Preliminary Results

WORK GROUP PLC

(the "Company")

Preliminary results

Work Group plc (LSE - AIM: "WORK") is pleased to announce preliminary results for the year ended 31 December 2013. During the financial year under review the Company disposed of Armstrong Craven allowing resources to be focused on the remaining Work Business Units ("continuing operations").

Continuing operations:

· Gross profit (net fee income) from continuing operations down 21% to £6.0m (2012: £7.6m)

· Second half gross profit from continuing operations remained constant at £3.0m despite first half client losses

· Operating loss before exceptional items from Work Business Units operations of £0.4m (2012: £0.1m profit), with a reduced second half loss of £0.1m

· Operating loss after exceptional costs of £1.3m (2012: £5.5m loss)

· Cash at year end of £1.3m (2012: £0.4m)

· No bank debt

Financial headlines - continuing operations

- Restated for continuing operations

^ References in the report to "net fee income" represent gross profit

ú Stated for Work Business Units segment

* Stated for continuing operations

Commenting on the results, Simon Howard, Executive Chairman said:

"2013 was a year of huge change for Work Group with the disposal of Armstrong Craven in June and the refocusing of the Work Business Units.

The second half performance was encouraging as, despite client losses in the first half, net fee income remained constant. In addition, more new clients were won in 2013 than in 2012.

We are now concentrating on the continuing opportunity we see to help employers take greater control of their resourcing activities, through a blended offering of our principal digitally-based communications offerings and RPO services. 

2014 will be a year of consolidating these activities and we have seen good progress thus far in 2014."

Further enquiries:

Chairman's Review

Overview

The conclusion of a review of our operations in 2013 confirmed that the Work Business Units and Armstrong Craven were both in markets which had been changing over the previous years and been diverging, and there was little synergy to be exploited between the two businesses. We took the decision to dispose of the trading activities of the Armstrong Craven segment and much of the first half of 2013, therefore, concentrated on the disposal itself while at the same time beginning a period of re-focus for the Work Business Units.

Our clients

Since 2008, Work Business Units have seen a market where clients have been moving more resourcing and communication activities in-house resulting in more of their expenditure being conducted on a project basis. Consequently, there are fewer opportunities for continuing relationships and greater emphasis is placed on an effective sales strategy. In this, 2013 was a year of measured success with 40 new clients using the Work Business Units services versus 34 in 2012.

The UK operations of the Work Business Units faced the loss of three of its top five clients during the first six months of 2013. All three were the subject of contractual reviews following relationships spanning several years and in only one case were we in a position to re-tender. This again is a reflection of the changing client market, both in the fact that they were not high margin clients, and that there was no opportunity to replace at a similar expenditure level.

It was a combination of these factors which saw revenue decline 27% to £10.4m for the Work Business Units (2012: £14.3m), while gross profit declined less, down 21% to £6.0m (2012: £7.6m). More encouragingly, and despite the first half client losses, gross profit for the second half was constant at £3m.

Our overseas operations in Hong Kong and New York continued to make progress, registering a combined 2% increase in NFI (net fee income) to £1.2m (2012: £1.2m). These businesses recorded a stable small loss of £0.1m (2012: £0.1m loss) as continued investment in sales and delivery capability in the regions was added, with second half performance better than the first.

We continue to have a broad spread of clients which we believe will be critical to our future growth.

Financial results

With the backdrop outlined, Work Group reported a £0.9m profit, (2012:£0.2m loss) at the pre-exceptional operating level, as set out in the Strategic report, whilst remaining debt free. The operating loss for the Group after exceptional costs was £1.6m (2012: £8.2m loss). Net cash at 31 December 2013 was £1.3m (2012: £0.4m).

Headcount across the Group decreased by 36% to 89 FTE's at the year-end (2012: 139). This net reduction was mainly a direct result of the disposal of the Armstrong Craven segment. Redundancy costs and ex-gratia payments included in the exceptional items was £0.1m(2012: £0.1m).

Total exceptional costs of £2.5m (2012: £8.0m) have been charged in 2013. These related to relocation costs, redundancy costs as noted above and impairment losses as specified below.

Following the disposal of Armstrong Craven, the London office was relocated in July to more appropriately sized premises with improved lease arrangements.

The annual impairment review of goodwill for the Work Business Units has resulted in no impairment charge being made, while the disposal of Armstrong Craven resulted in an impairment charge of £2.2m.

Simon Howard

Chairman

24 April 2014

Strategic Report

Results and review of business

The results for the year are set out in the consolidated income statement. The table below highlights the key financial performance measures used by the Group.

*Adjusted operating profit is stated pre-exceptional costs.

Key performance indicators

Business performance is measured across the business against financial and non-financial metrics. The directors have identified three key performance indicators that are reviewed by the Board regularly, these are:

· Net fee income (NFI) £8,086,000 (2012: £11,634,000)

NFI is the key measure of income.

· Operating profit/(loss) £901,000 (2012: loss £186,000)

This is the key measure of overall performance. The measure used is the operating profit before exceptional costs.

· Retention of employees 5.4 years (2012: 4.6 years)

We measure employee retention by reviewing the average length of an employee's service.

Consolidated income statement

For the year ended 31 December 2013

Consolidated statement of comprehensive income

For the year ended 31 December 2013

Consolidated and parent company statement of financial position

As at 31 December 2013

Consolidated and parent company statements of changes in equity

For the year ended 31 December 2013

Group

The cost of the investment held by the employee benefit trust in Work Group plc is shown above as Shares held by EBT.

The foreign exchange reserve represents the revaluation of the net assets in the foreign subsidiaries.

With the sanction of an Order of the High Court effective from 28 November 2005 the ordinary shares of £1 each and the cumulative ordinary shares of £1 each were both reduced to 10p per share and the share premium was cancelled. This created a special reserve.

Consolidated and parent company statements of changes in equity (continued)

For the year ended 31 December 2013

Company

Consolidated and parent company statements of cash flow

For the year ended 31 December 2013

Notes to the financial statements

For the year ended 31 December 2013

1 Summary of significant accounting policies

Work Group plc is a public limited company incorporated in England and Wales, domiciled in the United Kingdom and listed on the Alternative Investment Market (AIM). The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, International Financial Reporting Interpretation Committee (IFRIC) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

Going concern

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities. At the 31 December 2013 the Group had cash in hand of £1.3m and with no overdraft facility in place. This will be reviewed periodically. The resources of the Group have been compared to the detailed cash flow forecasts prepared for the 12 month period from the date of approval of the financial statements to April 2015. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.

2 Segmental reporting

During the year under review the chief operating decision-maker, who is the Board, has identified two operating segments, Work Business Units (previously known as Work Communications) and Armstrong Craven. During the year the trading activities of the Armstrong Craven segment were sold. Work Business Units combines the employer marketing service and recruitment process outsourcing services, and Armstrong Craven provided executive recruitment services. The Board assesses the performance of the operating segments based on net fee income and operating results before exceptional items.

The unallocated pool represents the central overheads that are not directly related to the operating trading activities of the segments.

Geographical information

The Group manages its business segments in the UK, which is the home country of the parent.

The sales analysis in the table below is based on the location of the customer. All significant assets and capital expenditure are located in the UK.

3 Discontinued operations

On 26th June 2013 the Group sold the Armstrong Craven segment. The Board committed to a plan to sell this segment following a strategic decision to place greater focus on the Work Business Units segment. The total consideration was £2,138k for the trading business and certain assets with the Group retaining the working capital element.

Financial information relating to the Armstrong Craven operations for the year to the date of disposal is set out below, and comparative figures have been restated.

4 Exceptional items

The exceptional costs of £2,528,000 (2012: £7,979,000) principally relate to goodwill impairment losses of discontinued operations, redundancies, compensation for loss of office and office relocation costs.

*See note 3

5 Operating loss

6 Taxation

*For discontinued operation reference to note 3.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. The standard rate of corporation tax in the UK for the year was 20% (2012: 20%), having qualified for the small profits tax rate. The differences are explained below:

7 Losses per share

As there were basic losses per share in 2013 the effect of share options is anti-dilutive, consequently diluted losses per share equates to the basic losses per share.

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year excluding treasury shares and shares held by the EBT which are treated as treasury shares.

For diluted earnings per share, the weighted average number of shares is adjusted to reflect the impact of all dilutive potential ordinary shares.

No further shares have been issued since 31 December 2013.

Losses reconciliation

Adjusted earnings per share exclude the cost of exceptional items less tax at 20% (2012: 20%).

*Excludes non-tax deductible items related to impairment losses.

8 Intangible assets

Goodwill has arisen in the past on the acquisitions of The Resourceful Group Limited, Park Human Resources Limited, Armstrong Craven Limited and Recruitment Communications Company Limited.

During the year the Group has recognised an impairment loss on goodwill of £2,200,000 (2012: 7,853,000) due to the disposal of the Armstrong Craven segments.

The Resourceful Group Limited, Park Human Resources and Recruitment Communications Company Limited's goodwill is allocated to the Work Business Units segment. The recoverable amount of goodwill is calculated based on the lower of, value in use using discounted cash flows and fair value less costs to sell. Management have projected the cash flows for the years 2014, 2015 and 2016. The key assumptions for the value in use calculations for the year 2017 onwards are future projections based on a long term growth rate of 2.5%.

The carrying value of goodwill at Group level is attributed to The Resourceful Group Limited, Park Human Resources Limited and Recruitment Communications Company Limited (£2,144,000).

Management does not currently foresee any change in the key assumptions it has employed when determining the value in use calculations, which would cause the carrying amount to exceed the recoverable amount for each cash-generating unit.

The post-tax rate used to discount the forecast cash flows is 13.6% (2012: 11.2%), being the Group's weighted average cost of capital.

During the year the Company recognised a goodwill impairment loss of £292,000 (2012: £10,153,000) due to the disposal of the Armstrong Craven segment. The carrying value of goodwill at Company level is attributed to The Resourceful Group Limited, Park Human Resources Limited and Recruitment Communications Company Limited (£966,000).

Other intangible assets in Group and Company relate to software licences. Additions in the year represent software licences for intangible assets under construction (2012: £108,000). Software licences are amortised over their estimated average useful life of five years after they are brought into use.

9 Property, plant and equipment

Group

Company

10 Investments in subsidiaries

Company

The movements in the year to investments, amounting to £1,532,000 (2012: decrease of £117,000), represents an increase to loans to the two foreign subsidiaries, Work Group Inc and Work Group Limited totalling £376,000 (see note 22), intended for working capital purposes. Also following the sale of the Armstrong Craven segment the investment in Armstrong Craven was written off totalling £1,908,000.

The loans to the two foreign subsidiaries are long term in nature with no intention of repayment. Consequently they are treated as an investment and any foreign exchange gains or losses are booked to foreign exchange reserves in the consolidated balance sheet.

All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly by the Parent Company does not differ from the proportion of ordinary shares held.

11 Deferred tax asset

The following table represents the ageing analysis of the deferred tax asset.

The following are the major deferred tax assets recognised by the Group and Company and movements thereon during the year:

Deferred income tax assets are recognised for tax loss and other timing differences to the extent that the directors believe that the realisation of related tax benefit through future taxable profits is probable.

The total deferred income tax asset not recognised in respect of trading losses of the foreign subsidiaries is £389,000 (2012: £362,000). Both the US and Hong Kong subsidiaries are early stage businesses and the Board is taking a more cautious and longer term view of the timing of future profits.

The Group did not recognise potential deferred income tax assets totalling £147,000 (2012: £153,000) related to the trading losses of the Hong Kong subsidiary.

The Group did not recognise deferred income tax assets totalling £242,000 (2012: £209,000) related to the trading losses of the US subsidiary.

Deferred tax asset of £691,000 (2012: £nil) has not been recognised in respect of capital losses of £3,455,000 (2012: £nil) based on the assessment made by the directors.

12 Inventories

All inventories are carried at cost or net realisable value.

13 Trade and other receivables

The amount owing from Group undertakings relate to the loan made by the Company to the EBT. No interest is applied to this balance (note 22).

Movements on the Group provision for impairment of trade receivables are as follows:

14 Financial instruments

The Group's financial instruments comprise cash and other items such as trade and other receivables and trade and other payables that arise directly from its operations. Further detail is set out below. The main purpose of holding cash is to finance the Group's future investments and operations. It is (and has been throughout the years presented) the Group's policy that no trading in financial instruments shall be undertaken.

The fair value of financial assets and liabilities is not materially different to their book value.

The Group manages its capital to ensure entities in the Group will be able to continue as a going concern.

The Group monitors and manages the financial risk relating to its operations on a regular basis. These risks include market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. The Group engages in regular review of policies and practices to bring these risks down to a minimum.

The Group manages liquidity risk by maintaining adequate reserves as well as the use of an overdraft facility if needed. Monthly cash flow and working capital projections are derived to ensure sufficient funds are available to meet obligations and capital expenditure requirements as they fall due.

Interest rate risk is managed by minimising external debt and periodically reviewing the competitiveness of debt facilities.

The Group continually reviews its exposure to exchange rate movements and has put in place methods to reduce the exchange rate risk wherever it sees such methods as beneficial.

The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the credit risk.

Trade receivables consist of a large number of customers spread across diverse industries. On-going credit evaluation is performed on the financial condition of trade receivables.

Financial assets

These equate to the fair value for the financial assets.

The Group's financial assets comprise trade and other receivables and cash and cash equivalents. Interest is received on cash deposits on a Group pooling basis at variable rates based on the relevant base rate. In 2013 this interest rate ranged from 0% - 0.5% (2012: 0% - 0.5%).

As of 31 December 2013, Group trade receivables of £658,000 (2012: £1,594,000) and Company trade receivables of £426,000 (2012: £1,509,000) were not yet due.

The remaining Group trade receivables of £763,000 (2012: £1,514,000) and Company trade receivables of £587,000 (2012: £1,452,000) were past due but not considered impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:

A provision for the trade receivables is established when there is some doubt that the Group will not be able to collect all amounts due.

At 31 December 2013, trade receivables denominated in foreign currencies accounted for 31% of Group trade receivables (2012: 9%) and 3% of Company trade receivables (2012: 5%). No interest was accrued for trade and other receivables.

Financial liabilities

The Group's financial liabilities consist of trade and other payables. A detailed description of these financial liabilities is given below:

These equate to the fair value for the financial liabilities.

Undrawn facilities were as follows:

During 2013 the overdraft facility was utilised resulting in £3,000 interest payable (2012: £2,000).

During the year the directors decided that the overdraft facility was no longer required.

15 Trade and other payables

The amounts owed to Group undertakings relate to the hive up of RCCHR (£1,178,000) in 2007. No interest is applied on these balances which are repayable on demand.

16 Ordinary share capital

No new shares were issued during the year.

17 Share based payments

Group and Company

Details of directors' share options are included in the Directors' remuneration report. 

At 31 December 2013, 12 employees held share options (2012: 36). Options were valued using the Black-Scholes option-pricing model.

The share options outstanding at 31 December 2013 had an exercise price in the range of £0.0625 to £0.20 (2012: £nil to £0.20) and a weighted-average contractual life of 6 years (2012: 7 years).

There are no performance conditions attached to the outstanding share options.

18 Reconciliation of operating loss to cash used in operations

19 Cash and cash equivalents

20 Leases

Operating leases

The Group and Company leases all of its properties. The Group and Company also lease plant and machinery under non-cancellable operating lease agreements.

The total future minimum lease payments are due as follows:

Company