The Board seeks to present a balanced and understandable assessment of the Group's position and prospects, through the Chairman's Statement and the Directors' Report.
The respective responsibilities of the Directors and the Auditors in connection with the Financial Statements are explained in the Statement of Directors' Responsibilities and the Independent Auditor's Report.
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report and Operating Review. The principal risks that may affect the Group's future performance are set out in Risk and Risk Management.
During the year being reported, trading has continued to be robust with an improvement in profitability being achieved. Prior to the acquisition of Eurovet, the Group entered into a facilities agreement on 4 April 2012 (the "Facility Agreement") with a syndicate of banks comprising Lloyds TSB Bank plc, Barclays Bank PLC, Svenska Handelsbanken AB (PUBL) and HSBC Bank plc (the "Banks") under which a facility of £120 million was made available. The Facility Agreement included:
- a £55.0 million, 4½ year amortising term loan, repayable in eight instalments on 31 March and 30 September each year of £5.0 million per instalment, rising to £7.5 million per instalment from and including 30 September 2015 with a final instalment of £7.5 million on 31 October 2016. The first repayment was paid on 31 March 2013; and
- a £65.0 million 4½ year revolving credit facility committed until 31 October 2016.
The net proceeds from the disposal of the Services Segment to Patterson Companies, Inc. in August 2013 will be used to reduce the Group's debt through the prepayment and cancellation of the Group's existing £50.0 million term loan facility and the reduction in amounts drawn under the Group's existing £65.0 million revolving credit facility. This revolving credit facility will be retained on an ongoing basis to fund the development of the business.
The Group also had cash balances of £32.8 million at 30 June 2013.
The Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing these annual financial statements.
Internal Control and Risk Management
The Directors are responsible for maintaining the Group's system of internal control and for reviewing its effectiveness from a financial, operational and compliance perspective. The system of internal control aims to safeguard the Company's assets, ensure that proper accounting records are maintained, ensure compliance with statutory and regulatory requirements and ensure the effectiveness and efficiency of operations including the assessment and management of risk. The system of internal control is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
The Group has an established, ongoing and embedded framework of internal financial and operational control for identifying, evaluating and managing the risks faced by the Group. Every four months the Board carries out a review of relevant risk areas and systems of internal control. The review is structured by business area and key risk strategy and is based upon a summary of information prepared and reviewed by the business units' executive teams on an ongoing basis. This framework has been in place throughout the year under review, and has continued up to the date of approval of the Annual Report.
The risk management process was last reviewed in 2009 and it has been agreed that the process will once again undergo a review during 2013/2014.
The Board has reviewed the operation and effectiveness of the internal controls for the year ended 30 June 2013. Further detail in respect of the risks and uncertainties faced by the Group and the mitigating action being taken can be found within the Risk and Risk Management section of this report.
The Group's key systems of control include:
- Management Structure
The Group is organised into operating segments within which there are a number of business units. Each business unit has its own Managing Director and executive team; there are clear reporting lines and delegated authorities in place.
Key functions such as tax, treasury, insurance, legal and personnel are controlled centrally.
- Management Accounting Processes
The finance function has implemented a detailed management accounting process which is in operation and allows the Board and management transparency in terms of financial and operational performance, measured against key performance indicators (set at both business unit and Group level). Detailed management accounts are prepared on a monthly basis covering all areas of the business; these are reviewed by the relevant business units at their management meetings and by the Board on a monthly basis, thereby allowing any material variances to be discussed and any necessary action taken on a timely basis. Detailed forecasts are prepared and discussed in detail on a quarterly basis; these are then escalated to the Board for consideration and approval.
The finance function maintain a financial policies manual which covers central and divisional management. The manual is reviewed at least annually and is also updated whenever reporting standards, legislation or internal commercial reasons dictate. Any changes to the policies are communicated throughout the Group's finance function. The finance function schedules two annual internal conferences at which a technical update, tailored specifically to the Group's commercial needs, is presented by the Auditor. During the 2012/2013 financial year this conference took place in November and April, the former meeting concentrated on the Senior Accounting Officer obligations and the latter provided an opportunity for the Chief Financial Officer to meet her team to discuss future strategy.
Business unit management certify on a quarterly basis that key financial controls have been performed and that significant risks have been identified.
- Business Plans
Business plans provide a framework from which annual budgets and forecasts are agreed with each business unit, including financial and strategic targets against which business performance is monitored. The plans are reviewed by executive management, and then by the Board for ultimate approval. Actual performance during the financial year is monitored monthly against budget, forecast and previous year.
- Investment Approval
The Group has clear requirements for the approval and control of expenditure. Strategic investment decisions involving both capital and revenue expenditure are subject to formal detailed appraisal and review according to approval levels set by the Board. Capital expenditure is controlled within each business with approval levels determined by the Board.
- Development Expenditure
The Group has a transparent and established process for evaluating and monitoring the level of development expenditure incurred. As with all other business units the Product Development and Regulatory team agrees an annual budget which receives approval from the Board; performance against this is monitored on an ongoing basis. The Product Development and Regulatory team re-evaluates all projects at least twice a year (and reports all material decisions and changes to the Board). When evaluating projects a number of measurement criteria are considered, including the products' net present value and return on investment.
- Whistle-blowing and Business Ethics Policy
The Company has a whistle-blowing policy in place which establishes a confidential channel of communication for employees to bring matters of concern about the running of the business to the attention of senior management. Upon being notified of such a concern, the policy sets out a defined process which allows a full investigation to take place and, where necessary, corrective action to be taken. The Audit Committee reviews the whistle-blowing policy on an annual basis.
The Business Ethics Policy is currently undergoing a review and it is intended that an updated policy is rolled out across the Group during 2013/2014.
Audit Committee and Auditors
Information relating to the Audit Committee is set out in the Letter from the Audit Committee Chairman and Audit Committee Report. This details the Company's compliance with the Code's requirements in respect of audit matters.
Responsibility for monitoring the Group's system of internal control rests with the Board. It is assisted by the Audit Committee, which reviews the Half-Yearly and Annual Reports provided to Shareholders, the audit process, the systems of internal control and risk management.
The Auditor is engaged to express an opinion of the Company's Annual Report and Accounts. They independently and objectively review management's reporting of the Group's consolidated results and financial position. In addition, they review the systems of internal control and the data contained in the Annual Report and Accounts to the level necessary for expressing their audit opinion.
Details of Directors' remuneration are set out in the Letter from the Remuneration Committee Chairman and Directors' Remuneration Report. This report details the Company's compliance with the Code's requirements with regard to remuneration matters.