of the Refinancing of the Group in September 2011, the Board considered its effectiveness and required expansion and considered the future initiatives and responsibilities of the committees that were re-established in 2012.
The full schedule of matters reserved to the Board is available on the Company's website, www.hclplc.com.
Audit Committee
Alan Walker (Chairman) and Alasdair Liddell served on the Committee from 1 January 2011 to the dates of leaving the Board. David Henderson (Chairman), Peter Sullivan and Mark Andrews are the current members of the Committee which they joined from the date of their respective appointments as Non-executive directors. Colin Whipp was a member of the Committee during the period that he was an Executive Director. While the Committee will in the future only be comprised of Non-executive directors, Colin's membership was deemed appropriate given the nature of the work that the Committee was undertaking during this period.
Some of its key responsibilities are to:
-- ensure that the appropriate financial reporting procedures are properly maintained;
-- consider the annual appointment of the external auditor and assess the independence of the external auditor;
-- review the need for an internal audit function and, if appropriate, the resources devoted to internal audit activities;
-- review the Company's compliance with regulatory requirements and the procedures for handling allegations from whistleblowers and the detection of fraud;
-- review management's reports on the effectiveness of systems for internal financial control, financial reporting and risk management; and
-- review accounts, review and approve accounting policies
The Committee met 9 times during the year and took the leading role in supervising the investigation of the accounting irregularities announced in January 2011 and working with the Company's then auditors to finalise the 2010 financial statements which included liaising with the Financial Reporting Panel to address irregularities relating to accounting policies adopted in 2009/2010 under the old Board. In addition, the Committee reviewed the Group's accounting policies and approved the 2011 Interim Accounts and was involved in a substantial tender exercise to engage its new auditors for the Company, Deloitte. Those invited to tender were BDO, Deloitte, KPMG, Ernst & Young and PwC.
Attendance
The Committee's policy is to meet at least twice a year.
The records of attendance during 2011 are:
Name of Committee No. of Meetings No. of Meetings Member could have attended attended ------------------- --------------------- ---------------- David Henderson (Chairman) 9 9 Peter Sullivan 9 6 Colin Whipp 8 8 Mark Andrews 1 1
Remuneration Committee
In the light of the number of Board meetings during 2011, the Company did not form a Remuneration Committee and the whole board participated in the discussions normally delegated to a Remuneration Committee.
The Company established a Remuneration Committee on 27 January 2012 which is constituted in accordance with the recommendations of the UK Corporate Governance Code. The members of the committee are Mark Andrews (Chairman), David Henderson and Peter Sullivan. The Committee has met three times in 2012 and those meetings were attended by its full membership.
Apart from Mark Andrews, whose interest is discussed in Note 26, none of the Committee has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in running the business.
The Committee's purpose is to review the performance of the Executive Directors and other senior executives and to determine appropriate levels of remuneration.
The remuneration and emoluments of Executive Directors are determined by the Board based on the recommendations of the Remuneration Committee.
Nomination Committee
During 2011 the role of the Nomination Committee was performed by the Board. In November 2011, the Board set up a new Nomination Committee which did not meet until 2012. The current members are Peter Sullivan (Chairman), David Henderson and Mark Andrews. As at the date of this Report, the Committee has met once in 2012, to consider and recommend the appointment of Sue Bygrave to the Board.
The Committee makes recommendations on all new Board appointments.
Some of its key responsibilities are to:
-- evaluate the balance of skills, knowledge and experience on the Board and, in the light of this evaluation, prepare a description of the role and capabilities required for a particular appointment;
-- use performance evaluation to assess whether non-executive directors are spending enough time to fulfil their duties;
-- consider candidates from a wide range of backgrounds with a wide range of capabilities and experience; and
-- give full consideration to succession planning in the course of its work and regularly review the structure, size and composition (including the skills, knowledge and experience) of the Board.
Committees' Terms of Reference.
The Board approved new terms of reference for all three Committees in February 2012 to ensure they were in line with best practice guidance and the Company's policies and practices. The full terms of reference can be reviewed on the Company's website, www.hclplc.com.
Internal Controls
In the 2010 Annual Report, the Board reported deficiencies in corporate governance, financial and operating controls, including compliance controls. Since the Refinancing in September 2011, the Board and senior management have been able to devote more attention to improving the overall control environment structure with particular focus on the operations of the UK businesses.
The Board is responsible for the Group's risk management process and its system of internal controls. Day-to-day responsibility for embedding controls is delegated to executive and senior management. Any system of internal control (encompassing strategic, financial, operational, compliance controls and risk management) is designed to manage but not eliminate risk as the Group seeks to achieve its objectives. The control framework should provide reasonable but not absolute assurance that the Group's assets and reputation are safeguarded and not subject to material loss or misstatement.
The Board has reviewed the control environment in 2011 and up to the date of this report. Significant steps have been taken to improve the overall structure of the control environment: the Chairman has led the appointment of a new Board; the schedule of matters reserved for the Board has been introduced; Board committees have renewed terms of reference. The Board has reviewed and considered the principal risks, and is implementing risk management and reporting procedures for these risks. In particular, the improvement of UK clinical compliance has been a major focus area, supported by the appointment of a UK Head of Clinical Governance and Compliance in October 2011. The Board has considered whether the restatements to the 2010 financial statements represent material losses. The restatements relate to HCA acquisition accounting matters and an isolated calculation error in the Social Care impairment review. The restatements have no future cash impact for the group. 2012 will see a review and reshaping of resources in the finance department under the leadership of Sue Bygrave, who was appointed Chief Financial Officer on 6 February 2012. During the remainder of 2012, the UK control environment will also be improved by the planned implementation of revisions to the corporate structure to reduce the number of active legal entities, the rolling out of a new IT front-office system (Itris) that will assist in embedding enhanced controls and standard policies and procedures.
Healthcare Locums plc
Unaudited Consolidated Statement of Comprehensive Income For the year ended 31 December 2011 ----------------------------------------- ----- -------- ------------ Restated(1) 2011 2010 Note GBPm GBPm ----------------------------------------- ----- -------- ------------ Revenue 4 227.1 154.9 Cost of sales (177.4) (114.2) ------------ Gross profit 4 49.7 40.7 Operating expenses (50.8) (43.7) Highlighted items: Goodwill impairment 12 - (51.4) Net exceptional operating expenses 5 (9.6) (4.8) ----------------------------------------- ----- -------- ------------ Total operating expenses (60.4) (99.9) -------- ------------ Loss from operations (10.7) (59.2) Finance income 7 24.8 2.0 Finance expense 7 (27.0) (6.4) -------- ------------ Loss before taxation from continuing operations 1 (12.9) (63.6) Tax benefit from continuing operations 8 2.6 2.5 -------- ------------ Loss for the year from continuing operations (10.3) (61.1) Profit for the year from discontinued operations, net of tax 9 1.4 - Loss for the year attributable to owners of the parent (8.9) (61.1) -------- ------------ Other comprehensive income: Share issue costs (2.3) - Release of deferred losses on cash flow hedges - 0.7 Tax relating to cash flow hedge reserve - (0.3) Translation adjustment 0.3 (0.2) Total other comprehensive (loss)/income (2.0) 0.2 ----------------------------------------- ----- -------- ------------ Total comprehensive loss for the year (10.9) (60.9) ----------------------------------------- ----- -------- ------------ Loss per share for loss attributable to the owners of the parent Basic and diluted - continuing business (pence) 10 (3.1) (56.2) Adjusted basic - continuing business (pence) 10 (3.9) (5.1) Basic and diluted - discontinued business (pence) 10 0.4 - ----------------------------------------- ----- -------- ------------ (1) 2010 figures have been restated for the revised impairment of goodwill and other assets in the UK Social Care division (Note 1). In addition the amounts credited or charged in the various headings for the operations of the Homecare division have been moved to profit for the year from discontinued operations - a net GBPnil result - as the Homecare division was sold in 2011 (Note 9). Unaudited Consolidated Statement of Financial Position as at 31 December 2011 Restated(1) 2011 2010 2009 Note GBPm GBPm GBPm ------------------------------------ ----- ------- ------------- ------- ASSETS Non-current assets Goodwill 12 39.8 46.2 60.3 Other intangible assets 13 53.9 75.6 3.5 Property, plant and equipment 14 2.0 2.5 1.0 Deferred tax asset 21 - - 1.7 95.7 124.3 66.5 ------- ------------- ------- Current assets Trade and other receivables 16 29.9 37.1 27.3 Current tax receivable 3.0 - - Cash and cash equivalents 14.2 10.6 4.1 47.1 47.7 31.4 ------- ------------- ------- Total assets 142.8 172.0 97.9 ------------------------------------ ----- ------- ------------- ------- LIABILITIES Current liabilities Trade and other payables 17 (25.5) (33.5) (18.4) Borrowings: Short term borrowings 18 - (0.1) (11.6) Current portion of long term borrowings 19 (0.9) (114.4) (4.3) Derivative financial liabilities 22 (1.7) (1.7) (0.8) Current tax payable - (0.5) (5.6) Deferred consideration 20 (1.5) - - Provisions 20 (2.7) (5.0) - (32.3) (155.2) (40.7) ------- ------------- ------- Non-current liabilities Borrowings 19 (39.3) (0.5) (5.5) Deferred tax liability 21 (9.2) (14.3) (1.7) Provisions 20 (2.1) (2.1) - (50.6) (16.9) (7.2) ------- ------------- ------- Total liabilities (82.9) (172.1) (47.9) ------------------------------------ ----- ------- ------------- ------- TOTAL NET ASSETS 59.9 (0.1) 50.0 ------------------------------------ ----- ------- ------------- ------- SHARE CAPITAL AND RESERVES ATTRIBUTABLE TO THE OWNERS OF THE PARENT Share capital 24 84.8 11.3 10.5 Share premium reserve 55.2 45.3 34.5 Cash flow hedge reserve - - (0.7) Share option reserve 1.2 4.7 1.1 Translation reserve 0.1 (0.2) - Retained earnings (81.4) (61.2) 4.6 ------------------------------------ ----- ------- ------------- ------- TOTAL EQUITY 59.9 (0.1) 50.0 ------------------------------------ ----- ------- ------------- ------- (1) Restated for amounts as reported in Note 1. Unaudited Consolidated Statement of Changes in Equity Cash flow Share Share Share hedge option Translation Retained capital premium reserve reserve reserve earnings Total Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm --------------------- ----- --------- --------- --------- --------- ------------ ---------- ------- Balance at 1 January 2009 10.5 34.3 (1.0) 0.6 - 4.2 48.6 Profit for the year - - - - - 3.0 3.0 Other comprehensive income - - 0.3 - - 0.3 0.6 Dividends - - - - - (3.8) (3.8) Issue of share capital - 0.2 - - - - 0.2 Deferred tax recognised on share based payment - - - - - 0.9 0.9 Credit in respect of share scheme charges - - - 0.5 - - 0.5 --------- --------- --------- --------- ------------ ---------- ------- Balance at 31 December 2009 10.5 34.5 (0.7) 1.1 - 4.6 50.0 Loss for the year - - - - (54.4) (54.4) Other comprehensive income for the year - - 0.7 - (0.2) (0.3) 0.2 Dividends 11 - - - - - (3.6) (3.6) Issue of share capital 24 0.8 10.8 - - - - 11.6 Deferred tax recognised on share based payment - - - - - (0.8) (0.8) Warrants issued during the year 23 - - - 3.0 - - 3.0 Credit in respect of share scheme charges - - - 0.6 - - 0.6 --------- --------- --------- --------- ------------ ---------- ------- Balance at 31 December 2010 (as previously reported) 11.3 45.3 - 4.7 (0.2) (54.5) 6.6 Prior year adjustment 1 (6.7) (6.7) Balance at 31 December 2010 (restated) 11.3 45.3 - 4.7 (0.2) (61.2) (0.1) Loss for the year - - - - - (8.9) (8.9) Other comprehensive income for the year - - - - 0.3 0.3 Dividends 11 - - - - - (2.1) (2.1) Issue of share capital 24 73.5 9.9 - - - (2.3) 81.1 Gain on Ares Lux debt for equity swap - - - - - (9.9) (9.9) Warrants lapsed during the year 23 - - - (2.7) - 2.7 - Amortisation of warrants - - - (0.3) - 0.3 - Debit in respect of share scheme credits - - - (0.5) - - (0.5) --------------------- ----- --------- --------- --------- --------- ------------ ---------- ------- Balance at 31 December 2011 84.8 55.2 - 1.2 0.1 (81.4) 59.9 --------------------- ----- --------- --------- --------- --------- ------------ ---------- ------- Unaudited Consolidated Statement of Cash Flows For the year ended 31 December 2011 --------------------------------------- ------- ------------ Restated(1) 2011 2010 GBPm GBPm --------------------------------------- ------- ------------ Cash flows from operating activities Loss for the year (8.9) (61.1) Adjustments for: Discontinued operation (1.4) - Loss/(gain) on fair value changes in contingent consideration 2.9 (4.2) Depreciation of property, plant and equipment 1.1 0.6 Amortisation of intangible assets 6.4 1.7 Goodwill impairment - 51.4 Impairment of property plant and equipment - 0.7 Impairment of other intangible assets - 2.7 Finance income (24.8) (2.0) Finance expense 27.0 6.4 Share based payments (credit) / charges (0.5) 0.6 Corporation tax benefit (2.6) (2.5) --------------------------------------- ------- ------------ Cash flows from operating activities before changes in working capital (0.8) (5.7) Changes in receivables 2.8 10.3 Changes in payables (1.4) (1.0) --------------------------------------- ------- ------------ Cash generated from operations 0.6 3.6 Corporation tax paid (2.5 ) (4.0) ------- ------------ Net cash flows from operating activities (1.9) (0.4) --------------------------------------- ------- ------------ Investing activities Interest received 0.1 1.5 Acquisition of subsidiaries, net of cash acquired - (89.8) Disposal of Homecare division 20.3 - Disposal of property, plant and equipment 0.1 - Contingent and deferred consideration paid (2.7) - Acquisition of property, plant and equipment (0.9) (1.3) Acquisition of intangible assets (0.2) (0.5) Net cash received from / (used in) investing activities 16.7 (90.1) --------------------------------------- ------- ------------ Financing activities Issue of ordinary shares 56.2 11.7 New loans acquired 38.9 140.5 Loans repaid (83.9) (24.9) Interest and similar expenses paid (14.4) (4.7) Loan fees (5.7) (7.7) Dividends paid to the owners of the parent (2.1) (3.6) Net cash (used in) / provided by financing activities (11.0) 111.3 --------------------------------------- ------- ------------ Net increase in cash and cash equivalents 3.8 20.8 Cash and cash equivalents (including short-term borrowings) at the beginning of the year 10.5 (7.5) Effect of exchange rates on cash and cash equivalents (0.1) (2.8) --------------------------------------- ------- ------------ Cash and cash equivalents (including short-term borrowings) at the end of the year 14.2 10.5 --------------------------------------- ------- ------------
(1) Restated for amounts as reported in Note 1.
Notes
1 General Information and Prior Year Restatement
Healthcare Locums plc is a Company incorporated in the United Kingdom under the Companies Act 2006 ("the Act"). The Company is listed on the Alternative Investment Market of the London Stock Exchange.
The financial information set out in the unaudited preliminary financial statements has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board as adopted by the European Union, and does not itself contain sufficient information to comply with IFRS. The accounting policies applied in preparing this financial information are consistent with the Group's financial statements for the year ended 31 December 2010 except in relation to the mandatory adoption of new accounting standards and revisions and amendments to existing accounting standards, none of which had any significant impact on the Group's results or financial position.
The financial information for the year ended 31 December 2010 has been derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. Those for the year ended 31 December 2011 will be delivered following the company's annual general meeting. The auditor's report on the accounts for the year ended 31 December 2010:
-- was qualified in respect of a limitation in scope relating to whether a GBP5.2m impairment of Information Technology systems should have been booked in 2010 or earlier;
-- drew attention by way of emphases of matter to a material uncertainty which may cast significant doubt about the company's ability to continue as a going concern and potential illegality of dividends (2010); and
-- contained a statement under s498(2) (relating to accounting records) and s498(3) Companies Act 2006 (failure to obtain information and explanations).
The auditors have not yet reported on the accounts for the year ended 31 December 2011, but the auditors have indicated that their report will include:
-- a qualification in respect of a limitation in scope relating to whether a GBP5.2m impairment of Information Technology systems should have been booked in 2010 or earlier;
-- emphasis of matter paragraphs drawing attention to a material uncertainty which may cast significant doubt about the company's ability to continue as a going concern, and material uncertainty relating to material claims (Note 25); and
-- a statement under s498 (3) Companies Act 2006 (failure to obtain information and explanations) with respect to the limitation of scope above.
The primary financial statements and the majority of figures in the notes are presented in Pounds Sterling ("GBP") because that is the currency of the primary economic environment in which the Group operates. Where it is considered useful and appropriate certain figures for the operations of the Australian business are disclosed in the notes in Australian Dollars ("A$").
Overseas operations are included in accordance with the policies set out in Note 3.
This unaudited preliminary announcement was approved by the Board and authorised for issue on 1 April 2012.
Prior year restatement
During the preparation of the Unaudited Consolidated Financial Statements for the year ended 31 December 2011, it became apparent that the recognition of a deferred tax liability of GBP9.6m (A$15.1m converted at rates ruling on the acquisition dates), on trademarks and other intangible assets of GBP31.8m (A$50.1m) recognised on the acquisition of LML and HCA had been omitted. As a result a restatement is required in the acquisition balance sheets to recognise this liability on the dates of acquisition of 1 August 2010 and 20 December 2010 respectively, with goodwill increasing by GBP9.6m at the date of acquisition. In addition, an escrow amount of GBP0.8m (A$1.2m) from a prior acquisition by HCA had been omitted and has also been included in the restated receivables on the acquisition balance sheet, with goodwill reducing by GBP0.8m at the date of acquisition. In addition, when completing the accounts for the consolidated Australian tax group for the tax year to June 2011 it was determined that the deferred tax asset estimate in the acquisition balance sheet was understated by GBP1.1m (A$ 1.7m) and the estimate in the acquisition balance sheet has been corrected, with goodwill increasing by GBP1.1m at the date of acquisition. A summary of the restatement entries is as follows: Acquisition 31 December date Forex 2011 A$m GBPm GBPm GBPm ------- ------------ ------ ------------ Goodwill 15.6 9.9 0.3 10.2 Receivables 1.2 0.8 - 0.8 Deferred tax asset (1.7) (1.1) - (1.1) Deferred tax liability (15.1) (9.6) (0.3) (9.9)
Also during the preparation of the Unaudited Consolidated Financial Statements for the year ended 31 December 2011 a clerical error in the 2010 calculation of the value in use of the UK Social Care division was discovered which, had the error not occurred, would have meant the impairment of the goodwill and assets associated with that division would have increased by GBP7.1m. A prior year adjustment has been booked to correct this misstatement, reducing goodwill by GBP5.4m, other intangible assets by GBP1.4m, tangible fixed assets by GBP0.3m, deferred tax liability by GBP0.4m and retained earnings at 31 December 2010 by GBP6.7m.
The combined impact of the above prior year adjustments on the loss from operations and loss for the year ended 31 December 2010 was as follows:
Loss Loss from for the operations year GBPm GBPm ------------ --------- As reported for the year ended 31 December 2010 (52.1) (54.4) Goodwill and asset impairment of Social Care division (7.1) (7.1) Deferred tax - 0.4 ------------ --------- As restated for the year ended 31 December 2010 (59.2) (61.1) ------------ ---------
The combined impact of the above prior year adjustments on the relevant figures in the Consolidated Statement of Financial Position at 31 December 2010 was as follows:
As previously Impact reported of restatements Restated GBPm GBPm GBPm -------------- ----------------- --------- Goodwill 41.4 4.8 46.2 Other intangible assets 77.0 (1.4) 75.6 Property, plant and equipment 2.8 (0.3) 2.5 Trade and other receivables 36.3 0.8 37.1 Deferred tax liability (3.7) (10.6) (14.3) -------------- ----------------- --------- Total restatements (6.7) ----------------- Profit and loss for the year (54.4) (6.7) (61.1) -------------- ----------------- --------- Profit and loss reserve (54.5) (6.7) (61.2) -------------- ----------------- ---------
The Group presents adjusted earnings per share in Note 10. The calculation for the year ended 31 December 2010 was misstated as detailed in that note.
2 Adoption of New and Revised Standards
In the current year, the following new and revised Standards and Interpretations have been adopted and have affected the amounts reported in these results.
Standards affecting the Unaudited Preliminary Financial Statements
IFRIC 19 - Extinguishing The Interpretation provides guidance Financial Liabilities on the accounting for "debt for with Equity Instruments equity swaps" from the perspective of the borrower. As discussed in Note 23c the Group extinguished debt by issuing equity instruments as part of the Refinancing. As a result of this a gain of GBP9.9m was recognised within finance income. ------------------------- -----------------------------------------
Standards not affecting the unaudited preliminary reported results or the financial position
The following new and revised Standards and Interpretations have been adopted in the current year. Their adoption has not had any significant impact on the amounts reported in these Preliminary Financial Statements but, with the exception of the amendment to IFRS 1 should the accounting for the Company (as opposed to the Group) be amended to IFRS, may impact the accounting for future transactions and arrangements.
Amendment to IFRS The amendment provides a limited 1 - Limited Exemption exemption for first-time adopters from Comparative from providing comparative fair-value IFRS 7 Disclosures hierarchy disclosures under IFRS for First-time 7. Adopters ------------------------ ----------------------------------------- IAS 24 (2009) The revised Standard has a new, - Related Party clearer definition of a related Disclosures party, with inconsistencies under the previous definition having been removed. ------------------------ ----------------------------------------- Amendment to IAS Under the amendment, rights issues 32 - Classification of instruments issued to acquire of Rights Issues a fixed number of an entity's own non-derivative equity instruments for a fixed amount in any currency and which otherwise meet the definition of equity are classified as equity. ------------------------ ----------------------------------------- Amendments to The amendments now enable recognition IFRIC 14 - Prepayments of an asset in the form of prepaid of a Minimum Funding minimum funding obligations. Requirement ------------------------ ----------------------------------------- Improvements to The amendments made to standards IFRSs 2010 under the 2010 improvements to IFRSs have had no impact on the Group. ------------------------ -----------------------------------------
At the date of authorisation of these Unaudited Preliminary Financial Statements the following Standards and Interpretations which have not been applied in these Financial Statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):
IFRS 1 (amended) Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters ----------------- ------------------------------------- IFRS 7 (amended) Disclosures: Transfers of Financial Assets ----------------- ------------------------------------- IFRS 9 Financial Instruments ----------------- ------------------------------------- IFRS 10 Consolidated Financial Statements ----------------- ------------------------------------- IFRS 11 Joint Arrangements ----------------- ------------------------------------- IFRS 12 Disclosure of Interests in Other Entities ----------------- ------------------------------------- IFRS 13 Fair Value Measurement ----------------- ------------------------------------- IAS 1 (amended) Presentation of Items of Other Comprehensive Income ----------------- ------------------------------------- IAS 12 (amended) Deferred tax: Recovery of Underlying Assets ----------------- ------------------------------------- IAS 19 (revised) Employee Benefits ----------------- ------------------------------------- IAS 27 (revised) Separate Financial Statements ----------------- ------------------------------------- IAS 28 (revised) Investments in Associates and Joint Ventures ----------------- ------------------------------------- IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine ----------------- -------------------------------------
The Directors do not consider that the adoption of the above standards will have a material impact on the Financial Statements of the Group in future periods.
3 Significant Accounting Policies (a) Basis of accounting
The Unaudited Consolidated Preliminary Financial Statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("EU") and therefore the Unaudited Consolidated Financial Statements comply with Article 4 of the EU IAS Regulation.
The Unaudited Consolidated Preliminary Financial Statements have been prepared under the historical cost basis, except for derivative financial instruments which are stated at their fair value. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies adopted are set out below.
(b) Basis of consolidation
The Unaudited Consolidated Preliminary Financial Statements incorporate the Financial Statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the Unaudited Consolidated Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary the accounting policies of subsidiaries are changed to ensure consistency with the policies adopted by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.
(c) Going concern
The Directors have adopted the going concern basis of accounting in preparing the Unaudited Preliminary Financial Statements. Further details of the Directors' consideration of the specific circumstances of the Group, and details of the material uncertainties which may cast significant doubt over the Group's and Company's ability to continue as a going concern are included in the Financial Review.
(d) Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are expensed as incurred.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments (see below). All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRSs. Changes in the fair value of contingent consideration classified as equity are not recognised.
The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3(2008) are recognised at their fair value at the acquisition date, except that:
-- deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with IAS 12 - Income Taxes and IAS 19 - Employee Benefits respectively;
-- liabilities or equity instruments related to the replacement by the Group of an acquiree's share-based payment awards are measured in accordance with IFRS 2 - Share-based Payment; and
-- 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 are measured in accordance with that standard.
The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed at the acquisition date, and is subject to a maximum of one year.
(e) Revenue recognition
Revenue represents the amounts earned from the provision of services to external customers during the reporting period - the time of provision of services being the point at which the amount of revenue can be measured reliably and when it is probable that the economic benefits will flow to the Group. Revenue is stated at invoiced amounts less value added tax or local taxes on sales, plus revenue earned but unbilled which is included as accrued income in receivables.
-- Revenue from temporary placements, which represents revenue for the services of temporary staff, is recognised when the services have been provided. Revenue includes the salary costs of the temporary staff unless paid directly by the client in which case revenue represents commission only; 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.
(f) Foreign currency
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 Consolidated Statement of Comprehensive Income.
On consolidation, the results of overseas operations are translated into Sterling at average rates. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the period end. All exchange differences arising on translation are recognised in the Consolidated Statement of Comprehensive Income and accumulated in the translation reserve.
In preparing the financial statements of each individual group entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
(g) Share-based payments
The Group operates an equity-settled, share-based compensation plan. When share options are awarded to employees a charge is made to the profit or loss recognising on a straight line basis the fair value of the options issued over the vesting period with a corresponding adjustment to share option reserve, based on the Group's estimate of the number of equity instruments that will eventually vest. 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.
(h) Employee benefits
Contributions to the Group's defined contribution pension schemes are charged to the Consolidated Statement of Comprehensive Income in the period 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 present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future benefits payable more than 12 months after the period-end are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Where data specific enough to calculate a provision as described above is not available provision is made for Long Service Leave on an estimated basis.
(i) 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. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.
Deferred tax is provided, using the 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 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 or loss 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.
(j) Goodwill
Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held equity interest (if any) in the entity over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
If, after reassessment, the Group's interest in the fair value of the acquiree's identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer's previously held equity interest in the acquiree (if any), the excess is recognised immediately in the Statement of Comprehensive Income as a bargain purchase.
Goodwill is not amortised but is reviewed for impairment at least annually. For the purposes of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount, being the value in use or - where reliably measurable - fair value less costs to sell, of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
(k) Other intangible assets
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 expected useful lives. The amortisation is shown as part of administrative expenses within the Consolidated Statement of Comprehensive Income.
Internally generated intangible assets arising from the Group's development of software are recognised only if all of the following conditions are met:
-- an asset is created that can be identified; -- it is probable that the asset created will generate future economic benefits; and -- the development cost of the asset can be measured reliably.
Internally generated intangible assets are amortised on a straight-line basis over their useful lives, commencing on the date they come into use.
The estimated useful lives are as follows:
Brands/trademarks - 20 years
Customer relationships - Over the contractual term or 6 years in 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, other than goodwill, with finite lives 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, being the value in use or - where reliably measurable - fair value less costs to sell, the asset is written down accordingly. Impairment of other intangible assets is included in operating expenses in the Consolidated Statement of Comprehensive Income.
(l) 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 on a straight-line basis to write off the cost, less estimated residual values, of 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 - 3 to 8 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.
(m) Impairment of assets
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 Consolidated Statement of Comprehensive Income.
(n) 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, each determined at the inception of the lease. The corresponding lease commitment is shown in the Consolidated Statement of Financial Position as a finance lease obligation.
Lease payments are apportioned between finance expenses and reduction of the finance lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in the Consolidated Statement of Comprehensive Income.
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 Consolidated 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. Provision is made for dilapidation costs expected to be incurred at the end of the lease term under tenant repairing leases.
(o) Sales ledger credits
From time to time in the United Kingdom the Group receives payments which are in excess of the amounts which the Group's accounting records show as due. The reasons include duplicate payments, credit notes not taken by customers and payments by customers who are "self billing" which are higher than our calculation of the amounts due. These matters are investigated and wherever possible the overpayments are resolved with the paying client and appropriate accounting entries made. If, after actively seeking to resolve the balance, it remains unresolved beyond the period set out in the Statute of Limitations (six years), the amount is credited to the Consolidated Statement of Comprehensive Income. The balance of sales ledger credits at the period end is shown within creditors.
(p) Financial instruments
Financial assets and financial liabilities are recognised in the Group's Statement of Financial Position when the Group becomes a party to the contractual provision of the instrument.
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:
Receivables 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). 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 of the receivable. Trade receivables are reported net of impairment provisions, which due to the nature of the customer base are not significant. The Group's receivables comprise trade and other receivables in the Consolidated Statement of Financial Position.
Cash and cash equivalents include cash in hand, deposits held at call with banks and bank overdrafts. Bank overdrafts are shown within current liabilities on the Consolidated Statement of Financial Position and are included within cash and cash equivalents for the purposes of the Consolidated Statement of Cash Flows.
Derivative financial instruments and hedging activities: Derivatives, including the embedded derivative within the Zero Coupon Loan Note, are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value through the Consolidated Statement of Comprehensive Income 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 tests the effectiveness of its hedges twice a year, at each external reporting date.
The Group only holds one derivative instrument which is not an economic hedge, the interest rate swap as required as part of the Refinancing.
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 Consolidated Statement of Comprehensive Income within finance income or expense. When a hedging instrument expires or is sold, or when a hedge no longer meets all 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 Consolidated 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 Consolidated Statement of Comprehensive Income within finance income or expense.
There were no new financial instruments entered into during the year ended 31 December 2011 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.
Zero coupon loan notes: These are initially recognised at fair value, being the present value at the time of issue of future cash payments to extinguish the instrument. They are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
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 Consolidated Statement of Comprehensive Income. When loans are refinanced drawings under the existing facilities are either extinguished or modified. Where facilities are extinguished the balance of unamortised fees are written off to Finance Expense. Where modified the unamortised fees are carried forward in the Consolidated Statement of Financial Position to be written off over the term of the modified facilities.
(q) Provisions and contingent liabilities
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the date of the Consolidated Statement of Financial Position, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
Obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the Group.
Contingent liabilities are possible obligations which arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. Provision is not made for any liability which could arise in the future, but significant contingent liabilities are reported in Note 25.
(r) 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.
(s) 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.
(t) Parent company
The Financial Statements of the parent company Healthcare Locums plc have been prepared in accordance with UK GAAP.
(u) Highlighted items.
Where certain items of operating expense or income 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 and disclosed in detail in the Notes to the Financial Statements. Highlighted items may include costs associated with restructuring the business, incremental costs of staff working directly on restructuring and refinancing, one off gains and losses, impairment of goodwill and intangible assets. In addition amounts of finance income or expense which are material by their size or incidence are disclosed in detail in the Notes to the Financial Statements .
(v) Adjusted operating profit
Adjusted operating profit is operating profits before share-based payments charges or credits and before highlighted items. The Board considers adjusted operating profit to be a better indicator of performance than operating profit as highlighted items, being exceptional in their nature by virtue of size or incidence, distort the results of the underlying business. Adjusted EBITDA is adjusted operating profit before charging depreciation and amortisation.
(w) Critical accounting judgements and key sources of estimation uncertainty
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 for intangible assets and contingent consideration. These estimates are based on historical experience, information obtained from the management of the acquired businesses, relevant market and industry data and the forecast 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 unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates. To assist in making these significant estimates, the Company engages expert professional valuers to assist with material acquisitions. Management monitors the carrying values of assets and adjustments are made if future market conditions indicate that such adjustments are appropriate.
Impairment of goodwill. The Group is required to test, on at least an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on the higher of value in use calculations or the fair value less costs to sell method. These both require 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 12.
Contractual claims and regulatory contingencies. The Group conducts its business principally in the UK and Australia and contractual 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 these 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 from that estimated. Provisions in respect of legal claims, contractual and regulatory proceedings are determined on a case by case basis and represent an estimate of probable losses after considering, among other factors, the progress of each case, the Group's experience of others in similar cases and the views of legal counsel. Where no estimate can be reliably made of the likely outcome of any claims, and they are potentially material, those claims are disclosed as contingent liabilities (Note 25).
Uncertain tax positions.Uncertain tax positions may arise where the Directors have had to make particular judgments in relation to certain tax treatments. Based on the status of enquiries with the relevant tax authorities and consideration of tax legislation, 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. However, significant judgment is required in making these estimates, particularly in relation to the recovery of losses, and the Group's final liabilities may ultimately be materially different.
Estimation of useful economic lives of long-lived assets.The economic life used to amortise intangible assets and depreciate property, plant and equipment relates to the future performance of the assets in question and management's judgment of the period over which the economic benefit will be derived from the asset.
As at 31 December 2011, the amount of property, plant and equipment included in the Unaudited Consolidated Statement of Financial Position was GBP2.0m (2010: GBP2.5m).
As at 31 December 2011, the amount of intangible assets included in the Unaudited Consolidated Statement of Financial Position was GBP53.9m (2010: GBP75.6m).
Employee benefits provision. In Australia employees, including locums, are entitled to long service leave after 10 years service (subject to specific rules and conditions which vary state by state). In determining the amount of the employee benefits provision, representing the value of expected future payments to be made in respect of services provided by employees up to the date of the Unaudited Consolidated Statement of Financial Position, the Directors consider salary levels, the past experience of employee departures and periods of service. As at 31 December 2011, the amount provided in the Unaudited Consolidated Statement of Financial Position was GBP2.8m (2010: GBP3.6m).
Zero Coupon Loan Notes. The Zero Coupon Loan Notes were issued during the year as part of the Refinancing. The nominal value of the Zero Coupon Loan Notes was discounted to fair value at a rate of 15% which the Directors considered fairly represented the return a non-Senior lender would seek from the Company for a loan maturing in September 2021. The Directors assessed at the date of issue and at the year end the likelihood of further Zero Coupon Loan Notes being issued if future EBITDA or enterprise value targets are achieved.
4 Segmental Analysis
The segmental analysis provided below represents the information presented to the Board of Directors, which is the Chief Operating Decision Maker as defined by IFRS 38.
In the UK the Group provides locum recruitment services for health and social care staff, being Doctors, Nurses, Allied Health Professionals (AHP) and Qualified Social Workers (QSW). The permanent placement business which places staff in each of these sectors is managed as a separate segment. Australia is also managed as a separate, single segment. During the year ended 31 December 2011 placement of theatre nurses, which was previously included within AHP was moved to the Nurses segment. Prior year segmental information has been restated to reflect the current reporting structure.
The Board 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. The Board considers gross profit to be its current, consistent measure for determining segment profitability, it being the contribution generated towards overheads. It does not receive segment information on the costs below gross profit or on assets and liabilities by segment. For 2012 operating costs will be charged to each division, either directly or by a central allocation, and this enhanced divisional analysis will be reported in accounts beginning with the Interim Results for the six months to June 2012.
Year Restated Restated ended Year ended year ended year ended 31 December 31 December 31 December 31 December 2011 2011 2010 2010 Gross Gross Revenue profit Revenue profit GBPm GBPm GBPm GBPm ----------------------------- ------------- ------------- ------------- ------------- UK: Locum doctors 25.5 3.7 33.7 6.3 Locum qualified social workers 26.5 4.6 35.6 6.8 Locum allied health professionals (restated) 30.6 8.2 47.0 14.7 Locum nursing (restated) 25.2 6.9 26.3 7.0 Permanent placements 2.6 2.6 3.9 3.9 Inter-segment (0.1) - (0.6) (0.4) ------------- ------------- ------------- ------------- Total UK 110.3 26.0 145.9 38.3 Australia 116.8 23.7 9.0 2.4 ------------- ------------- ------------- ------------- Continuing operations 227.1 49.7 154.9 40.7 ------------- ------------- Operating expenses (50.8) (43.7) Goodwill impairment - (51.4) Net exceptional operating expenses (9.6) (4.8) ------------- ------------- Loss from operations (10.7) (59.2) Finance income 24.8 2.0 Finance expense (27.0) (6.4) ----------------------------- ------------- ------------- ------------- ------------- Loss before taxation from continuing operations (12.9) (63.6) ----------------------------- ------------- ------------- ------------- -------------
Inter-segment adjustments represent removal of the overlapping commission revenue from placements recognised by two or more segments, revenue and cost of sales not allocable to the reported segments and measurement differences between the basis used to report invoiced transactions to the chief operating decision maker and the basis used in the Group Financial Statements.
The geographical distribution of the non-current assets of the Group as at 31 December was as follows: UK Australia Other Total 2011 GBPm GBPm GBPm GBPm --------------------------- ------ ----------- ------ ------ Property, plant and equipment 0.8 1.2 - 2.0 Goodwill 19.5 20.3 - 39.8 Other intangible assets 4.7 49.2 - 53.9 --------------------------- ------ ----------- ------ ------ Total 25.0 70.7 - 95.7 --------------------------- ------ ----------- ------ ------ UK Australia Other Total 2010 (Restated) GBPm GBPm GBPm GBPm --------------------------- ------ ----------- ------ ------ Property, plant and equipment 0.9 1.5 0.1 2.5 Goodwill 19.5 26.7 - 46.2 Other intangible assets 5.7 69.9 - 75.6 Total 26.1 98.1 0.1 124.3 --------------------------- ------ ----------- ------ ------
At 31 December 2009 all the assets of the Group were in the 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 Trusts accounted for 32.4% (2010: 66.1%). The decrease is due to the inclusion of a full year's revenue from HCA. There were no other single customers contributing more than 10% of Group revenue in 2011 or 2010.
As an additional voluntary disclosure the analysis of operating expenses is as follows:
Year ended Year ended 31 December 31 December 2011 2010 GBPm GBPm ---------------------------------- --------------- --------------- UK based administration expenses (incl corporate) 28.8 38.5 Depreciation, amortisation and share scheme movements 1.0 2.5 29.8 41.0 ---------------------------------- --------------- --------------- Australia based administration expenses 15.0 2.3 Depreciation and amortisation 6.0 0.4 21.0 2.7 ---------------------------------- --------------- --------------- Total 50.8 43.7 ---------------------------------- --------------- --------------- 5 Net Exceptional Operating Expenses Restated Year ended Year ended 31 December 31 December 2011 2010 GBPm GBPm ------------------------------------------- ------------- ------------- Exceptional operating income/(expense): Reorganisation and refinancing costs: Restructuring costs (1.8) (0.3) Refinancing additional costs (0.7) - Australia - integration costs (0.6) (0.4) Onerous leases (0.7) (0.7) ------------- ------------- (3.8) (1.4) (Loss) / gain on fair value changes in contingent and deferred consideration (Note 15) (2.9) 4.2 Investigation and resolution of (2.9) - accounting irregularities Acquisition related transaction costs (Note 15) - (2.8) Costs related to advice concerning possible disposal of business - (1.4) Impairment of property, plant and equipment (Note 14) - (0.7) Impairment of other intangible assets (Note 13) - (2.7) ------------------------------------------- ------------- ------------- Net exceptional operating expenses (9.6) (4.8) ------------------------------------------- ------------- -------------
Reorganisation and refinancing costs in 2011 include:
Restructuring costs primarily relate to redundancies and office relocation costs.
Refinancing additional costs includes the incremental costs of staff wholly, or predominantly, involved in work related to the Refinancing.
The investigation and resolution of the accounting irregularities includes external professional advisers and the incremental costs of staff wholly, or predominantly, involved in work relating to the investigation.
The 2010 figures are restated for the additional impairment of the fixed assets of the Social Care division as reported in Note 1. The reorganisation costs in 2010 principally included employee redundancy costs, relocation of offices associated with the ongoing off-shoring of back and middle office functions to India and also the ongoing restructuring within the Qualified Social Workers division. Provision 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 acquisitions.
The tax effect of the above exceptional items is a tax credit of GBP0.1m for Australia (2010:GBPnil). There is no tax effect in relation to the UK exceptional items (2010: GBP1.2m credit)..
6 Loss From Operations Loss from operations for the year has been arrived at after charging/(crediting) the following: ----------------------------------------------------------------------- Year ended Year ended 31 December 31 December 2011 2010 GBPm GBPm ----------------------------------------- ------------- ------------- Amortisation of other intangible assets 6.4 1.7 Depreciation of property, plant and equipment 1.1 0.6 Foreign exchange losses (0.6) (0.6) Hire of other assets - operating leases 0.7 0.9 Share-based payments scheme (credits) /charges (0.5) 0.6 Gain on disposal of property, plant and equipment (0.1) - Fees payable to the Company's current auditor for: - audit of the Company's annual 0.2 - accounts - audit of the Company's subsidiaries 0.1 - Fees payable to the Company's previous auditor for: - audit of the Company's annual accounts - 0.5 - audit of the Company's subsidiaries 0.1 0.2 - other services - 0.1 ----------------------------------------- ------------- ------------- 7 Finance Income and Expense Year ended Year ended 31 December 31 December 2011 2010 Finance income GBPm GBPm ---------------------------------------- ------------- ------------- Exceptional finance income: Refinancing - difference between - fair value of shares issued to Ares Lux and the mezzanine finance retired (Note 23c) 9.9 Fair value adjustment on Zero 7.7 - Coupon Loan Note (Note 23e) Forex on Refinancing 0.3 - Bank debt waived (Note 23f) 5.9 - Accrued interest payable written 0.6 - off in Refinancing (Note 23f) ------------- ------------- 24.4 - Interest received on bank deposits 0.1 - Foreign exchange gains 0.2 1.5 Gain on fair value changes in derivative financial instruments 0.1 0.5 ---------------------------------------- ------------- ------------- 24.8 2.0 ---------------------------------------- ------------- ------------- Year ended Year ended 31 December 31 December 2011 2010 Finance expense GBPm GBPm ---------------------------------------- ------------- ------------- Exceptional finance expense: Bank fees relating to debt repaid 4.4 - written off (Note 23g) Professional fees of Banks' advisers 3.0 - (Note 23h) Advisers fees on the Refinancing 2.5 - (Note 23h) Warrant option written off (Note 2.6 - 19) Arrangement fee on ACE Limited 0.2 - facility (Note 23b)(iv)) ------------- ------------- 12.7 - Bank loans and overdrafts 14.0 3.7 Loss on fair value changes in derivative financial instruments - 2.5 Finance lease interest 0.2 0.2 Imputed interest on Zero Coupon 0.1 - Loan Notes (Note 22) ---------------------------------------- ------------- ------------- 27.0 6.4 ---------------------------------------- ------------- -------------
The Group did not apply, in either 2011 or 2010, cash flow hedge accounting in respect of the derivative financial instruments previously designated in a hedge relationship or to new instruments acquired during the year. Accordingly, all fair value changes were recognised in the Unaudited Consolidated Statement of Comprehensive Income. Gains and losses recognised in other comprehensive income in prior years were recycled to the Unaudited Consolidated Statement of Comprehensive Income upon settlement of related hedging instruments in 2010.
8 Tax benefit Year ended Restated 31 December Year ended 2011 31 December 2010 GBPm GBPm --------------------------------------- ------------- ------------- UK corporation tax - current year - - UK corporation tax - prior year (0.8) - Group relief re Homecare (0.4) - Carry back to prior year - (1.1) Current tax credit (1.2) (1.1) ------------- ------------- Deferred tax Origination and reversal of temporary differences (1.4) (1.4) ------------- ------------- Total tax benefit (2.6) (2.5) --------------------------------------- ------------- -------------
The tax benefit assessed for the period is lower than the standard rate of corporation tax in the UK. The differences are explained below:
Year Restated ended Year ended 31 December 31 December 2011 2010 GBPm GBPm ----------------------------------------- ------------- ------------- Loss before taxation including discontinued operations (11.1) (63.6) ----------------------------------------- ------------- ------------- Tax at the standard rate of corporation tax in the UK of 26.5 % (2010 - 28%) (2.9) (17.8) Effects of: Expenses not deductible for tax purposes 3.4 12.3 Non-taxable income (3.0) - Over provision in prior years (0.8) - Tax related to discontinued operations (0.4) - Unrecognised potential deferred tax assets 1.4 3.0 Impact of overseas tax (0.3) - ----------------------------------------- ------------- ------------- Total tax benefit for the year (2.6) (2.5) ----------------------------------------- ------------- ------------- 9 Profit for the Year from Discontinued Operations, net of Tax
On 27 June 2011 the Group announced that its wholly owned Australian subsidiary, HCA, had agreed to sell its Homecare Division to KinCare Health Services Pty. Limited. The sale was completed on 18 July 2011.
The disposal enables HCL to focus on the development of the core UK and Australian businesses and realise value from non-core elements of the business, which would have required further investment to realise their true potential. The net proceeds were used to reduce the Group's debt.
The net assets sold comprised:
GBPm ------------------------------- ------ Property, plant and equipment 0.2 Intangible assets - goodwill 6.6 Intangible assets - other 15.9 Deferred tax asset 0.4 Trade and other receivables 4.4 Cash and cash equivalents - Assets sold 27.5 ------ Trade and other payables (1.6) Short term provisions (1.8) Long term provisions (0.2) Deferred tax liability (4.3) Liabilities transferred (7.9) ------ Net assets sold 19.6 ------------------------------- ------ Disposal proceeds 22.7 Costs of sale (2.4) Net proceeds of disposal 20.3 ------------------------------- ------ Net gain on disposal 0.7 ------------------------------- ------
There was no tax effect of the disposal.
The results of trading and cash flows for the current year to the date of disposal, and the prior year from the date of acquisition were as follows:
1 January to 20 December 17 July to 31 December 2011 2010 GBPm GBPm -------------------------- ---------- ---------------- Revenue 16.3 2.3 Cost of sales (11.5) (1.7) ---------- ---------------- Gross profit 4.8 0.6 Administrative expenses (3.3) (0.5) Other operating expenses (0.4) (0.1) ---------- ---------------- Profit from operations 1.1 - Finance expense (net) - - ---------- ---------------- Profit before taxation 1.1 - Tax expense (0.4) - -------------------------- ---------- ---------------- Profit for the period 0.7 - -------------------------- ---------- ---------------- Operating cash flows 1.3 0.3 Financing cash flows (0.1) - -------------------------- ---------- ---------------- Total cash flows 1.2 0.3 -------------------------- ---------- ----------------
10 Earnings Per Share
Restated year Year ended ended 31 December 31 December 2011 2010 Number Number '000 '000 ----------------------------------------- ------------- ------------- Number of ordinary 10p shares Weighted average number of shares 334,075 108,768 ----------------------------------------- ------------- ------------- Calculation of adjusted earnings GBPm GBPm for the year: ----------------------------------------- ------------- ------------- Loss for the year from continuing operations (10.3) (61.1) ------------- ------------- Adjustments: Goodwill impairment - 51.4 Net exceptional operating expenses (Note 5) 9.6 4.8 Share-based payment (credits)/charges (0.5) 0.6 Exceptional finance income (24.4) - Exceptional finance expense 12.7 - ------------- ------------- (2.6) 56.8 Tax effect of above items (0.1) (1.2) Post tax adjustments (2.7) 55.6 ------------- ------------- Adjusted loss for the year from continuing operations (13.0) (5.5) ----------------------------------------- ------------- ------------- Earnings per share from continuing Pence Pence operations ----------------------------------------- ------------- ------------- Basic and dilutive earnings per share (3.1) (56.2) Adjusted basic earnings share (3.9) (5.1) ----------------------------------------- ------------- ------------- GBPm GBPm Profit for the year from discontinued 1.4 - operations ----------------------------------------- ------------- ------------- Earnings per share from discontinued Pence Pence operations ----------------------------------------- ------------- ------------- Basic and dilutive earnings 0.4 - per share ----------------------------------------- ------------- -------------
The restatement of the 2010 earnings per share relates to the prior year adjustment of the Social Care goodwill and other asset impairments as disclosed in Note 1 and a correction of the calculated tax effect of the adjustments as noted below. The amounts reported last year were 50.0p for basic and diluted loss per share and 18.5p for adjusted basic and diluted loss per share.
During the preparation of the Unaudited Consolidated Financial Statements for the year ended 31 December 2011, it became apparent that the tax effect of the adjusting items for earnings per share (EPS) purposes presented in Note 10 to the Consolidated Financial Statements for the year ended 31 December 2010 was misstated. The note presented the tax effect of adjusting items of GBP13.3m but should have been GBP0.4m. The impact of this restatement would have been to increase adjusted earnings by GBP12.9m from negative earnings of GBP20.1m to negative earnings of GBP7.2m and increase adjusted basic earnings per ordinary shares by 11.88p from negative 18.48p to negative 6.60p. In preparing the adjusted earnings per share for 2011 the gain on inter-company financing with Australia was excluded as it is not a one-off credit. The GBP1.5m booked as an adjusting entry in the 2010 earnings per share calculation has been eliminated.
Earnings per share from continuing and discontinued operations in 2011 were a loss of 2.7p per share and adjusted earnings from continuing and discontinued operations were a loss of 3.5p per share.
At 31 December 2011, there were 175,495 (2010: 4,019,281) potentially dilutive share options and zero (2010: 2,943,453) potentially dilutive warrants which have not been included above as they do not affect EPS, on the basis that they are not currently dilutive.
11 Dividends
Year ended Year ended 31 December 31 December 2011 2010 GBPm GBPm ---------------------------------- ------------- ------------- Interim dividend of 1.8p paid on 10 January 2011 (2010 - 1.5p paid on 1 April 2010) per ordinary share relating to the previous year's results. 2.1 1.6 Final dividend in 2009 of 1.9p paid on 25 June 2010 per ordinary share relating to the previous year's results. - 2.0 2.1 3.6 ---------------------------------- ------------- -------------
The Directors are not proposing a final dividend for 2011 (2010: nil).
As reported in the Consolidated Financial Statements for the year ended 31 December 2010 the Board became aware that certain of the dividends paid under the management of the previous Board were potentially unlawful.
Since the date of issue of the Consolidated Financial Statements for the year ended 31 December 2010 further analysis has been performed. After taking legal and accounting advice, the Board has concluded that the dividend paid on 10 January 2011 was unlawful as the then board should have known at the date that the dividends were approved and paid that the Company had insufficient reserves available to make the payment. The Board has been unable as yet to come to a definite conclusion about the legality of the dividends paid on 1 April and 25 June 2010. No action will be taken to recover unlawful dividends from shareholders in general. However, the Board is considering whether remedies are available against former directors to recover unlawful dividends paid to them and damages for breach of duty in authorising the relevant dividends.
12 Goodwill
Restated Total GBPm ----------------------------------- --------- Cost: At 1 January 2009 and 31 December 2009 60.3 Additions as reported 26.5 Restatement of additions (Notes 1 and 15) 9.9 Effect of movements in foreign exchange (as reported) 0.6 Restatement of the effect of movements in foreign exchange 0.3 --------- At 31 December 2010 97.6 Adjustment to acquired asset - values Disposals (6.5) Effect of movements in foreign exchange 0.1 ----------------------------------- --------- At 31 December 2011 91.2 ----------------------------------- --------- Impairment: At 1 January 2009 and 31 - December 2009 Charge in the year as originally reported 46.0 Restatement (Note 1) 5.4 ----------------------------------- --------- At 31 December 2010 and 31 December 2011 51.4 ----------------------------------- --------- Carrying amount: At 31 December 2011 39.8 ----------------------------------- --------- At 31 December 2010 46.2 ----------------------------------- --------- At 31 December 2009 60.3 ----------------------------------- --------- The carrying amount is attributable to the following business segments: ------------------------------------------------------------------------ Restated(1) 31 December 31 December 31 December 2011 2010 2009 GBPm GBPm GBPm ----------------------------- ------------ ------------- ------------ Doctors - - 22.4 Social Care - - 20.6 Allied Health Professionals 8.0 10.7 17.3 Nursing 11.5 8.8 - Australia 20.3 26.7 - ----------------------------- ------------ ------------- ------------ Total 39.8 46.2 60.3 ----------------------------- ------------ ------------- ------------
(1) The amount reported for Australia in the 2010 Financial Statements was GBP16.5m. Prior year adjustments as reported in detail in Note 1 and 17 for LML of GBP0.7m and for HCA of GBP9.5m increased the amount in the restated Consolidated Statement of Financial Position to GBP26.7m. The amount reported for Social Care was GBP5.4m at 31 December 2010. As reported in Note 1 this amount has been fully impaired by a prior year adjustment.
As a result of the transfer of the theatre nurses operations from the Allied Health Professionals segment to the Nursing segment GBP2.7m of associated goodwill was transferred between those segments during 2011.
At 31 December 2011 goodwill was tested for impairment. The recoverable amounts of all the above segments were determined from value in use calculations, based on cash flow projections from the formally approved budget for 2012, formally approved forecasts for 2013 and 2014 and estimates for subsequent years.
The impairment charge taken in 2010 reflected 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 key assumptions in the value in use calculations for 2011 and 2010 were:
-- Risk-free rate - 2.1% (2010: 4.1%) -- Equity market risk premium - 7.2% (2010: 5%) -- Beta 1.195 (2010: 1.09) -- Small stock premium 6% (2010: 5%) -- Gross cost of debt, inclusive of amortisation of fees, 11.0% (2010: 7.2%) -- Expected long-term tax rate - 25% UK, 30% Australia (2010: 25% and 30%) -- Zero coupon loan notes discount rate 15% (2010 not applicable)
-- The post-tax discount rate used was 11.76% for UK operations and 11.72% for Australian operations based on the estimated pre tax discount rate of 15.68% (2010: 16.67%)
-- Long term revenue growth estimate 2% for the UK operations and 2.5% for the Australian operations (2010: 2% for both the UK and Australia)
Based on the stated assumptions there was no impairment of goodwill at 31 December 2011. To assess the likelihood of an impairment changes to the assumptions were made, singly and in combination, including a 1% increase in the weighted average cost of capital, reducing the revenue growth estimate to 2%, reducing the gross margin by 1%. None of these indicated a need for an impairment charge.
If the discount rate used in 2010 had been decreased or increased by 2%, the impairment amount would have been lower by GBP2.7m or higher by GBP2.0m, respectively.
13 Other Intangible Assets
Acquired Brands Customer Computer candidate and Knowledge Non-compete relationships software database trademarks database agreements Total GBPm GBPm GBPm GBPm GBPm GBPm GBPm -------------------- --------------- ---------- ----------- ------------ ---------- ------------ ------- Cost: At 1 January 2009 4.0 6.0 - - 0.1 - 10.1 Additions - 1.6 - - - - 1.6 Disposals - (0.1) - - - - (0.1) --------------- ---------- ----------- ------------ ---------- ------------ ------- At 31 December 2009 4.0 7.5 - - 0.1 - 11.6 Acquisitions 27.4 0.6 13.1 32.1 - 0.5 73.7 Additions - 0.5 - - - - 0.5 Disposals - (0.5) - - - - (0.5) Effect of movements in foreign exchange 0.8 - 0.4 1.0 - - 2.2 --------------- ---------- ----------- ------------ ---------- ------------ ------- At 31 December 2010 32.2 8.1 13.5 33.1 0.1 0.5 87.5 Additions - 0.4 - - - - 0.4 Transfer to property, plant & equipment - (0.2) - - - - (0.2) Disposals (7.5) (6.9) (3.3) (5.3) (0.1) - (23.1) Effect of movements in foreign exchange 0.2 - 0.1 0.2 - - 0.5 -------------------- --------------- ---------- ----------- ------------ ---------- ------------ ------- At 31 December 2011 24.9 1.4 10.3 28.0 - 0.5 65.1 -------------------- --------------- ---------- ----------- ------------ ---------- ------------ ------- Amortisation: At 1 January 2009 1.0 0.8 - - 0.1 - 1.9 Provided for the year 0.5 0.5 - - - - 1.0 Impairment - 5.3 - - - - 5.3 Disposals - (0.1) - - - - (0.1) --------------- ---------- ----------- ------------ ---------- ------------ ------- At 1 January 2010 1.5 6.5 - - 0.1 - 8.1 Provided for the year 0.8 0.4 0.3 0.1 - - 1.6 Disposals - (0.5) - - - - (0.5) Impairment as previously reported 0.7 0.6 - - - - 1.3 Impairment (prior year adjustment (Note 1)) 1.3 0.1 - - - - 1.4 --------------- ---------- ----------- ------------ ---------- ------------ ------- At 31 December 2010 4.3 7.1 0.3 0.1 0.1 - 11.9 Provided for the year 2.9 0.3 1.4 1.7 - 0.1 6.4 Disposals (0.3) (6.4) (0.2) (0.2) (0.1) - (7.2) Effect of movements in foreign exchange - - - 0.1 - - 0.1 -------------------- --------------- ---------- ----------- ------------ ---------- ------------ ------- At 31 December 2011 6.9 1.0 1.5 1.7 - 0.1 11.2 -------------------- --------------- ---------- ----------- ------------ ---------- ------------ ------- Net book value: At 31 December 2011 18.0 0.4 8.8 26.3 - 0.4 53.9 -------------------- --------------- ---------- ----------- ------------ ---------- ------------ ------- At 31 December 2010 (Restated) 27.9 1.0 13.2 33.0 - 0.5 75.6 -------------------- --------------- ---------- ----------- ------------ ---------- ------------ ------- At 31 December 2009 2.5 1.0 - - - - 3.5 -------------------- --------------- ---------- ----------- ------------ ---------- ------------ -------
At 31 December 2011 computer software included GBP0.2m under construction (2010: GBPnil). The Group amortises intangible assets from the date the assets are ready to use.
Bank loans are secured on all assets of the Group.
The asset lives of the material intangibles assets have been assessed at 20 years for brands and trademarks and 10 years for the main acquired candidate database. Customer relationships are amortised over the life of the contracts.
14 Property, Plant and Equipment
Improvements Office to leasehold and Computer Motor buildings Equipment Vehicles Total GBPm GBPm GBPm GBPm ------------------------------ -------------- -------------- ---------- ------ Cost: At 1 January 2009 0.9 1.9 - 2.8 Additions - 0.4 - 0.4 Disposals - (0.9) - (0.9) -------------- -------------- ---------- ------ At 31 December 2009 0.9 1.4 - 2.3 Acquisition 0.6 0.7 0.2 1.5 Additions 0.2 1.1 - 1.3 Disposals (0.2) (0.5) - (0.7) -------------- -------------- ---------- ------ At 31 December 2010 1.5 2.7 0.2 4.4 Additions 0.3 0.4 0.7 Transfer from intangible assets - 0.2 - 0.2 Disposals (0.3) (0.5) (0.1) (0.9) ------------------------------ -------------- -------------- ---------- ------ At 31 December 2011 1.5 2.8 0.1 4.4 ------------------------------ -------------- -------------- ---------- ------ Depreciation and impairment: At 1 January 2009 0.5 1.2 - 1.7 Provided for the year 0.1 0.4 - 0.5 Disposals - (0.9) - (0.9) -------------- -------------- ---------- ------ At 31 December 2009 0.6 0.7 - 1.3 Provided for the year 0.1 0.5 - 0.6 Impairment as reported in 2010 - 0.4 - 0.4 Impairment prior year adjustment (Note 1) - 0.3 - 0.3 Disposals (0.2) (0.5) - (0.7) -------------- -------------- ---------- ------ At 31 December 2010 0.5 1.4 - 1.9 Provided for the year 0.3 0.8 - 1.1 Disposals (0.3) (0.3) - (0.6) ------------------------------ -------------- -------------- ---------- ------ At 31 December 2011 0.5 1.9 - 2.4 ------------------------------ -------------- -------------- ---------- ------ Net book value: At 31 December 2011 1.0 0.9 0.1 2.0 ------------------------------ -------------- -------------- ---------- ------ At 31 December 2010 (As restated) 1.0 1.3 0.2 2.5 ------------------------------ -------------- -------------- ---------- ------ At 31 December 2009 0.3 0.7 - 1.0 ------------------------------ -------------- -------------- ---------- ------ Assets included above held under finance leases (Note 19): Net book value: At 31 December 2011 - 0.1 - 0.1 At 31 December 2010 0.1 0.8 - 0.9 At 31 December 2009 - 0.4 - 0.4 ------------------------------ -------------- -------------- ---------- ------ Depreciation charge: Year ended 31 December 2011 - 0.3 - 0.3 Year ended 31 December 2010 - 0.4 - 0.4 Year ended 31 December 2009 0.1 0.3 - 0.4 ------------------------------ -------------- -------------- ---------- ------
Bank loans are secured on all assets of the Group.
15 Acquisitions
There were no acquisitions during the year ended 31 December 2011. However, following a further review of the assets and liabilities acquired with Last Minute Locums Pty Limited ("LML") and Healthcare Australia Holdings Pty Limited ("HCA"), the Group has made prior year adjustments, as disclosed in Note 1 and in part (e) of this note. As a result of making the prior year adjustments, set out below is the revised table of the 2010 acquisitions:
Orion and HCA MJV LML Restated(1) Redwood Restated(1) Total GBPm GBPm GBPm GBPm GBPm ----------------------------- ------ ---------------- -------- ------------- ------- Cash consideration 3.7 4.9 5.0 83.3 96.9 Contingent consideration (at acquisition date fair value) 4.8 1.2 1.6 - 7.6 Total consideration 8.5 6.1 6.6 83.3 104.5 ----------------------------- ------ ---------------- -------- ------------- ------- Fair value of assets and liabilities acquired: Intangible assets: Customer relationships 1.0 1.3 1.2 23.9 27.4 Computer software - - - 0.6 0.6 Acquired candidate database 0.9 - 1.3 10.9 13.1 Brands and trademarks 0.9 1.8 0.4 29.0 32.1 Non-compete agreements - 0.5 - - 0.5 ------ ---------------- -------- ------------- ------- 2.8 3.6 2.9 64.4 73.7 Cash/(invoice discounting balance) acquired (1.0) - - 7.6 6.6 Property plant and equipment - - - 1.5 1.5 Trade and other receivables originally reported 1.5 - - 16.7 18.2 Trade and other receivables restatement - - - 0.8 0.8 Deferred tax asset originally reported - - - 4.8 4.8 Deferred tax asset restatement - - - (1.1) (1.1) Trade and other payables (0.6) - - (13.8) (14.4) Employee benefits provision - - - (3.5) (3.5) Current taxation (0.2) - - (0.2) (0.4) Deferred tax liability originally reported (0.8) (0.5) - (7.2) (8.5) Deferred tax liability restatement - (0.7) - (8.9) (9.6) Net assets acquired 1.7 2.4 2.9 61.1 68.1 ----------------------------- ------ ---------------- -------- ------------- ------- Goodwill as previously stated 6.8 3.0 3.7 13.0 26.5 Goodwill restatement - 0.7 - 9.2 9.9 ----------------------------- ------ ---------------- -------- ------------- ------- (1) Of the total cash consideration, GBP562,000 was paid in January 2011. Transaction costs (Note 5) 0.2 0.7 0.2 1.7 2.8 ----------------------------- ------ ---------------- -------- ------------- -------
During 2010, Healthcare Locums plc completed four acquisitions and a number of amendments to the purchase consideration amounts and terms were negotiated during the year ended 31 December 2011 as detailed below. These resulted in the following credits / (charges) which were reported within net exceptional operating costs in the Unaudited Consolidated Statement of Comprehensive Income (Note 5)
a below) Orion / MJV variation agreement (4.5) c below) LML contingent consideration written off 0.9 d below) Redwood variation agreements 0.7 (2.9) ------
(a) On 23 July 2010 the Group acquired 100% of the voting share capital of Orion Locums Limited ("Orion"), a leading nursing and healthcare staffing locum business in the UK, for an initial cash consideration of GBP3,200,000 and 100% of the voting share capital of MJV Locums Limited ("MJV") for an initial cash consideration of GBP500,000 from a common shareholder, Craig Tibbles, who held 100% of the issued share capital of both companies. The Group also agreed to pay contingent consideration in cash on these acquisitions of up to GBP5,600,000 for Orion and GBP1,400,000 for MJV. The fair value of the contingent consideration at the time of acquisition was GBP4,780,000.
Following a review of post-acquisition performance to 31 December 2010 the fair value was re-assessed as GBP548,000 and the reduction was recognised as a gain of GBP4,232,000 in the Consolidated Statement of Comprehensive Income in 2010.
On 4 January 2011 the total contingent consideration was replaced by a fixed GBP5,000,000 of deferred consideration (GBP2,000,000 payable in 2011 and GBP3,000,000 payable in 2012) following the signing of a variation agreement and GBP4,452,000 was charged to the Unaudited Consolidated Statement of Comprehensive Income in 2011.
(b) As disclosed in Note 23b as part of the Refinancing Craig Tibbles agreed to accept 25,000,000 New Ordinary Shares in return for releasing HCL from paying GBP1,000,000 of the deferred consideration due in 2011 and GBP1,500,000 of the deferred consideration due in 2012. As part of the same agreement the remaining GBP2,500,000 due to Craig Tibbles was amended to GBP1,000,000 payable on 3 October 2011 and GBP900,000 payable on 1 October 2012, or, at Craig Tibbles' election, GBP800,000 on 1 June 2012. The balance of GBP600,000 was released to the Unaudited Consolidated Statement of Comprehensive Income to cover matching costs and asset write offs including an assessment of underpaid VAT due to input tax having been incorrectly calculated prior to the acquisition.
(c) On 1 August 2010 HCL International Pty Ltd (a wholly owned Australian subsidiary of Healthcare Locums plc) acquired the business and assets of Last Minute Locums Pty. Ltd. ("LML"), an established Australian medical staffing business with a database of over 3,500 qualified doctors, for an initial cash consideration of A$7,850,000 (GBP4,834,000) and a contingent consideration based on post-acquisition results of up to a maximum of A$5,000,000. At the date of acquisition the fair value of the contingent consideration was assessed to be A$2,000,000 (GBP1,232,000). Exchange rate movements to 31 December 2010 increased the contingent consideration in Sterling terms to GBP1,309,000. During 2011 additional consideration was earned, based on exceeding the post-acquisition results targets, of A$275,291 (2010: A$298,161) and both of these amounts were paid during the year. The likelihood of meeting the remaining targets has been reviewed and the balance of the contingent consideration, amounting to A$1,426,548 (GBP0.9m) has been written off to the Unaudited Consolidated Statement of Comprehensive Income in 2011.
(d) 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 Limited (subsequently renamed as Dancorp Limited "Dancorp") for an initial cash consideration of GBP5,000,000 and a contingent consideration of up to a maximum of GBP1,650,000. The fair value of the contingent consideration at the date of acquisition was GBP1,650,000. This was a related party transaction as set out in Note 31.
On 25 March 2011 the total contingent consideration was replaced by GBP1,328,194 of deferred consideration following the signing of a variation agreement and GBP321,806 was credited to the Unaudited Consolidated Statement of Comprehensive Income in the year ended 31 December 2011. GBP650,000 was paid during the year ended 31 December 2011 and agreement was reached with the administrators of Dancorp before 31 December 2011 to settle the balance of the deferred consideration by a final payment of GBP325,000 (paid after the year-end) with the remaining GBP353,194 credited to the Unaudited Statement of Comprehensive Income in the year ended 31 December 2011, making the total amount credited in the year GBP675,000.
(e) 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$131,200,000 (approximately GBP83,345,000, of which GBP562,000 was deferred and paid in 2011). 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.
As reported in Note 1, a review during the year ended 31 December 2011 identified that deferred tax liabilities on trademarks and other intangible assets had not been recognised in the acquisition balance sheets of LML and HCA. These deferred tax liabilities have now been recognised as a prior year adjustment. In addition a provision from a prior acquisition by HCA was recognised but not an associated asset, a GBP0.8m (A$1.2m) escrow account, which matched the liability. In addition when completing the accounts for the consolidated Australian tax group for the year to June 2011 it was determined that the deferred tax estimate in the acquisition balance sheet was understated by GBP1.1m (A$1.7m) and the estimate in the acquisition balance sheet has been corrected. Goodwill, receivables and the net deferred tax liability at 31 December 2010 were increased by GBP10.2m, GBP0.8m and GBP11.0m respectively.
Transaction costs were all expensed .
The acquisitions represented a significant step towards implementing a stated strategy of the previous Board of establishing a significant presence in the UK nursing recruitment market and pursuing international acquisitions which will generate additional revenue outside of the UK. The completion of the acquisitions significantly broadened HCL's international operations.
16 Trade and Other Receivables
Restated(1) 31 December 31 December 31 December 2011 2010 2009 GBPm GBPm GBPm ------------------- ------------ ------------- ------------ Trade receivables 25.1 28.6 17.6 Other receivables 0.6 3.1 5.0 Prepayments 1.0 0.7 1.2 Accrued income 3.2 4.7 3.5 ------------------- ------------ ------------- ------------ 29.9 37.1 27.3 ------------------- ------------ ------------- ------------
(1) Other receivables were reported in the Financial Statements at 31 December 2010 as GBP2.3m. They have been restated to GBP3.1m following the recognition of a GBP0.8m (A$1.2m) escrow account of HCA omitted from the Acquisition Balance Sheet (Note 1 and Note 15e).
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.
17 Trade and Other Payables
31 December 31 December 31 December 2011 2010 2009 GBPm GBPm GBPm ------------------------ ------------ ------------ ------------ Trade creditors 5.8 6.6 2.1 Other taxes and social security 2.4 7.7 5.8 Accruals 9.0 10.6 5.2 Deferred income 0.2 0.6 - Sales ledger credits 4.3 4.3 3.3 Other creditors 3.8 3.7 2.0 ------------------------ ------------ ------------ ------------ 25.5 33.5 18.4 ------------------------ ------------ ------------ ------------
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 31 December 2011 2010 2009 GBPm GBPm GBPm --------------------- ------------- ------------ ------------ Bank overdraft - 0.1 - Invoice discounting - - 11.6 --------------------- ------------- ------------ ------------ - 0.1 11.6 ----------------------------------- ------------ ------------
19 Loans and Long Term Borrowings
31 December 31 December 31 December 2011 2010 2009 GBPm GBPm GBPm -------------------------- ------------ ------------ ------------ Non-current: Sterling denominated: Secured bank loans - - 5.6 Zero coupon loan notes 2.6 - - Obligations under finance leases 0.1 0.5 0.1 Unamortised debt issue costs - - (0.2) Australian Dollar denominated: Secured bank loans 38.2 - - Unamortised debt issue (1.6) - - costs -------------------------- ------------ ------------ ------------ Total non-current borrowings 39.3 0.5 5.5 -------------------------- ------------ ------------ ------------ Current portion of long-term debt Sterling denominated: Secured bank loans - 81.5 4.3 Obligations under finance leases 0.3 0.4 0.2 Unamortised debt issue costs - (5.3) (0.2) Fair value of warrants - (2.9) - Australian Dollar denominated: Secured bank loans 1.3 43.0 - Unamortised debt issue costs (0.7) (2.3) - -------------------------- ------------ ------------ ------------ Total current borrowings 0.9 114.4 4.3 -------------------------- ------------ ------------ ------------
When preparing the 2010 Consolidated Financial Statements the Board believed it was probable that as at 31 December 2010 the Group was in default under the Senior Facility Agreement ("SFA") and the Mezzanine Facility Agreement ("MFA") with its lenders. If a default did exist then the lenders would have had the right, on service of a notice, to require the loans drawn under the SFA and the MFA to be repaid immediately. In those specific circumstances it was considered appropriate to classify all the Group's loans as current liabilities. Following the completion of the Refinancing the Group is not in default and so for 31 December 2011 the portions of the loans repayable after 31 December 2012 have been reported as non-current liabilities.
There are no differences between the book value and the fair value of the loans and long-term borrowings at either date.
The Group capitalised total fees of GBP0.7m (2010: GBP7.7m) paid for the loans modified during the year. Fees are amortised using the effective interest method over the term of the respective loans. The loans to which the capitalised fees at 31 December 2010 above relate were either repaid, hence derecognised, during the year and the appropriate proportion of unamortised fees were charged to Finance Costs, or modified in which case the appropriate proportion of fees at the time of the modification were carried forward.
The Zero Coupon Loan Notes are stated at fair value, being the fair value recognised at date of issue plus the imputed interest to 31 December 2011. More details are set out in Note 23e.
The warrants recognised at fair value at 31 December 2010 were partly amortised during the year through Finance Expense, and the balance of GBP2.6m outstanding at the date of Refinancing lapsed as part of the Refinancing at the time the derecognition of the mezzanine facility and so have been written off to Finance Expense (Note 7).
The finance leases are secured on the assets to which they relate. The carrying values of these assets are disclosed in Note 14.
Future lease payments are due as follows:
Minimum lease Present payments Interest value 2011 2011 2011 GBPm GBPm GBPm -------------------------------------------------- ---------- --------- -------- Not later than one year 0.4 0.1 0.3 Later than one year and not later than five years 0.1 - 0.1 -------------------------------------------------- ---------- --------- -------- 0.5 0.1 0.4 -------------------------------------------------- ---------- --------- -------- Minimum lease Present payments Interest value 2010 2010 2010 GBPm GBPm GBPm -------------------------------------------------- ---------- --------- -------- Not later than one year 0.6 0.2 0.4 Later than one year and not later than five years 0.6 0.1 0.5 -------------------------------------------------- ---------- --------- -------- 1.2 0.3 0.9 Minimum lease Present payments Interest value 2009 2009 2009 GBPm GBPm GBPm -------------------------------------------------- ---------- --------- -------- Not later than one year 0.4 0.1 0.3 Later than one year and not later than five years 0.1 - 0.1 0.5 0.1 0.4 ----------
20 Provisions and Deferred Consideration
Contingent consid- Deferred consid- eration Employee benefits Onerous leases Total provisions eration GBPm GBPm GBPm GBPm GBPm At 1 January 2009 1.2 - - 1.2 - Paid during the year (1.2) - - (1.2) - At 31 December 2009 - - - - - On acquisition: Contingent consideration 7.6 - - 7.6 - Employee benefits - 3.5 - 3.5 - Movement during the year: - Employee benefits - 0.1 - 0.1 - Orion and MJV - fair value (Note 15) (4.2) - - (4.2) - LML - foreign exchange variation 0.1 - - 0.1 - At 31 December 2010 3.5 3.6 - 7.1 - Movement during the year: Disposal - (1.1) - (1.1) - Orion and MJV - deed of variation (Note 15) (0.5) - - (0.5) 0.5 Redwood - deed of variation (Note 15) (1.7) - - (1.7) 1.7 Paid during the period (0.4) (0.3) (0.2) (0.9) (1.7) Applied in settlement for new shares subscription - - - - (2.5) Reclassifications - - 0.9 0.9 (0.3) Charged/(credited) to income statement (0.9) 0.6 1.3 1.0 3.8 - At 31 December 2011 - 2.8 2.0 4.8 1.5 31 December 2011: Current - 1.6 1.1 2.7 1.5 Non-current - 1.2 0.9 2.1 - 31 December 2010: Current 2.8 2.2 - 5.0 - Non-current 0.7 1.4 - 2.1 -
Details of the Orion, MJV and Redwood contingent and deferred consideration movements are set out in Note 15.
Employee benefits comprise long service leave benefits of GBP2,299,000 (2010: GBP2,767,000) and provision for paid leave of GBP444,000 (2010: GBP795,000) relating to the employees of HCA.
The onerous lease provision represents the future payments to which the Group is committed on properties which were vacated prior to 31 December 2011 or where the intention to move was announced prior to that date. The longest remaining lease term for any of the applicable properties expires on 3 October 2014. Due to the relatively short time frame, and the amounts involved, the future payments have not been discounted as the impact would not be significant.
Contingent consideration paid during 2009 related to the acquisition of Tempaid.
21 Deferred Taxation
The movement on the deferred tax account is shown below:
Accelerated capital Other short term Intangible fixed assets Tax losses allowances temporary differences Total GBPm GBPm GBPm GBPm GBPm At 31 December 2009 0.7 - (0.2) (0.5) - Arising on acquisitions as originally reported (Note 15) 8.5 - - (4.8) 3.7 Arising on acquisitions restatement (Notes 1 and 15) 9.6 (0.3) - 1.4 10.7 (Credited)/charged to income statement as originally reported (Notes 1 and 8) (0.5) - 0.2 (0.7) (1.0) (Credited)/charged to income statement on restatement (Notes 1 and 8) (0.4) - - - (0.4) Charged to equity - - - 1.2 1.2 Foreign exchange adjustment as originally reported 0.1 - - - 0.1 Foreign exchange adjustment on restatement 0.3 - - - 0.3 Other (0.3) - - - (0.3) At 31 December 2010 (as restated) 18.0 (0.3) - (3.4) 14.3 Arising on acquisitions - Arising on disposals (4.3) - - 0.4 (3.9) (Credited)/charged to income statement (Note 8) (0.9) (0.6) - 0.1 (1.4) Foreign exchange adjustment 0.2 - - - 0.2 At 31 December 2011 13.0 (0.9) - (2.9) 9.2 -----
(1) As reported in Note 1 and Note 15 the Financial Statements for the year ended 31 December 2010 have been restated to account for a deferred tax liability recognised on trademarks and other intangible assets included within the assets acquired in that year and to reflect a corrected estimate of the deferred tax asset at the date of acquisition. The previously reported figure for deferred tax on acquisitions of GBP3.7m has been increased by GBP10.7m to GBP14.4m, and the foreign exchange impact of restating the acquired amount to the 31 December 2010 rate of exchange has been increased from GBP0.1m to GBP0.4m.The deferred tax credit to the Consolidated Statement of Comprehensive Income for the year ended 31 December 2010 was originally reported as GBP1.0m and increased to GBP1.4m as a result of the Social Care goodwill restatement. The total net deferred tax liability at 31 December 2010 was GBP3.7m and the above adjustments combine to increase that amount by GBP10.6m to GBP14.3m.
Deferred tax has been calculated on UK and Australian temporary differences at 25% and 30% respectively. The UK Government has announced a future decrease in the UK corporation tax rate to 24% with effect from 1 April 2012, falling by a further 1% per annum to 22% by 1 April 2014. The impact of these proposed rate changes has not been reflected in the table above as they have not been substantively enacted at the balance date. The impact of these rate changes would be to reduce the group's UK deferred tax balance above by GBP48,000 if the UK temporary difference were all to reverse at 22%.
The analysis of the net deferred tax balance between deferred tax assets and deferred tax liabilities is as follows:
At 31 December 2011 Restated at 31 December 2010 At 31 December 2009 GBPm GBPm GBPm ------------------- Represented by deferred tax asset - - (1.7) Represented by deferred tax liability 9.2 14.3 1.7
There are unrecognised deferred tax assets in respect of the following items:
At 31 December 2011 Restated at 31 December 2010 GBPm GBPm UK trading tax losses 4.3 6.0 UK non-trading tax losses 0.2 0.1 Other UK short term temporary differences 0.8 0.7 Australian capital losses 3.8 - ---------------------------- Total 9.1 6.8 ----------------------------
The above assets have not been recognised as in the opinion of the Directors it is not probable that they will be recovered. None of the tax losses have an expiry date.
There are no temporary differences in relation to unremitted earnings of overseas subsidiaries
22 Financial Instruments
The Group's financial instruments comprise bank term loans, zero coupon loan notes, cash and interest rate swap agreements, trade and other receivables and payables. For a part of the year there were drawings under the Mezzanine Facility Agreement. Balances at the year-end for these financial instruments were as follows:
Monetary assets 2011 2010 2009 GBPm GBPm GBPm Current financial assets Trade and other receivables 29.9 37.1 27.3 Cash and cash equivalents 14.2 10.6 4.1 Total current financial assets 44.1 47.7 31.4 Analysed by currency (GBP equivalent): Pound Sterling 28.9 31.0 31.3 Australian Dollar 15.2 16.7 0.1 44.1 47.7 31.4 Financial liabilities measured at amortised cost 2011 2010 2009 GBPm GBPm GBPm Current financial liabilities Trade and other payables 25.5 33.5 18.4 Short term borrowings - 0.1 11.6 Current portion of long term borrowings 0.9 114.4 4.3 Total current financial liabilities 26.4 148.0 34.3 Non-current financial liabilities Long term borrowings 39.3 0.5 5.5 Total non-current financial liabilities 39.3 0.5 5.5 Analysed by currency (GBP equivalent): Pound Sterling 18.6 94.5 39.7 Australian Dollar 47.1 54.0 0.1 65.7 148.5 39.8 Derivative financial liability in an eligible Derivative financial liability held at fair value hedge relationship through profit or loss 2011 2010 2009 2011 2010 2009 GBPm GBPm GBPm GBPm GBPm GBPm Derivative financial liabilities - - 0.3 1.7 1.7 0.5
The Group's bank loans of A$60.0m (GBP39.5m) (2010: A$65.7m (GBP43.0m) and GBP73.2m) bear interest based upon Reuters quoted market bid rates at the time of drawdown for the applicable drawdown period, plus a margin (2010: LIBOR plus a margin).
The Zero Coupon Loan Notes of nominal GBP10.2m (2010: GBPnil), which fall due in September 2021, bear no interest, but the loan note agreement provides for the issue of further Zero Coupon Loan Notes of up to GBP2.5m in nominal value if the Group achieves certain EBITDA and enterprise value targets. (See below for information on the fair value attributed to the Zero Coupon Loan Notes and the embedded derivative.)
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 of A$60m outstanding as at 31 December 2011 (2010: A$62.3m) which exposes the Group to currency risk. Since the Refinancing the loan has been held within the sub-group in Australia and so forms part of the A$ net assets of that sub-group. The impact of movements of the exchange rate of the A$ against Sterling on net assets pass through the translation reserve in the Unaudited Consolidated Statement of Comprehensive Income.
There is an A$ denominated inter-company account between Healthcare Locums plc and the Australian sub-group which gives rise to exchange gains and losses booked in finance costs in the Unaudited Consolidated Statement of Comprehensive Income. As at 31 December 2011 the amount of A$18m was recorded as a receivable balance in Healthcare Locums plc. At 31 December 2011 the rate of exchange was GBP1 = A$1.5195 (2010: GBP1 = A$1.5274).
As at 31 December 2011 60% (2010: 66%) of the total assets of the Group were held in subsidiary companies outside the UK and denominated in currencies other than Sterling; principally in A$. Group policy is not to hedge the net investments in foreign operations using derivative financial instruments as it does not consider that the reduction in foreign currency exposure warrants the cash flow risk created from such hedging techniques.
If Sterling had been 10% weaker / stronger against the A$ during the year ended 31 December 2011, with all other variables held constant, the post tax loss for the year would have been GBP0.9m lower/higher.
If Sterling had been 10% weaker / stronger against the A$ during the year ended 31 December 2011, with all other variables held constant, the total comprehensive loss for the year would have been higher/lower by GBP1.1m.
(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 mix of equity, bank debt and loan notes. Interest rate risk arising due to the Group's borrowings in A$ at floating rates of interest is mitigated, by agreement with the lenders, by interest rate instruments that generate a desired risk profile to manage the Group's exposure to interest rate fluctuations. At 31 December 2011 67% of the A$ floating rate interest exposure had been swapped to a fixed rate of 10.67% (2010: GBP33.2m fixed at 3.305% and A$44.9m fixed at 6.14%).
Hedge accounting has not been applied to the swap instruments and therefore they are measured at fair value through the Unaudited Consolidated Statement of Comprehensive Income and a credit of GBP0.5m (2010: charge of GBP1.7m) has been made to the Unaudited Consolidated Statement of Comprehensive Income to reflect the movement in the fair value of these instruments. At 31 December 2011 no instruments were recorded in equity (2010: none).
As of the close of business at 31 December 2011 interest rate exposure was limited to the unhedged 33% of the A$60m of borrowings i.e. on A$20m (GBP13.2m), offset by the cash balances of GBP14.2 m which earn floating rate interest income. The impact of a 1% change in interest rates is, therefore, not significant.
(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 in the UK towards NHS Trusts, Local Authorities and other Government institutions and in Australia to public hospitals and health providers. Private sector customers are subject to credit checking procedures prior to commencing trade with them. The quality, and hence 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.
The Group transacts with counterparties which it considers to be creditworthy. During the year ended 31 December 2011 surplus cash was deposited with Lloyds Bank plc. After the year end, as noted in liquidity risk below, most of the surplus cash was moved to a Liquidity Fund managed by Scottish Widows which reduced the credit risk.
Current Up to 1 month overdue 1 to 2 months overdue >2 months overdue Trade debtors 31 December 2011 GBP19.4m GBP3.5m GBP1.9m GBP0.3m % of trade debt per ageing category - 31 December 2011 77.5% 13.9% 7.6% 1.0% Trade debtors 31 December 2010 GBP21.4m GBP4.2m GBP1.7m GBP1.3m % of trade debt per ageing category - 31 December 2010 74.6% 14.7% 6.1% 4.6% Trade debtors 31 December 2009 GBP13.3m GBP3.2m GBP0.7m GBP0.4m % of trade debt per ageing category - 31 December 2009 76.0% 18.0% 4.0% 2.0%
(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.
Liquidity risk arises principally from the volume of revenue forecast and the potential for adverse outcomes in litigation.
The factors considered by the Board in assessing going concern are set out in Note 3c and the Financial Review.
In December 2011 the Board approved a Treasury Policy setting out, inter alia, how the short term cash resources should be managed. Until then short term cash resources were deposited with Lloyds Bank plc. Shortly after the year end, in accordance with the Treasury Policy, the Group opened a Liquidity Fund account managed by Scottish Widows, a subsidiary of Lloyds Banking Group plc. Liquidity Funds provide instant access to the deposited funds. The Liquidity Fund is rated AAA by S&P, whose rating criteria stipulates that a minimum of 50% of the portfolio should be composed of A-1+ (or equivalent) instruments in order for the fund to maintain a AAA rating. The methodology S&P applies to calculate the A-1+ percentage counts A-1 (or equivalent) rated instruments maturing in seven days or less towards the A-1+ percentage minimums, as historical default rates on A-1 paper maturing within seven days are similar to the default rates of A-1+ issuers. By using such Funds counterparty risk for the Group is reduced as the Fund invests in a wide range of counterparties.
Gross, undiscounted liabilities are due as follows (2010 figures refer to the contractual payment dates for bank loans and not the classification of those loans as current in the Unaudited Consolidated Statement of Financial Position as reported in Note 19):
Due in 1 to On demand Due within 1 year 2 years Due in 2 to 5 years Over 5 years GBP'm GBP'm GBP'm GBP'm GBP'm ----------------- --------- ------------------- 2011 Non derivative financial instruments - outflows Long and short term borrowings - 4.8 7.3 37.3 10.2 Finance leases - 0.4 0.1 - - Trade and other payables - 4.3 - - - Deferred consideration - 1.5 - - - ----------------- --------- ------------------- - 11.0 7.4 37.3 10.2 Derivative financial instruments - net outflows - 0.9 0.8 - - Total - 11.9 8.2 37.3 10.2 --------- ------------------- 2010 Non derivative financial instruments - outflows Long and short term borrowings(1) 0.1 16.6 19.5 120.5 Finance leases - 0.4 0.5 - Trade and other payables - 33.5 - - Contingent consideration - 2.7 0.4 0.3 ----------------- --------- ------------------- 0.1 53.2 20.4 120.8 Derivative financial instruments - net outflows - 1.2 1.2 2.3 Total 0.1 54.4 21.6 123.1 --------- ------------------- 2009 Non derivative financial instruments - outflows Long and short term borrowings 11.6 4.4 4.8 0.9 Finance leases - 0.3 0.1 - Trade and other payables - 18.4 - - ----------------- --------- ------------------- 11.6 23.1 4.9 0.9 Derivative financial instruments - net outflows - 0.7 0.2 - Total 11.6 23.8 5.1 0.9 --------- -------------------
The above tables summarise undiscounted cash flows based on the financial liabilities of the Group outstanding at the year-end and assuming no changes in interest rates from the year-end rates.
Fair value estimation
In the opinion of the Board the carrying value of the assets and liabilities of the Group approximate their fair values. As noted above, the only other financial instruments that are measured at fair value through the Consolidated Statement of Comprehensive Income are interest rate swaps. There are no financial assets or liabilities held for trading purposes or any investments classified as available-for-sale.
GBP10,212,500 of Zero Coupon Loan Notes were issued to Ares Lux as part of the Refinancing as reported in Note 23e. They are repayable in normal circumstances in September 2021, or earlier in the event of another refinancing or a change of control of the Group. The Directors have discounted the Zero Coupon Loan Notes at 15%, a rate between the cost of the Group's senior debt and the cost of equity after the Refinancing to give a fair value at the time of issue of GBP2,505,115. The imputed interest is charged to finance expenses from the date of issue until the repayment date. The charge in the year ended 31 December 2011 was GBP113,245 (2010: GBPnil). The Loan Notes contain an embedded derivative as additional Loan Notes, up to a maximum value of GBP2,500,000, will be issued if the Group achieves certain EBITDA targets in the years ended 31 December 2013 and/or 2014, or if the Enterprise Value at 31 December 2013 and/or 31 December 2014 and/or 31 December 2015 exceeds certain target amounts. No value has been attributed by the Directors to the embedded derivative at the time of issue or at the year end as the Directors believe these targets will not be met.
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. The fair value of the Zero Coupon Loan Notes is based on management judgements and as such falls into Level 3 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 long-term objective is to ensure its continued ability to provide a growing return for its equity shareholders through a combination of capital growth and distributions.
As reported in the Consolidated Financial Statements for the year ended 31 December 2010, the Board determined that it was a priority to reduce the gearing of the Group. As a result of the restatement of the 2010 Financial Statements net equity became negative at 31 December 2010. As at 31 December 2011 the gearing was 43.4% Two transactions, in particular, during the year contributed significantly to the reduction. Firstly, the sale of the Homecare Division of HCA, as announced on 18 July. Net proceeds of sale of A$30.5m (GBP20.3m) were used to reduce debt. Secondly, the Refinancing approved by shareholders on 12 September 2011 as set out in detail in Note 23.
The facilities provided by the Group's bankers include a number of financial covenants on interest cover and leverage (debt to EBITDA). The first testing of the covenants will be at 30 September 2012.
23 Refinancing
On 19 August 2011 the Board announced a substantial Refinancing of the Company, comprising a GBP60,000,000 Placing of Ordinary Shares of 10p each at par, an Open Offer of up to GBP4,250,579 of Ordinary Shares of 10p each at par, a Debt for Equity Conversion and a Debt Repayment and Restructuring (together the "Refinancing").
The Refinancing was conditional on the approval of the Refinancing Resolutions by Shareholders in General Meeting, and the Refinancing Resolutions were all passed at the General Meeting held on 12 September 2011.
On 13 September 2011 the shares of the Company were re-listed on the AIM, following the suspension of trading on 25 January 2011, and 734,450,971 new shares were admitted to trading on the AIM.
There were a number of steps within the Refinancing and these are described in more detail below.
(a) New shares issued
The following new shares were issued as part of the Refinancing:
Number
GBP60,000,000 Placing of New Ordinary Shares of 10p each 600,000,000 Debt for Equity swap by way of issue of Ordinary Shares at 18p to Ares Capital Europe (Luxembourg) S.a.r.l. 125,000,000 Open Offer of up to GBP4,250,579 New Ordinary Shares of 10p each 9,450,971 Total number of New Ordinary Shares issued 734,450,971
(b) Utilisation of the proceeds of the Placing
The Placing raised GBP60,000,000 which was utilised as follows:
GBP Repayment of existing bank debt 35,000,000 Settlement of debt owed to Craig Tibbles (i) 2,500,000 Commission to Toscafund Asset Management LLP(ii) 1,137,500 Commission to ACE Limited. (iii) 200,000 Working capital facility fee to ACE Limited. (iv) 250,000 Settlement of working capital facility capital and accrued interest due to Ares (iv) 3,017,540 Nomad fees to Fairfax 710,920 Cash received - available to pay costs and professional fees 17,184,040 Total 60,000,000 (i) The Company and Craig Tibbles agreed, subject to completion of the Refinancing, to restructure the two deferred consideration payments of GBP2,000,000 and GBP3,000,000 payable by the Company to Craig Tibbles under the terms of the acquisitions of Orion Locums Limited and MJV Locums Limited in 2010. One element of the agreement was that GBP2,500,000 be released by way of subscription by Craig Tibbles for 25,000,000 New Ordinary Shares under the Placing. He has agreed not to sell any of the New Ordinary Shares purchased for a period of 12 months after the date of the Refinancing. (ii) The Company agreed to pay Toscafund Asset Management LLP a commission of GBP1,137,500 for participating in the Placing, in which Toscafund Asset Management LLP agreed to subscribe for 336,375,000 New Ordinary Shares. The commission was considered to be within the range of normal market rates for a transaction of this type. The cost is included in the GBP2.3m share issue costs in the Consolidated Statement of Comprehensive Income. . (iii) The Company agreed to pay ACE Limited, a member of the Ares concert party, a commission of GBP200,000 for participating in the Placing, in which ACE Limited agreed to subscribe for 131,625,000 New Ordinary Shares. The commission was considered to be within the range of normal market rates for a transaction of this type. The cost is included in the GBP2.3m share issue costs in the Consolidated Statement of Comprehensive Income. (iv) The Company negotiated an Interim Working Capital Facility of up to GBP5,000,000 with ACE Limited on 19 August 2011. The arrangement fee of GBP250,000 for the facility, which was made available until the earlier of the Refinancing or 17 October 2011, was agreed to be repaid by way of set-off against subscription monies payable by ACE Limited in the Placing. In addition the Company agreed to repay ACE Limited all capital and accrued interest drawn, amounting to GBP3,017,540 under the Interim Working Capital Facility by way of set-off against subscription monies payable by ACE Limited in the Placing. The arrangement fee was expensed in finance costs (Note 7).
(c) Debt for Equity Swap with Ares Capital Europe (Luxembourg) S.a.r.l. ("Ares Lux")
Ares Lux provided finance to the Company through a Mezzanine Facility Agreement, as part of the financing raised to acquire HCA in December 2010, and agreed, subject to the Admission of New Ordinary Shares to the AIM and subject to the terms of the Restructuring Agreement, to convert up to GBP22,400,000 of capital and accrued interest into 125,000,000 New Ordinary Shares. This was the same in economic terms as Ares Lux subscribing GBP12,500,000 for New Ordinary Shares at par and writing off up to GBP9,900,000 of capital and accrued interest. At the date of completion of the Refinancing the actual amount due to Ares Lux, excluding the GBP10,212,500 referred to in (e) below, was GBP22,396,586. As noted below the fair value of the New Ordinary Shares issued to Ares Lux was 10p per share, or GBP12,500,000 in total. The difference between the fair value of the shares issued and the amount of principal and accrued interest outstanding under the Mezzanine Facility Agreement, being GBP9,896,586, was recorded as a gain in Finance Income (Note 7).
(d) Utilisation of the proceeds of the Open Offer
The Open Offer raised GBP945,097 which was utilised as follows:
GBP
Registrar's fees 18,551 Cash received 926,546 Total 945,097 (e) Debt for Zero Coupon Loan Note ("Note" or "Notes") Swap with Ares Lux
Ares Lux agreed, subject to the same conditions as in (c) above, to convert GBP10,212,500 of the debt owed to it by the Company under the Mezzanine Facility Agreement into Notes, for a principal amount of GBP10,212,500. If the Group achieves certain EBITDA or Enterprise Value targets or if certain conditions are met, the Company will be obliged to issue additional Notes to the holders. The maximum number of new Notes to be issued is GBP2,500,000. The Notes do not accrue interest and they fall due for repayment on 30 September 2021 except in certain circumstances relating to a change in control of the Group or a further refinancing in which case the redemption date may be brought forward. As disclosed in Note 24 the fair value of the Notes at the date of issue was GBP2,505,115 and the gain of GBP7,707,385 is reported in finance income (Note 7). A finance expense is being recognised in the Unaudited Consolidated Statement of Comprehensive Income post the date of issue which will increase the liability to the full value of GBP10,212,500 by the 30 September 2021. For the period from issue to 31 December 2011 the amount of the charge was GBP113,245 (2010: GBPnil).
(f) Waiver of existing bank debt
The banks agreed to waive debt existing immediately prior to the Refinancing amounting to capital of GBP5,941,826 and accrued interest of GBP564,605 and these amounts were credited to Finance Income (Note 7).
(g) Write off of capitalised bank fees
Fees incurred in negotiating bank facilities are recorded in the Unaudited Consolidated Statement of Financial Position as a reduction of the total borrowings and written off to the Unaudited Consolidated Statement of Comprehensive Income over the term of the facility. As part of the Refinancing, drawings under the existing facilities were either extinguished or modified. Where facilities were extinguished the balance of unamortised fees were written off to Finance Expense. Where modified the appropriate proportion of unamortised fees were carried forward in the Unaudited Consolidated Statement of Financial Position to be written off over the term of the modified facilities. The amount of GBP4,380,402 was written off to Finance Expense (Note 7).
(h) Costs
Advisers' fees totalling GBP5,556,819 were incurred in negotiating the Refinancing. Of these costs GBP2,472,116 was paid to the advisers to the Company and the Company also paid GBP3,084,703 of costs incurred by the banks. All of these costs have been charged to finance expenses (Note 7).
(i) Share issue costs
Costs of GBP2,315,194 were incurred which were directly related to the issue of shares in the Refinancing. As no share premium was created from the issue of those shares the cost has been charged to the Profit and Loss Reserve.
(j) Modified loans
Modified loans of A$60,000,000 (GBP38.9m) were drawn by HCA under the Syndicated Facility Agreement. The loans are secured by a charge on the assets of the Group. Details of the terms of the new loans are set out in Note 22. Costs directly attributable to the raising of the new loans, amounting to GBP672,134, were debited to unamortised debt issue costs within borrowings (Note 19).
(k) Warrants
Under the terms of the Mezzanine Facility granted by Ares Lux in 2010 the Company granted Ares Lux warrants over 2,493,453 shares in the Company at an exercise price of 10p per share. The warrants lapsed as part of the Refinancing and GBP2.6m was charged to Finance Expense (Note 7).
Based on the price paid for new shares in the Placing and the Open Offer, and the prices in the open market immediately after the shares were relisted, the Directors consider the fair value of the shares issued in exchange for debt to be 10p each.
24 Share Capital
Authorised 31 December 31 December 2011 2010 2009 2011 2010 2009 Number '000 Number Number GBPm GBPm GBPm '000 '000 -------- --------------------- ----- ----- Equity share capital Ordinary shares of 10p each 847,799 200,000 200,000 84.8 20.0 20.0 -------- --------------------- ----- Allotted, called up and fully paid 31 December 31 December 2011 2010 2009 2011 2010 2009 Number '000 Number Number '000 GBPm GBPm GBPm '000 -------- ------------ Equity share capital Ordinary shares of 10p each 847,799 113,338 104,667 84.8 11.3 10.5 -------- The movements in the issued share capital are set out below: Ordinary shares of 10p Number '000 GBPm -------- --------------------- As at 1 January 2009 104,272 10.4 Shares issued following exercise of share options granted to employees at 30 September 2009 395 0.1 As at 31 December 2009 104,667 10.5 Shares issued following exercise of share options granted to employees and other parties on: 27 January 2010 500 - 29 April 2010 250 - 20 September 2010 4 - 3 November 2010 584 0.1 New ordinary shares issued on 16 July 2010 7,333 0.7 --------------------- As at 31 December 2010 113,338 11.3 Shares issued in year (i) 10 - New ordinary shares issued on 13 September 2011 (Note 23) 734,451 73.5 --------------------- As at 31 December 2011 847,799 84.8 -------- (i) During 2011 the Registrars issued a share certificate for an incorrect number of shares, and the purchaser subsequently sold the shares. The Registrars paid the Company 20p per share, after the year end, in settlement.
The shares issued in January 2010 following 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 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 pursuant to an option deed dated 4 November 2005 at the exercise price of 55.0p per share.
On 16 July 2010, the Company issued 7,333,334 new 10p ordinary shares at 150p per share raising a total of GBP11.0m. Transaction costs of GBP469,000 were incurred in relation to this issue which were charged to the Share Premium Account.
All the new shares issued during the year and the prior year have the same rights, preferences and restrictions as those relating to the ordinary shares already in issue at the start of the year.
25 Contingent Liabilities
Claims and Litigation
From time to time the Group and Company are in receipt of claims from customers and employees arising in the normal course of business.
The following disclosures are made in connection with claims or exposures which the directors consider represent material uncertainties. Any adverse judgement in respect of these matters may have a material impact on the Group's and Company's results from operations, cash flows and financial position. In this event, the Directors may have to enter into negotiations with the Group's providers of finance or seek alternative sources of finance since the Group's cash flow forecasts and currently available financing assume no outflow of funds for any settlement or Court award in respect of these matters:
Dismissal of Executive Vice Chairman - Ms. Kate Bleasdale
The former Executive Vice Chairman was dismissed on 11 March 2011. She has since that date launched legal proceedings against the Company for unfair dismissal, victimisation and sex discrimination, claiming damages of GBP12m. The Company has taken legal advice and will vigorously defend itself against these charges, initially at an Employment Tribunal in April 2012. Whilst the outcome is uncertain, on the basis of legal advice received, the Board believes the claims are unfounded and therefore that there is no liability or probable cash outflow for the Group and Company, other than legal costs in defending the claim.
Litigation
Proceedings were filed on 12 February 2012 against Healthcare Locums plc, the Company's former Executive Vice Chairman, Kathleen V Bleasdale, former Group Finance Director, Diane Jarvis and former Chairman Alan Walker ("the Defendants") in the United States District Court for the Southern District of New York. The proceedings were filed by Permian Master Fund, LP; Permian Investments Partners, LP; Arundel Capital LLC; Arundel Long Fund LP; Arundel Hedge Fund LP; Privet Capital, LLC and Flinn Investments, LLC ("the Plaintiffs"). On 26 March 2012 notice was received that the claims against Kathleen V Bleasdale had been dismissed without prejudice.
The Summons alleges that the Plaintiffs were induced to invest in securities issued by HCL or instruments linked to those securities on the basis of knowing or reckless misrepresentations by the Defendants concerning the Company's accounting practices and operating results and that disclosures concerning the Company's accounting irregularities caused material declines in the prices of HCL securities and instruments linked thereto, injuring the Plaintiffs. The Complaint alleges that the Plaintiffs have suffered substantial damages. The Complaint is available for inspection from the court.
The Complaint requests a trial by jury and the Plaintiffs seek rescission and or compensatory damages (including interest thereon). Whilst the information provided is insufficient to enable the Board to assess the quantum of the compensatory damages claimed, it would appear that the Plaintiffs seek to assert a loss in the value of their investments. In the claim, the Plaintiffs assert that they spent in the region of GBP13m purchasing their investments. The Plaintiffs also seek an award for punitive damages for each claim to the maximum extent allowable by US law together with an award of costs and such other relief as the US Court may deem just and proper. The Board are unable to quantify the claim.
The Board is taking legal advice on the merits of the Complaint and the proper jurisdiction for the determination of any such claim. At this early stage the Board has been unable to form a view as to whether any liability exists, to quantify the claim, whether any economic outflow is probable and if so, its timing.
No provision has been made for future legal costs which are written off as incurred.
Other contingent liabilities
In addition the Company and certain of its UK subsidiaries have the following contingent liabilities in respect of its day-to-day operations.
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 a small number of companies which Her Majesty's Revenue & 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 Umbrella Company being in arrears with payments to HMRC in respect of any locums provided from such companies, a residual risk remains.
The company operates self-billing arrangements for the a large part of the locum workforce which enables the group to obtain a VAT deduction but which requires the supplier to account for VAT accordingly. There are a number of requirements associated with the operation of self-billing arrangements to obtain the VAT deduction. Should these requirements not be met there may be a contingent liability in respect of the VAT deduction claimed.
As well as the specific material contingent liabilities set out above, the Group's principal risks and uncertainties are set out in the statement on Principal Risks and Uncertainties.
26 Related Party Transactions
MyWorkforce Limited, Nationwide Accreditation Bureau Company Limited, Montagu Nursing Agencies Limited, Dancorp Limited and Netengines Holdings Limited were related parties to the Group by virtue of a significant shareholder of the Company and husband of Ms. Kate Bleasdale, John Cariss, owning the majority of the share capital of these companies.
There were no transactions with any of the above companies in 2011 other than settlement of the amounts outstanding at 31 December 2010 of GBP52,000 to Nationwide Accreditation Bureau Company Limited and GBP65,000 to Redwood Group Limited. There were no balances outstanding at 31 December 2011. During 2010 the Group purchased services from Nationwide Accreditation Bureau Company Limited of GBP199,000 and from Redwood Group Limited of GBP200,000. The Group invoiced services provided to Netengines Holdings Limited of GBP20,000.
Nationwide Accreditation Bureau Company Limited and Netengines Holdings Limited have both made commercial claims against the Group which have been rejected after an assessment by the Directors of the likelihood of the claims being successful. They are disclosed here as they are related parties.
During the year ended 31 December 2010 the Group purchased the trade and assets of Redwood Health Limited from the previous owners for a maximum consideration of GBP6,650,000, and Redwood Health Limited subsequently changed its name to Dancorp Limited. The previous owners were Cardale Investments Limited, a company controlled at one time by Ms. Kate Bleasdale and her husband Mr. John Cariss. Dancorp Limited is now in administration and negotiations took place with the Administrator regarding the final settlement of the deferred consideration, as detailed in Note 15.
On 20 August 2010 the Company received an interest free GBP400,000 loan from Cardale Investments LLP. The loan was fully repaid on 6 September 2010.
During the year ended 31 December 2010 wages and salaries were paid to relatives of Directors then in office of GBP33,101 to Ian Jarvis, the husband of Ms. Diane Jarvis; GBP525 to Daniel Cariss, the son of Ms. Kate Bleasdale; and GBP79 to Danial Dedat, the son of Mr. Mo Dedat.
On 24 January 2011 the Company assigned the lease, which expires on 23 January 2020, of an office in London to Cardale Investments LLP. There was a rent free period until 23 June 2011 included within the agreement and the office furniture, fixtures and fittings, with a net book value of GBP20,000 that were owned by the Company were transferred free of charge to Cardale Investments LLP.
During 2011 the law firm SNR Denton provided a significant level of legal services to the Group. Mark Andrews, who joined the Board on 1 October 2011, was a Partner in SNR Denton until 30 April 2011 and remains a Consultant. Whilst SNR Denton was not a related party at any time in the year the Board considers the prior business relationship with SNR Denton, before Mark Andrews joined the Board, should be noted here for completeness.
A number of the Directors who served during the year provided their services through their management companies. In addition small amounts of expenses directly incurred in providing their services were billed through those companies. The Directors and their companies were:
Andrew McRae (to 31 January 2011) MCR Consulting Limited Colin Whipp Amersham Business
Management Limited
Alan Walker Alfa International Limited
Bill Jessup Corporate Navigator Limited
Alasdair Liddell Alasdair Liddell Limited
Under the rules of the Alternative Investment Market a shareholder controlling in excess of 10% of the issued share capital is a related party. The Toscafund Concert Party was a related party during the year and the Company paid fees of GBP1,137,500 to Toscafund Asset Management LLP as disclosed in Note 23(b)(ii). The Toscafund Concert Party subscribed for 336,375,000 New Ordinary Shares in the Placing, a part of the Refinancing, paying GBP33,637,500. The Ares concert party became a related party when the refinancing was completed. Concurrently to the completion of the Refinancing the Company paid fees of GBP200,000 to ACE Limited as disclosed in Note 23(b)(iii), swapped debt for equity as disclosed in Note 23c and swapped debt for the Zero Coupon Loan Note as disclosed in Note 23(e). The Zero Coupon Loan Note was still held by Ares Lux at 31 December at which time the fair value in the Unaudited Consolidated Statement of Financial Position was GBP2,618,360.
27 Post Balance Sheet Event
Information relating to a claim made in New York after the year end by Permian Master Fund LP, et al, is disclosed in Note 25.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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