Interim Results

Staffline Recruitment Group plc 03 September 2007 Embargoed until 0700 Monday 3 September 2007 STAFFLINE RECRUITMENT GROUP PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007 A strong performance driven by organic growth Staffline Recruitment Group plc, the leading provider of recruitment and outsourced human resource services to UK industry, today announces its interim results for the six months ended 30 June 2007. Financial highlights: â€¢ Revenue up 52% to Â£52.3m (2006: Â£34.4m); up 47% to Â£50.5m excluding OSP â€¢ Operating profit up 33% to Â£1.6m (2006: Â£1.2m) â€¢ Pre tax profit up 40% to Â£1.4m (2006: Â£1.0m) â€¢ Basic earnings per share increased by 41% to 4.5p (2006: 3.2p) â€¢ Interim dividend of 1.3p per share declared; representing an increase of 30% (2006: 1.0p) Operational highlights: â€¢ Acquisition of Onsite Partnership ('OSP') on 19 March 2007; integration proceeding well â€¢ Significant organic growth in OnSites to 75 locations - a net increase of 12 since 30 June 2006 â€¢ OSP added a further 12 locations giving a combined total of 87 OnSites â€¢ A strong trading performance from the Industrial branch network â€¢ Continued strong demand for Techsearch â€¢ Substantially extended our geographical reach both organically and by acquisition â€¢ Gangmaster Licensed status providing further opportunities as focus on compliance continues Current trading: â€¢ Trading during July and August has been in line with our expectations for the year as a whole â€¢ A further 10 OnSites are expected to be open by the end of September Commenting on the results, Andy Hogarth, Managing Director, said: 'The Group has had an excellent start to 2007 and I am very pleased to be able to report a strong trading performance across all of our businesses including OSP, which we acquired in March. 'Whilst the market continues to be very competitive our order book remains strong, reflecting the increasing demand for our service, so the Board's expectations for the year as a whole remain unchanged.' For further information, please contact: www.staffline.co.uk --------------------- Staffline Recruitment Group plc 0115 950 0885 Andy Hogarth, Managing Director 07931 175775 Carole Harvey, Finance Director 07904 262132 Oriel Securities Limited Natalie Fortescue 020 7710 7600 Smithfield Katie Hunt/Will Henderson 020 7360 4900 A presentation for analysts will be held at 10.45 for 11.00am at the offices of Smithfield, 10 Aldersgate Street, London EC1A 4HJ Print resolution images are available for the media to view and download from www.vismedia.co.uk About Staffline Staffline Recruitment Group plc's main business is as a specialist supplier of 'blue collar' temporary and contract staff to industry. It provides a fully outsourced service, managing the temporary recruitment function of its clients on their premises, at 87 OnSite locations nationwide and also has a network of 17 industrial branches. In addition, the Group has a smaller division called Techsearch which specialises in temporary and permanent engineering, IT, HR and FMCG placements and operates from 4 branches. The Group, which is managed from a head office in Nottingham, was founded in 1986 and was admitted to AIM in December 2004 (Ticker: STAF.L). Chairman's Statement Introduction The Group achieved a strong performance in the period, almost entirely driven by organic growth. For the six months ended 30 June 2007, Staffline's results are well ahead of the same period in the previous year and slightly ahead of our expectations. In addition, we announced on 19 March 2007 our first acquisition, of Onsite Partnership ('OSP'), which specialises in logistics and distribution labour outsourcing. OSP has traded in line with our expectations in the first half albeit that it has had little effect on Group performance as its sales are heavily biased towards the second half of the year, which includes the Christmas period. Staffline continues to specialise in the provision of blue collar unskilled and semi skilled temporary workers to UK industry. Over 70% of our sales are attributable to our OnSite managed services division which offers a fully managed outsourced service to our clients. We have maintained our traditional focus on the food processing and manufacturing sectors but we are seeing increased demand from other sectors, most notably e-retailing and logistics. In addition, we have substantially extended our geographical reach both organically and through the OSP acquisition. Financial Results The Group has continued to benefit from strong demand for its services from across all the sectors in which it operates, resulting in a 40% increase in pre-tax profit for the six months ended 30 June 2007 to Â£1.4m (2006: Â£1.0m) and a 41% rise in basic earnings per share to 4.5p (2006: 3.2p). Dividends The group continues to be committed to a progressive dividend policy and I am pleased to be able to report a further increase in the interim dividend declared by the board, a rise of 30% to 1.3p per share (2006: 1.0p). The interim dividend is payable on 16 November 2007 to shareholders on the register on 19 October 2007. Summary We are pleased to be able to report an encouraging set of interim results and continued progress with growing the Group organically, supplemented by the recent acquisition of OSP. Overall, the Board's expectations for the year as a whole remain unchanged and we are confident of continued significant growth in the future. Derek Mapp Chairman 3 September 2007 Managing Directors Review The Group has had an excellent start to 2007 and I am very pleased to be able to report a strong trading performance across all of our businesses including OSP, which we acquired in March. In particular, our managed outsourcing division, OnSite, has continued to achieve excellent organic growth. We have had further success in expanding the business geographically, with a growing presence in Southern England driven by our newly appointed Regional Director. In addition, we now have a sales presence in Scotland which has already resulted in the winning of an OnSite for a new client due to be opened this autumn. Strategy Staffline's strategy continues to be based primarily on organic growth through expansion of the number of OnSite locations for both new and existing customers. Despite the strong growth achieved to date, we currently estimate that Staffline has approximately a 3% market share providing ample opportunity to grow significantly in the next few years. As indicated at the time of the Group's Admission to AIM in 2004, acquisitions will only be selectively considered where opportunities are identified to acquire complementary companies that improve our service offering, such as OSP, and create shareholder value. Financial Results Turnover for the six months ended 30 June 2007, excluding OSP, was Â£50.5m, an increase of 47% from Â£34.4m in the first half of 2006. Gross profit grew at a slower rate as an expected result of our strategy to increase our OnSite business which achieves lower gross margins. Overall profit before tax increased by 40% to Â£1.4m (2006: Â£1.0m), giving a 41% rise in basic earnings per share to 4.5p (2006: 3.2p). Debtor days have continued to improve in the period and have been reduced to 29 (2006: 30) further demonstrating our efficiency in this area. Our term loan has increased overall by Â£1.5m reflecting the Â£2m loan used to acquire OSP offset by a Â£0.5m scheduled repayment. Operational Review OnSite Division Overall trading within the division has been good, driven by new business wins both with new clients and existing clients. As at 30 June 2007 the number of OnSite locations operated by Staffline, excluding OSP operations, had increased to 75 representing a net increase of 12 since 30 June 2006. 12 OSP locations have been integrated into Staffline's operations from 1 July 2007, giving a total of 87. The Group has a further 10 OnSites which are expected to be open by the end of September, which will result in the Group having 97 OnSite locations. We have been seeing increased demand from beyond our target sectors, most notably from the e-tailing and logistics sectors, including winning a number of OnSites with a leading logistics service provider. As a result we have developed specific expertise to address these sectors' particular needs. Industrial Branches The Group's Industrial Branch division continues to develop, reflected in a good trading performance across almost the entire network. During the period, it has increased the client base it serves whilst also introducing new client relationships through which to grow our OnSite business. Techsearch Our smaller Techsearch brand which represents less than 10% of Group turnover, has enjoyed a satisfactory start to the year driven by continued demand for well qualified candidates looking for permanent positions. The Group as a whole benefits from Staffline's ability, through the Techsearch offering, to provide its clients with candidates for a broader range of positions. On Site Partnership ('OSP') In March 2007, we completed the acquisition of OSP, which specialises in making both permanent and temporary placements in the logistics and distribution sectors. OSP complements our existing operations, providing us with additional cross-selling opportunities and a greater geographical reach. The consideration paid for the business was Â£2m in cash. We have now completed the integration of the temporary placement side of the business and have made some cost savings through the rationalisation of a number of OSP locations close to where Staffline sites already existed and also by reducing central administration costs. These locations will, from 1 July 2007, trade under the Staffline name, a move which has been well received by those clients affected. The existing permanent recruitment offering will continue to be branded OSP. Industry Background Gangmaster Licensing Act 2004 Since the Act's introduction a total of 29 Gangmasters have had their licences revoked with another 30 having been refused a licence. The continued focus on regulation and compliance, combined with the lack of understanding of the requirements of the Act amongst potential clients, is providing us with opportunities to utilise our status as a fully licensed and compliant provider and resulting in increased business flowing to us. EU Accession State Workers The proportion of our workforce originating from the new accession states has increased to 60%, from 52% last year. We are still experiencing some skills shortages but have increased the reach of our recruitment drive to beyond the major cities in Eastern Europe in order to fulfil client requirements. Health and Safety Health and safety continues to be a major focus of attention for us, and the Group recognises the importance of its role in ensuring that contractors are placed in safe working environments. Employees The average number of permanent Staffline employees has increased to 237 (2006: 205). The take up of the share option scheme, which is open to all employees, has continued to be high and, of the first options issued at the time of the Group's admission to AIM, some 300,000 have now been exercised by staff. We believe that by making options available to all members of staff we encourage better retention and ensure employees feel a key part of the success of the Company. Current Trading and Prospects Group trading during July and August has been in line with our expectations for the year as a whole, which reflects the Group's traditional seasonal trading pattern and weighting towards the second half. Great progress has been made in the first half towards achieving our year end expectations. Whilst the market continues to be very competitive our order book remains strong, reflecting the increasing demand for our service, so the Board's expectations for the year as a whole remain unchanged. Andy Hogarth Managing Director 3 September 2007 Consolidated income statement For the six months ended 30 June 2007 Period Period Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Note Unaudited Unaudited Audited Â£'000 Â£'000 Â£'000 Sales revenue 52,324 34,384 84,111 Cost of sales (44,174) (28,356) (69,975) -------- -------- -------- Gross profit 8,150 6,028 14,136 Administrative (6,518) (4,812) (10,383) expenses -------- -------- -------- Profit from operations 1,632 1,216 3,753 Finance costs 5 (229) (212) (395) -------- -------- -------- Profit for the period before taxation 1,403 1,004 3,358 Tax expense 7 (469) (338) (1,014) -------- -------- -------- Net profit for the period 934 666 2,344 ======== ======== ======== Earnings per ordinary share 8 Basic 4.5p 3.2p 11.3p ======== ======== ======== Diluted 4.3p 3.1p 10.9p ======== ======== ======== Consolidated statement of changes in equity For the six months ended 30 June 2007 Share based Profit Share payment Share and loss capital reserve premium account Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 At 31 December 2005 2,082 68 14,257 1,636 18,043 Net result for the period to 30 June 2006 - - - 666 666 Employee share based compensation - 110 - - 110 At 30 June 2006 (unaudited) 2,082 178 14,257 2,302 18,819 Net result for the period to 31 December 2006 - - - 1,678 1,678 Employee share based compensation - (71) - - (71) Dividend paid - - - (458) (458) At 31 December 2006 (audited) 2,082 107 14,257 3,522 19,968 Net result for the period to 30 June 2007 - - - 934 934 Employee share based compensation - 31 - - 31 Employee share options exercised 30 - 211 - 241 At 30 June 2007 (unaudited) 2,112 138 14,468 4,456 21,174 Consolidated balance sheet At 30 June 2007 At 31 At 30 June At 30 June December 2007 2006 2006 Unaudited Unaudited Audited Note Â£'000 Â£'000 Â£'000 Assets Non current Goodwill 9 24,397 22,326 22,326 Property, plant and equipment 10 838 163 204 -------- -------- -------- 25,235 22,489 22,530 -------- -------- -------- Current Trade and other receivables 11 15,204 9,645 13,189 Cash and cash equivalents 12 1,707 1,389 823 -------- -------- -------- 16,911 11,034 14,012 -------- -------- -------- Total assets 42,146 33,523 36,542 ======== ======== ======== Liabilities Non current Bank loans 14 (4,900) (3,379) (3,150) Current Trade and other payables 13 (10,577) (9,721) (9,139) Bank overdrafts and loans 14 (5,022) (450) (3,807) Current tax liabilities (473) (1,154) (478) -------- -------- -------- (16,072) (11,325) (13,424) -------- -------- -------- Total liabilities (20,972) (14,704) (16,574) ======== ======== ======== Equity Share capital 16 (2,112) (2,082) (2,082) Share premium (14,468) (14,257) (14,257) Share based payment reserve (138) (178) (107) Profit and loss account (4,456) (2,302) (3,522) -------- -------- -------- Total equity (21,174) (18,819) (19,968) ======== ======== ======== Total equity and liabilities (42,146) (33,523) (36,542) ======== ======== ======== Consolidated cash flow statement For the six months ended 30 June 2007 Year 6 months 6 months ended 31 ended 30 ended 30 December June 2007 June 2006 2006 Unaudited Unaudited Audited Note Â£'000 Â£'000 Â£'000 Cash flows from operating activities Profit before taxation 1,403 1,004 3,358 Adjustments for: Depreciation of property, plant and equipment 75 27 93 -------- -------- -------- 1,478 1,031 3,451 Change in trade and other receivables (1,160) (982) (4,526) Change in trade and other payables 441 271 2,877 -------- -------- -------- Cash generated from operations 759 320 1,802 Adjustment for debt issue costs 13 25 50 Employee equity settled share options 31 110 39 Taxes paid (475) - (1,352) -------- -------- -------- Net cash inflow from operating activities 328 455 539 ======== ======== ======== Cash flows from investing activities Acquisition of subsidiary, net of cash acquired (2,098) - - Purchases of property, plant and equipment (19) (102) (209) -------- -------- -------- Net cash used in investing activities (2,117) (102) (209) ======== ======== ======== Cash flows from financing activities Increase/(decrease) of loans 1,523 (246) (375) Movement in invoice discounting facility - 730 (2,458) Proceeds from the issue of share capital 241 - - Dividends paid - - (458) -------- -------- -------- Net cash from/(used in) financing activities 1,764 484 (3,291) Net (decrease)/increase in cash and cash equivalents (25) 837 (2,961) Cash and cash equivalents at beginning of period 12 (2,409) 552 552 -------- -------- -------- Cash and cash equivalents at end of period 12 (2,434) 1,389 (2,409) ======== ======== ======== Notes to the interim report For the six months ended 30 June 2007 1 general information Staffline Recruitment Group plc, a Public Limited Company is incorporated and domiciled in the United Kingdom. The interim financial statements for the period ended 30 June 2007 (including the comparatives for the year ended 31 December 2006 and the period ended 30 June 2006) were approved by the board of directors on 31 August 2007. Under the Security Regulations Act of the EU, amendments to the financial statements are not permitted after they have been approved. 2 Accounting policies Basis of preparation The interim financial report has been prepared under the historical cost convention and in accordance with International Accounting Standard 34 'Interim Financial Reporting'. The accounting policies and methods are the same as in the most recent annual financial statements and are set out below. Consolidation and investments in subsidiaries Subsidiaries are all entities over which the Group has the power to control the financial and operating policies. The Group obtains and exercises control through voting rights. The consolidated financial statements of the Group incorporate the financial statements of the parent company as well as those entities controlled by the Group by full consolidation. In addition, acquired subsidiaries are subject to application of the purchase method. This involves the revaluation at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at their revalued amounts, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Goodwill represents the excess of acquisition cost over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary at the date of acquisition. Material intra-group balances and transactions, and any unrealised gains or losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Income recognition Income for temporary contractors is recognised on receipt of contractor timesheets, which are signed by the customer authorising invoices to be raised. Income from permanent placements is recognised when the candidates start work. Turnover represents sales to outside customers at invoiced amounts less value added tax. Impairment The Group's goodwill and property, plant and equipment are subject to impairment testing. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management controls the related cash flows. Individual intangible assets or cash-generating units that include goodwill with an indefinite useful life are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's or cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. Property, plant and equipment Computer equipment, fixtures and fittings and property are carried at acquisition cost less subsequent depreciation and impairment losses. Depreciation is charged on these assets on a straight line basis over the estimated useful economic life of each asset. The useful lives of property, plant and equipment can be summarised as follows: Computer equipment 3 years Fixtures and fittings 3 years Freehold property 50 years Leases In accordance with IAS 17 (revised 2003), the economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. All leases are treated as operating leases. Payments on operating lease agreements are recognised as an expense on a straight-line basis. Associated costs, such as maintenance and insurance, are expensed as incurred. The Group does not act as a lessor. Taxation Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amounts of assets and liabilities in the consolidated financial statements with their respective tax bases. However, in accordance with the rules set out in IAS 12, no deferred taxes are recognised in conjunction with goodwill. This applies also to temporary differences associated with shares in subsidiaries if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that they will be able to be offset against future taxable income. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Most changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement. Only changes in deferred tax assets or liabilities that relate to a change in value of assets or liabilities that are charged directly to equity are charged or credited directly to equity. Pensions Pensions to employees are provided through defined contributions to individual personal pension plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into an independent entity. The Group has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. The contributions recognised in respect of personal pension plans are expensed as they fall due. Liabilities and assets may be recognised if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short term nature. Financial assets The Group's financial assets include cash and trade receivables. All financial assets are recognised on their settlement date. All financial assets are initially recognised at fair value, plus transaction costs. Interest and other cash flows resulting from holding financial assets are recognised in profit or loss when received, regardless of how the related carrying amount of financial assets is measured. Trade receivables are provided against when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of the receivables. The amount of the write-down is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows. Cash and cash equivalents For the purposes of the cashflow statement, cash and cash equivalents include cash at bank and in hand and short term highly liquid investments such as bank deposits less advances from banks repayable within three months from the date of advance. Equity An equity investment is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Share capital is determined using the nominal value of shares that have been issued. The share premium account represents premiums received on the initial issuing of the share capital. Any transaction costs associated with the issuing of shares are deducted from share premium, net of any related income tax benefits. The share based payment reserve represents the value of shares provided under share based payment arrangements. The profit and loss account includes all current and prior period results as disclosed in the income statement. Share based employee remuneration All share-based payment arrangements are recognised in the consolidated financial statements. The Group operates equity-settled share-based remuneration plans for remuneration of its employees. All employee services received in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value of the share options awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). All share-based remuneration is ultimately recognised as an expense in profit or loss with a corresponding credit to the share based payment reserve, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised, if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment is made to the expense recognised in prior periods if fewer share options ultimately are exercised than originally estimated. Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as share premium. Financial liabilities The Group's financial liabilities include bank loans, an overdraft facility and trade and other payables. Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument. All interest related charges are recognised as an expense in 'finance cost' in the income statement. Bank loans are raised for support of long term funding of the Group's operations and acquisitions. They are recognised at proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the income statement on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade payables are recognised initially at their nominal value and subsequently measured at amortised cost less settlement payments. Dividend distributions to shareholders are included in 'other short term financial liabilities' when the dividends are approved by the shareholders' meeting. Other provisions, contingent liabilities and contingent assets Other provisions are recognised when present obligations will probably lead to an outflow of economic resources from the Group and they can be estimated reliably. Timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events, for example, legal disputes or onerous contracts. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the balance sheet date, including the risks and uncertainties associated with the present obligation. Any reimbursement expected to be received in the course of settlement of the present obligation is recognised, if virtually certain as a separate asset, not exceeding the amount of the related provision. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. In addition, long term provisions are discounted to their present values, where time value of money is material. All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognised in the consolidated balance sheet. Probable inflows of economic benefits to the Group that do not yet meet the recognition criteria of an asset are considered contingent assets and therefore not recognised. Estimation uncertainty The key area of estimation uncertainty in the financial statements is the impairment of goodwill. The annual impairment assessment in respect of goodwill requires estimates of the value in use of cash generating units to which goodwill has been allocated to be calculated. As a result, estimates of future cashflows are required, together with an appropriate discount factor for the purpose of determining the present value of those cashflows. The basis of review of the carrying value of goodwill is as detailed in note 9. A key area of judgment is the allocation of goodwill in respect of the acquisition of OSP, which has been carried out on a provisional basis in these statements. 3 Segmental reporting (a) By business segment (primary segment): As defined under International Accounting Standard 14 (IAS14), the only material business segment the Group has is that of providing temporary staff to customers of Staffline Limited and Onsite Partnership Limited, 'OSP'. The activities of the National Response Centre and the placement of permanent staff both contribute less than 10% of Group total revenue. The sales are from the rendering of services. (b) By geographical segment (secondary segment): Under the definitions contained in IAS 14, the only material geographic segment that the Group operates in is the United Kingdom. 4 ACQUISITION OF SUBSIDIARY On 19 March 2007, the Company acquired the entire issued share capital of Onsite Partnership Limited, OSP offers temporary and permanent recruitment services to clients in the UK. The acquisition has been accounted for using the purchase method of accounting. From the date of acquisition to 30 June 2007 the acquisition contributed revenue for the period of Â£1,846,738 and a profit after tax for the period of Â£1,551 to the Group. If the acquisition had occurred on 1 January 2007, Group revenue would have increased by Â£3,751,593 and profit after tax would have increased by Â£10,993. Note that the OSP business has a second half bias. These amounts have been calculated using the Group's accounting policies. The provisional goodwill arising on the acquisition during the year is attributable to the anticipated future profitability of the acquisition. In addition, this acquisition brings access to new service offerings for the Group. Effect of acquisition Acquiree's Fair value Acquisition book values adjustments amount Acquiree's net assets at the acquisition date: Â£'000 Â£'000 Â£'000 Property plant and equipment 824 (134) 690 Trade and other receivables 855 - 855 Cash and cash equivalents 6 - 6 Trade and other payables (997) - (997) Loans (521) - (521) Deferred tax (8) 8 - Net identifiable assets and liabilities 159 (126) 33 Goodwill on acquisition 2,071 Cash consideration paid including fees 2,104 The fair value adjustments above have arisen as a result of the recognition of the market value of the Head Office property of Onsite Partnership Limited and the adoption of the accounting policies of the Group. The provisional allocation of the fair value adjustments is still under review. The cash consideration paid was Â£2 million. Costs of acquisition were Â£104,000 in respect of advisors fees. 5 Finance costs 6 months ended 6 months ended Year ended 30 June 30 June 31 December 2007 2006 2006 Unaudited Unaudited Audited Â£'000 Â£'000 Â£'000 Interest payable on bank loans and 229 212 395 overdraft ======== ======== ========= 6 Directors and EMPLOYEES remuneration Employee benefits expense Expense recognised for employee benefits is analysed below: 6 months 6 months Year ended 31 ended 30 ended 30 December June 2007 June 2006 2006 Â£'000 Â£'000 Â£'000 Wages and salaries 4,127 2,957 6,613 Social security costs 448 317 709 Other pension costs - defined contribution plans 86 42 116 Share option charge 31 110 39 -------- -------- --------- 4,692 3,426 7,477 ======== ======== ========= Number Number Number The average number of persons (including directors) employed by the Group during the period was: 237 205 213 ======== ======== ========= Share-based employee remuneration As at 30 June 2007 the Group operated a share based payment scheme for employees. The share option scheme is available to all full time members of staff, except for two of the executive directors, Andy Hogarth and Marshall Evans, subject to the rules of the scheme, the key points of which are as follows: â€¢ only staff with in excess of six months service are eligible; â€¢ the number of options granted are a factor of length of service and current salary; â€¢ options are exercisable between two and seven years of being granted; â€¢ except in certain limited circumstances all options lapse if an employee leaves the Group; and â€¢ exercise of options is not subject to any specific performance criteria. The share options for Carole Harvey have different conditions as detailed below: C Harvey 1 January 2007 Granted Lapsed/exercised 30 June 2007 Exercise price 100,000 Nil Nil 100,000 105.5p These share options have a performance condition such that the average share price of the Company must achieve 158.25p for 20 consecutive days during the measurement period. This condition has now been satisfied. The share options can be exercised between three and seven years of being granted. All share based employee remuneration will be settled in equity. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Share options and weighted average exercise price are as follows for the reporting periods presented: 30 June 2007 30 June 2006 31 December 2006 Number Weighted Number Weighted Number Weighted average average average exercise exercise exercise price price price (pence) (pence) (pence) Outstanding at start of period 812,225 97 687,330 88 687,330 88 Granted 238,404 146 96,215 130 193,192 125 Lapsed (17,712) (113) (26,450) (85) (68,297) (85) Exercised (299,988) (80) - - - - -------- --------- --------- --------- --------- --------- Outstanding at end of period 732,929 118 757,095 93 812,225 97 ======== ========= ========= ========= ========= ========= The Group has the following outstanding share options and exercise prices: 30 June 2007 30 June 2006 31 December 2006 Number Weighted Weighted Number Weighted Weighted Number Weighted Weighted average average average average average average exercise contractual exercise contractual exercise contractual price life price life price life (pence) (months) (pence) (months) (pence) (months) Date exercisable and option life: 2006 (up to 2011) 97,824 80 - 396,742 80 5 374,709 80 - 2007 (up to 2012) 131,288 97 3 264,138 100 19 150,135 97 8 2008 (up to 2013) 265,413 118 14 96,215 130 23 287,381 118 20 2009 (up to 2014) 238,404 146 20 - - - - - - ======= ======= ======= ======= ======= ======= ====== ======= ======= Share options are exercisable between values of 80p and 174p. The fair value of options granted was determined using the Black-Scholes valuation model. Significant inputs into the calculations were: â€¢ exercise prices as detailed above â€¢ 30% volatility based on expected share price â€¢ a risk free interest rate of 4.75%. â€¢ all options are assumed to vest after two years from the date of grant of the options â€¢ dividends in line with current levels In total Â£31,000 of employee remuneration expense has been included in the consolidated income statement to 30 June 2007 (31 December 2006: Â£39,000 and 30 June 2006 Â£110,000) which gave rise to the share based payment reserve. No liabilities were recognised due to share based payment transactions. 7 Tax expense A reconciliation of the tax expense applicable to the profit before tax using the statutory rate to the tax expense at the effective tax rate and a reconciliation of the statutory tax rates to the effective tax rates are as follows: 6 months 6 months Year ended ended 30 June ended 30 June 31 December 2007 2006 2006 Â£'000 % Â£'000 % Â£'000 % Profit for the period before taxation 1,403 1,004 3,358 Tax rate 30% 30% 30% ======== ====== ======== ====== ========= ===== Expected tax expense 421 30 301 30 1,007 30 Adjustment for non-deductible expenses relating to short term timing differences (3) (0.2) (18) (1.8) (24) (0.7) Other non-deductible expenses 51 3.6 51 5.1 25 0.7 Adjustment in respect of prior periods - - 4 0.4 6 0.2 -------- ------ -------- ------ --------- ----- Actual tax expense 469 33.4 338 33.7 1,014 30.2 ======== ====== ======== ====== ========= ===== Comprising: Current tax expense 469 338 1,014 ======== ====== ======== ====== ========= ===== There is no tax expense or credit in relation to the share based payment reserve credited to equity. 8 Earnings per share The calculation of the basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period. The calculation of the diluted earnings per share is based on the basic earnings per share adjusted to allow for all dilutive potential ordinary shares. Details of the earnings and weighted average number of shares used in the calculations are set out below: Basic Diluted 6 months 6 months Year ended 6 months 6 months Year ended ended 30 ended 30 31 December ended 30 ended 30 31 December June 2007 June 2006 2006 June 2007 June 2006 2006 Unaudited Unaudited Audited Unaudited Unaudited Audited Earnings (Â£'000) 934 666 2,344 934 666 2,344 ======== ======== ========= ======== ======== ========= Weighted average number of shares 20,978,586 20,824,463 20,824,463 21,711,515 21,425,328 21,511,163 ======== ======== ========= ======== ======== ========= Earnings per share (pence) 4.5p 3.2p 11.3p 4.3p 3.1p 10.9p ======== ======== ========= ======== ======== ========= The weighted average number of shares has increased by 732,929 (year ended 31 December 2006: 686,700 and period ended 30 June 2006: 600,865) shares to take account of all dilutive potential ordinary shares that could be issued under the share option scheme. Staffline Recruitment Group plc paid a final dividend of Â£359,000 as proposed in the annual report for the year ended 31 December 2006 on the 5 July 2007 (Â£250,000 for the year ended 31December 2005 on the 4 July 2006.) An interim dividend of Â£275,000 (2006: Â£208,000) has been proposed but has not been accrued within these financial statements. This represents a payment of 1.3 pence (2006: 1.0 pence) per share. 9 Goodwill Goodwill Â£'000 Gross carrying amount and net book value at 30 June 2006 and 31 December 2006 22,326 Acquisition of subsidiary (note 4) 2,071 Gross carrying amount and net book value at 30 June 2007 24,397 Goodwill above relates to the acquisition of the following cash generating units: Date of acquisition Original cost Â£'000 Staffline Recruitment Limited 8 December 2004 22,326 Onsite Partnership Limited 19 March 2007 2,071 =========== Goodwill arising on consolidation which represents the excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired is capitalised and is tested annually for impairment. The directors do not consider that there were any material intangible assets that should be separately recognised at the date of acquisition. The recoverable amount for Staffline Recruitment Limited and OSP Limited was determined based on a combined value-in-use calculation, covering a detailed one year conservative forecast, followed by an extrapolation of expected cash flow over the next 9 years at a growth rate of 10%, which represents a conservative long term average growth rate and a discount rate of 13%. The growth rate used does not exceed the long term average growth rate for the market in which the group operates. Management have used a forecast period of 10 years as they feel this represents the minimum period that the business model they have developed is sustainable. Management's key assumptions for Staffline Recruitment Limited and OSP Limited together forming Staffline Recruitment Group plc include assumptions that there will be no significant changes in the business and that turnover growth will not exceed historic growth levels. Management have considered internal and external market data in setting their assumptions. Apart from the considerations described in determining the value-in-use of the cash generating unit above, the Group management is not currently aware of any other probable changes that would necessitate changes in its key estimates. 10 PROPERTY, PLANT AND EQUIPMENT Group Property Computer Fixtures and Total equipment fittings Â£'000 Â£'000 Â£'000 Â£'000 Gross carrying amount At 1 January 2007 - 1,479 146 1,625 Additions - 19 - 19 Acquisition of subsidiary 600 65 25 690 -------- --------- --------- --------- At 30 June 2007 600 1,563 171 2,334 -------- --------- --------- --------- Depreciation and impairment At 1 January 2007 - 1,316 105 1,421 Provided in the period - 68 7 75 -------- --------- --------- --------- At 30 June 2007 - 1,384 112 1,496 -------- --------- --------- --------- Net book amount at 30 June 2007 600 179 59 838 ======== ========= ========= ========= Net book amount at 31 December 2006 - 163 41 204 ======== ========= ========= ========= Net book amount at 30 June 2006 - 119 44 163 ======== ========= ========= ========= All assets stated above are secured against bank loans outstanding at the year end. 11 TRADE AND OTHER RECEIVABLES At 30 At 30 At 31 June June December 2007 2006 2006 Â£'000 Â£'000 Â£'000 Trade and other receivables, gross 15,217 9,654 13,204 Impairment of trade and other receivables (13) (9) (15) ---------- ---------- --------- Trade and other receivables, net 15,204 9,645 13,189 ========== ========== ========= Trade and other receivables are usually due within 14 - 30 days and do not bear any effective interest rate. All trade receivables are subject to credit risk exposure. However, the Group does not identify specific concentrations of credit risk with regards to trade and other receivables as the amounts recognised represent a large number of receivables from various customers. The fair value of these short term financial assets is not individually determined as the carrying amount is a reasonable approximation of fair value. 12 CASH AND CASH EQUIVALENTS At 30 At 30 At 31 June June December 2007 2006 2006 Â£'000 Â£'000 Â£'000 Cash and cash equivalents 1,707 1,389 823 Bank overdraft (see note 14) (4,141) - (3,232) ---------- ---------- --------- Cash and cash equivalents per cashflow (2,434) 1,389 (2,409) statement ========== ========== ========= Cash and cash equivalents consist of cash on hand and balances with banks only. At the period end Â£1,707,000 (year ended 31 December 2006: Â£823,000 and period ended 30 June 2006: Â£1,389,000) of cash on hand and balances with banks were held by the subsidiary undertaking, however this balance is available for use by the Company. 13 trade and other payables At 30 At 30 At 31 June June December 2007 2006 2006 Â£'000 Â£'000 Â£'000 Trade and other payables 10,577 6,533 9,139 Invoice discounting liability - 3,188 - ----------- --------- --------- 10,577 9,721 9,139 =========== ========= ========= The invoice discounting facility included above was secured on the trade debtors of the Group and bore interest at commercial rates. The fair value of trade and other payables has not been disclosed as, due to their short duration, management considers the carrying amounts recognised in the balance sheet to be a reasonable approximation of their fair value. 14 Borrowings Bank loans are repayable as follows: At 30 At 30 At 31 June June December 2007 2006 2006 Â£'000 Â£'000 Â£'000 In one year or less or on demand 5,035 500 3,857 In more than one year but not more than two years 940 500 500 In more than two years but not more than three years 940 500 500 In more than three years but not more than four years 940 500 500 In more than four years but not more than five years 1,046 500 500 In more than five years 1,173 1,500 1,250 --------- --------- --------- 10,074 4,000 7,107 Debt issue costs (152) (171) (150) --------- --------- --------- 9,922 3,829 6,957 ========= ========= ========= Split: Current liabilities: Bank loan 881 450 575 Overdraft 4,141 - 3,232 --------- --------- --------- 5,022 450 3,807 Non current liabilities: Bank loan 4,900 3,379 3,150 --------- --------- --------- 9,922 3,829 6,957 ========= ========= ========= Bank loans and overdrafts are secured by a debenture over all the assets of the Group. The bank loan is repayable in quarterly instalments of Â£192,000 in September and December 2007, Â£235,000 until December 2011, Â£288,000 until June 2013 and Â£20,000 until September 2014. Interest accrues on the loan at 1.1% (1.2% at 31 December 2006 and 2% at 30 June 2006) above base rate. The bank loans contain various covenants which, if breached, could lead to the loan becoming payable on demand. The covenants have all been satisfied to date. Note that the use of an overdraft facility was established with effect from July 2006. At June 2007 there was Â£1707,000 cash available for offset against this overdraft (December 2006 Â£823,000). Previously an invoice discounting facility provided 85% of eligible debtors up to a maximum of Â£6,000,000 and was disclosed in 'Trade and other payables' (see note 13). The net increase in Bank loans is Â£1,523,000. The purchase of Onsite Partnership limited was financed by a loan of Â£2,000,000, however, during the period repayments totalling Â£462,000 were made plus Â£15,000 in respect of new debt issue costs. On the basis of discounting the future loan repayments at a rate of 5% the theoretical fair value of the bank loan is Â£4,984,000 at 30 June 2007 (31 December 2006 Â£3,205,000 and 30 June 2006 Â£3,249,000). Fair values of the bank loans have been determined by calculating the present values at the balance sheet date of the future cashflows, using fixed effective market interest rates available to the Group. No fair value charges have been included in the income statement for the period as financial liabilities are carried at amortised cost in the balance sheet. 15 deferred tax assets and liabilities A deferred tax asset of Â£138,000 arose from temporary differences on computer equipment, fixtures and fittings at 30 June 2007. It is Group policy to not recognise these deferred tax assets in the financial statements. At 31 December 2006 the unrecognised deferred tax asset was Â£168,000. 16 SHARE CAPITAL At 30 At 30 At 31 June June December 2007 2006 2006 Â£'000 Â£'000 Â£'000 Authorised 30,000,000 ordinary 10p shares 3,000 3,000 3,000 Allotted, issued and fully paid 21,124,451 ordinary 10p shares 2,112 20,824,463 ordinary 10p shares 2,082 2,082 Ordinary 10p shares At 30 June 2007 At 30 June 2006 At 31 December 2006 Shares issued and fully paid at the beginning of the year 20,824,463 20,824,463 20,824,463 Issued during the period 299,988 - - ----------- -------------- ------------- Shares issued and fully paid 21,124,451 20,824,463 20,824,463 Shares authorised but unissued 8,875,549 9,175,537 9,175,537 ----------- -------------- ------------- Total equity shares authorised at 31 December 30,000,000 30,000,000 30,000,000 ----------- -------------- ------------- All ordinary shares have the same rights and there are no restrictions on the distribution of dividends or repayment of capital. During the period 299,988 shares were issued in respect of the exercise of employee share options. 17 related party transactions The only related parties are the Group's directors as described below. Transactions with Group directors The Group directors' personal remuneration includes the following expenses: 6 months ended 30 6 months ended 30 Year ended 31 June 2007 June 2006 December 2006 Â£'000 Â£'000 Â£'000 Short-term employee benefits: Salary and bonus 354 205 454 Social security costs 42 23 51 Share based employee remuneration 5 - 13 Post employment benefits relating to defined contribution pension schemes 17 14 34 -------- --------- --------- 418 242 552 ======== ========= ========= None of the amounts above were outstanding at the year-end 18 operating leases The Group's minimum operating lease payments for the full remaining lives of the leases are as follows: 30 June 30 June 31 December 2007 2006 2006 Land and Land and Land and buildings buildings buildings Â£'000 Â£'000 Â£'000 In one year or less 38 288 278 Between one and five 396 481 348 years In five years or more 83 53 36 --------- ---------- ---------- 517 822 662 ========= ========== ========== Lease payments recognised as an expense during the six months ended 30 June 2007 amount to Â£159,000 (period ended 31 December 2006 : Â£335,000 and 30 June 2006 : Â£206,000). Operating lease agreements do not contain any contingent rent clauses. None of the operating lease agreements contains renewal or purchase options or escalation clauses or any restrictions regarding dividends, future leasing or additional debt. 19 risk management objectives and policies The Group is exposed to a variety of financial risks which result from both its operating and investing activities. The Group's risk management is coordinated at its headquarters, in close co-operation with the board of directors, and focuses on actively securing the Group's short to medium term cash flows by minimising the exposure to financial markets. Staffline Recruitment Group plc does not actively engage in the trading of financial assets for speculative purposes. The most significant financial risks to which the Group is exposed are described below: Credit risk Generally, the maximum credit risk exposure of financial assets is the carrying amount of the financial assets as shown on the face of the balance sheet (or in the detailed analysis provided in the notes to the financial statements). Credit risk, therefore, is only disclosed in circumstances where the maximum potential loss differs significantly from the financial asset's carrying amount. The Group's trade and other receivables are actively monitored to avoid significant concentrations of credit risk. The Group has adopted a policy of careful monitoring with customers who lack an appropriate credit history. Cash flow and fair value interest rate risks The Group seeks to manage financial risks to ensure sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. Short term flexibility was achieved by the use of an overdraft facility with effect from July 2006. (Previously an invoice discounting facility provided 85% of eligible debtors up to a maximum of Â£6,000,000). All financial liabilities of the Group are subject to floating interest rates. Interest rate risk is managed through the negotiation of appropriate funding arrangements combined with active management of working capital in order to minimise overall interest charges. -------------------------- This information is provided by RNS The company news service from the London Stock Exchange

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