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2023 ReportAnnual Report and Accounts 2009/2010 dotDigital is an award-winning digital marketing specialist with over 3500 clients generating strong recurring revenues from the provision of digital marketing services such as: Email Marketing Search Engine Optimisation E-Commerce • • • • Website Design and Optimisation The Group now employs 103 staff across offices in Croydon, London Bridge, Manchester, Northampton and recently Minsk, Belarus. Corporate social responsibility report Contents 01 Key highlights 02 Chairman’s and Chief Executive’s report 10 14 Our Board of Directors 16 Corporate governance report 18 Audit Committee report 20 Remuneration Committee report 22 Report of the Directors’ 28 30 Consolidated income statement 30 31 32 33 34 35 35 Company statement of cash flows 36 IBC Company information Consolidated statement of comprehensive income Consolidated statement of financial position Company statement of financial position Consolidated statement of changes in equity Company statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Independent Auditor’s report 1 Key highlights • Like for like profits growth of 48% on turnover up 43% • Cash on account as at 30 June 2010 was approximately £1.3m • National Business Awards winner - Best Growth Strategy • Acquisition of Netcallidus to strengthen SEO services • Considerable investment in hardware and R&D • Continued strong client growth • • • Total staff headcount grown from 62 to 103 Strengthened competitive position in the Digital Marketing Sector Post year end: opening of offices in Minsk, employing 15 staff Turnover Expenses Profit before tax Profit after tax £6.0m 43% increase in turnover 42% increase in expenses 44% profit before tax 48% profit after tax £4.7m £4.7m £4.2m £3.6m £3.3m £1.3m £1.08m £0.9m £1.14m £0.9m £0.77m 2010 2009 (14 month period) 2009 (12 month period) 2010 2009 (14 month period) 2009 (12 month period) 2010 2009 (14 month period) 2009 (12 month period) 2010 2009 (14 month period) 2009 (12 month period) Last year’s results to June 2009 covered a 14 month period enabling the accounts for dotMailer Limited to become coterminous with those of dotDigital Group plc. As these accounts cover a twelve month period and to provide a meaningful comparison of performance on a like-for-like basis, the Directors have provided a summary above of the previous year’s income statements restated for a 12 month period. Accordingly, all of the comparisons in the commentary are based on a comparison of results for the 12 months ended June 2010 with the 12 months ended June 2009. The Group has enjoyed a strong year of profitable growth. On turnover up 43% to £6.0m (12 months ended June 2009: £4.2m), post-tax profits grew 48% to £1.14m (12 months ended June 2009: £0.77m). dotDigital Group Annual Report and Accounts 2009/2010 2 Chairman’s & Chief Executive’s report This pleasing result is slightly ahead of our target and reflects our continued focus on new client acquisition and investment in new products and services. In addition to achieving significant growth in profitability, we have continued to invest for the future. For example, to strengthen our competitive position we have committed resources to the underlying technical infrastructure which supports our products and more particularly, significant sums have been invested in further product development. Our total investment this year has amounted to £92k of capital investment in hardware and £338k of research and development activity in products and services. Added to our internal investment, we committed funds to the acquisition of Netcallidus Limited (“Netcallidus”) in May as part of the strategy to increase our presence and profits from the provision of search engine optimisation (SEO) services. As the acquisition took place very late in our financial year the impact of consolidation of the Netcallidus profits on the Group profit for the year has been minimal. In line with IFRS3 the costs of acquisition have been expensed in the current financial year. Acquisition strategy Since admission to the Plus market, as well as driving the business forward with an aggressive organic growth strategy, the Board have approved an acquisition strategy that it believes will deliver long-term shareholder value. The target sectors selected for potential acquisitions are: • • • • • • • SEO; Mobile; Word of Mouth Marketing; Surveys; Analytics; Usability testing; Research. The ‘ideal’ criteria agreed for acquisition targets are as follows: • • • High proportion of recurring revenues ideally minimum 40% of total; No more than 10% of revenue from one client; Strong technology with ownership of IP; www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 • • • • • • Not dependant on one (few) key person(s); Client base closely matches the dotMailer/Group client profiles; Turnover £1m plus or potential to be £1m plus inside two years; Total consideration ideally 3-7 PE Ratio; Deferred consideration to ensure goal alignment to dotDigital shareholders; Consideration ideally no more than 50% cash with the remainder payable in shares. Strict enforcement of the above criteria will inevitably restrict the number of available targets and the Board approval process has flexibility to vary these criteria when an opportunity arises with considerable potential future earnings growth, or where the target can provide a technology platform of value to the existing customer base. Acquisition of Netcallidus In 2009 the Board agreed that a strategic priority was to bring SEO under our own roof where in the past we had provided this service through a joint venture with a third party. During the course of 2009 we formed dotSEO to commence provision of this service in house and we engaged in negotiations with four potential acquisition targets during 2009 before finally acquiring Northamptonshire based Netcallidus. Netcallidus is a highly successful and fast-growing search marketing business (which met all of our acquisition criteria) in May 2010. To overcome the challenge of valuing a young fast-growing profitable business in a burgeoning market sector but during a global downturn both we and Netcallidus agreed that the most appropriate deal structure would be through an earn-out scheme linked to a multiple of Netcallidus’s post-tax profit in 2009/10, 2010/11 and 2011/12, with an initial cash consideration. The Board believes that this arrangement will achieve goal alignment between the Directors of Netcallidus, the Board and shareholders of dotDigital. The final consideration paid to the original shareholders of Netcallidus will be three times the profit after tax for the year ended 30 June 2012, and will be made up of both cash and dotDigital Ordinary Shares. If the targets in the business plan are met, the profits from Netcallidus will have significantly increased the profits of the Group and in the opinion of the Board will be earnings accretive and value enhancing. 3 dotDigital Group Annual Report and Accounts 2009/2010 Our business is split into five main brands and business units, each with high level expertise: dotMailer – In the Directors’ opinion, a market leading email marketing platform with exceptional features and ease of use. It is delivered and supported by a team of dedicated and passionate professionals. dotCommerce – The Group’s latest ecommerce solution considered by the Directors to provide a unique and compelling proposition to online sellers; a flexible bespoke build experience, for the cost of an off-the-shelf package. dotSEO – dotSEO undertakes detailed keyword analysis to identify the primary keywords and phrases visitors are using to find your products and services, develops a SEO strategy to maximise traffic and conversion and focuses on generating maximum ROI from your online marketing. dotAgency – An in-house creative agency team specialising in website design, build, digital marketing strategy and search engine optimisation. netcallidus – Netcallidus has been helping all types of businesses harness the power of Internet Marketing Services since its inception. With over 100 clients across B2B and B2C Netcallidus have the expertise to achieve great results from search engine optimisation and management of pay per click campaigns. 4 Chairman’s & Chief Executive’s report continued 43% Increase in revenue in 2010 www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 The Group has made excellent progress with the integration of Netcallidus. All accounting and management information is now handled by our central finance team and sales teams across all of the dotDigital business have now been trained in the sale of SEO. Moreover, the Directors of Netcallidus have agreed a business plan with the Board and operational processes for sale and support of clients using SEO services have been harmonised. Netcallidus deferred consideration IFRS3 (Revised ) requires the deferred consideration payable in October 2011 and October 2012 based on multiples of profit after tax for years ended 30 June 2011 and 30 June 2012 to be estimated and included in the accounts as part of the fair value of the acquisition. The calculation of fair value has been based upon deferred consideration that has been based upon a range of scenarios of possible future profits. Taking in to account the uncertainties inherent in forecasting the revenues and profits of a relatively newly established business that had been part of the Group for only 6 weeks at the year end and which is operating in a fast changing market place it should be noted there is a very high likelihood that the actual profits for the year ended June 2012 could be at variance with these estimates. In arriving at and negotiating the structure of the acquisition the Board were mindful of the need to ensure the proposed deferred consideration did not create liquidity risk for the Group. The structure of the deferred consideration element is such that under all the scenarios which could be envisaged the cash flows generated by the profit stream of the Netcallidus business will be sufficient to fund the cash element of the deferred consideration. Minsk, Belarus In October 2010 we announced the opening of a new facility in Minsk employing 15 staff initially to provide strengthened operational capability to Netcallidus and at the same time removing the requirement for outsourcing to India. So far we have been pleased with the outcome of this exercise and have plans to use further talented Belorussian staff across other areas of the Group. Organic growth strategy Last November dotDigital won the National Business Awards Best Growth Strategy award. This was in recognition of our organic growth strategy of pursuing new client acquisition through a mixture of online 5 “ Thanks for creating such a superb website. It’s a joy to look at and use. I’m particularly impressed by the amount of work that’s been done in such a short period of time.” Jules Griffith, Director of Communications, Somerset House “ Our website went live and it was a much smoother transition than I thought! The dotAgency team have been extremely helpful and supportive.” Tracy Wheeler Throgmorton Age of employees (by number of emplyees) “ I’d tried 2 other ecommerce solutions providers before I found dotCommerce. Use them.” Paul Bennett Fastfixdirect.co.uk 35 30 25 20 15 10 5 0 20-25 26-30 31-40 41-50 marketing and attendance at trade shows and through increasing the level of cross-sell to existing clients through focused account management and provision of complimentary and adjacent services. By focusing on our own search engine optimisation and through the implementation of a comprehensive CRM system we have high levels of organic growth with client numbers increasing at the rate of around 100 new clients per month. Continuous training of our sales and account management teams has resulted in cross selling of other adjacent digital marketing services to our client base. This is becoming a significant source of new revenue which we expect will continue to grow, particularly with the added expertise of Netcallidus. The Directors believe that by focussing on four key areas, growth will continue within the business: • • Highly focused marketing activity delivering high quality sales leads to a fully motivated and goal aligned sales team; Recruitment of the best available talent in all areas of business; • • Designing and building innovative products that are intuitive to use and deliver high levels of functionality to assist our clients in beating their business objectives; Outstanding levels of support and client care. By focusing on all aspects of our clients’ digital marketing needs, we believe the business is uniquely positioned to provide companies with solutions to fulfil their requirements and provide a positive return on investment. Staff The Board would like to thank all of the management and staff for their hard work, dedication and commitment to the business during the past year. We have a very young team, whose average age is 26 (excluding Directors). Many of those young people have taken on extra responsibilities, learned new skills and taken up leadership challenges during the past year. The quality and commitment of our team is one of the factors which gives the Board great confidence that we can continue to grow even in difficult economic times. We believe in giving employees sufficient autonomy to make good decisions about everything from product design to dealing with customer service issues. It is because of the quality of our staff that we have continued to grow our customer base and deliver great new products and services to our clients. With this in mind we aim to share the success of the Group with the staff through bonus payments and share options. The Directors are open about the business objectives and senior managers actively engage with their teams so that everyone understands how their efforts contribute to the overall business success. All staff who have completed their probation are eligible for a performance and profit related bonus scheme and are eligible for share options managed through an HMRC approved employee share option scheme. dotDigital Group Annual Report and Accounts 2009/2010 6 Chairman’s & Chief Executive’s report continued Irwin and Jordan “ You provided a fantastic platform to allow us designers to do what we are good at - making clothes look good! dotCommerce’s systems allow us to display our collection in an elegant and sophisticated way!” www.irwinandjordan.com www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 Despite becoming a much larger business, the Directors firmly believe that maintaining the entrepreneurial culture that was fundamental to the success of the business in its early days, is still critical to achieving success today. The Group adopts a wide range of formal and informal communication tools to ensure ideas are shared. The vision is shared and that people have a sense of belonging to the business. Our commitment to exceptional client service The Board firmly believes that the key to a long-term sustainable growing business emanates from delighting our customers. Everyone in the business is customer driven and we are striving to develop a culture that is passionate about customer service. The business is structured to ensure that all customers receive client service and support appropriate to their needs and we have introduced a number of new initiatives to ensure we continue to evolve and develop products and services which delight our clients. During the year there have been considerable activity aimed at continually improving the service we provide to our customers, including: • • • • • The appointment of Skip Fidura as Group Client Services Director; Expanding our friendly and effective telephone support teams; Introducing video-based usability testing and tracking techniques to improve user experience of our products; In-depth client interviews to understand how our service can be improved still further simple surveys to get quantitative data on client needs; User Groups to obtain first-hand feedback from customers about new product features. IT infrastructure The Group has made significant investments in its IT infrastructure. As part of the strategy to ensure the Company is well positioned to exploit future growth opportunities, the Board has approved capital expenditure on a number of projects including: • • • • Ensuring future scalability through the use of latest blade server technology and SAN data storage systems; Creating a full-scale test facility; Reducing dependencies on single suppliers; Reducing environmental impact by selecting low power consumption hardware; 7 We aim to share the success of the Company with the staff... dotDigital Group Annual Report and Accounts 2009/2010 8 Chairman’s & Chief Executive’s report continued • • • Fully documenting systems and security policies; Increasing resilience by eliminating single points of failure and implementing mirroring technology; Extensive security audits, including external penetration testing. The Group is focusing on developing significant new features and enhanced usability for its email marketing product, dotMailer. Future planned product development will include new versions of the content management tool, a new survey tool and a SaaS version of the successful E-Commerce platform known as dotCommerce. Improving gross margin on bespoke projects Following successful trials during the year the Group has modified its approach to managing bespoke projects carried out on behalf of clients. Whilst project management, project specification and client management are still carried out by employees based in the UK, much of the development activity will be carried out by partner organisations operating with a lower cost and fixed prices to ensure margins are managed. The Directors are confident that this change in approach will improve profitability, give greater flexibility of scheduling, and ensure a greater capacity to scale to meet client demands. Product development The Board has a clear strategy to increase the proportion of Group revenues that will be derived from recurring revenues based on products sold on a Software as a Service (“SaaS”) basis. The development team working on product development has been significantly strengthened during the year and following changes made to the delivery of client bespoke projects further development resource will be focused on product development during 2010/2011. Strategy for the coming year The Board has agreed a business plan for the coming year that it believes will continue to deliver growth in both profits and revenues and position the business soundly for growth in future years. Some key elements of the plan are as follows: • • • • To complete the integration of Netcallidus and focus all our sales teams on identifying profitable SEO opportunities from within our client base; We recognise the dynamic growth in this market is occurring worldwide and part of the Group’s short-term objective is to identify the areas in which we could make the maximum impact; To initiate a programme of international expansion of our core services. This may involve overseas acquisitions and/or franchising agreements to suitably qualified overseas partners; Increase the resources focused on our own search engine optimisation and business marketing, expanding the use of social media marketing, PR and educational client events and reviewing our branding; www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 9 ‘ The market for our products and services continues to remain buoyant despite the world economic crisis. The growth of our customer base remains unabated as they continue to embrace the power of digital marketing.’ • • • • To further expand the technical development resources focused on the delivery of innovative new products and services which are complimentary and adjacent to our existing offerings. Continuing to add innovative new features to our existing products; To extend the use of usability testing and user experience techniques to ensure our products enjoy maximum take-up by new trial users and by testing the concept of “freemium” versions of our products to widen the user base; We aim to start development of SaaS version of dotCommerce aimed at providing a fully featured easy to use E-Commerce application for the smaller end of the SME market; We plan to launch a new version of dotMailer with a brand-new step process and highly intuitive and innovative drag-and-drop editing tool. Dividend policy It is the Board’s intention to achieve capital growth on the strength of continuing to grow the business, investment in new products and identifying further earning enhancing acquisitions. Although the business is cash flow positive the Directors believe that it is inappropriate to propose a dividend during this phase of planned high growth. Outlook The market for our products and services continues to remain buoyant despite the world economic crisis. The growth of our customer base remains unabated as they continue to embrace the power of digital marketing. After settling the initial acquisition consideration for Netcallidus, our cash position remains strong and we believe we are well placed to continue to invest in hardware, research and development and further acquisitions. Recognition of the dotDigital Group brands has continued to grow during the past year and this strong brand awareness combined with customer testimonials, increased marketing activity and continuously improving products will position the business well to win new clients into the future. We look forward to the New Year with confidence. David Pacy Chairman 11 November 2010 Peter Simmonds Chief Executive 11 November 2010 dotDigital Group Annual Report and Accounts 2009/2010 10 Corporate social responsibility report The Group is committed to achieving a long-term successful and sustainable business as a leading provider of digital marketing solutions. dotDigital’s products are used by hundreds of charities worldwide who have enjoyed our special charity rates. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 The Board believes in the importance of social responsibility and sustainability within the business. A responsible approach to the environment, health and safety and fair treatment of our people, our customers, our suppliers, our local communities and other key stakeholders is embedded in our Group culture and values. In a nutshell, dotDigital recognises its obligations to all those with whom it has dealings and our good reputation is vital to instil confidence in all who do business with us. Support for not for profit sector The UK charity sector has always been a key focus for the business. dotDigital has a pre-determined pricing model for registered charities and has worked with some of the country’s leading charities including Fairtrade, Wateraid and WRC. dotDigital is committed to providing the very highest possible services and quality products to charities at an affordable rate. Sustainability and the environment dotDigital has been quick to accentuate the environmentally friendly role of digital marketing in its thought leadership and media outreach and has worked with both the DMA and IAB to promote this message. Email marketing is a viable paper-free alternative to direct mail and leafleting. dotDigital has made a significant investment in the virtualisation, storage technology and modern blade hardware to continue to deliver high levels of customer service to dotDigital Group customers whilst dramatically reducing the environmental impact of running a large data-centre. The key benefits include: • • • • • • • Increased resilience of our key infrastructure; Server consolidation from many independent computers to far fewer; Unified server management to ensure maximum efficiency and performance; Reduced power consumption through less processors and better utilisation of those in use; Reduced cooling need, resulting in lower use of air conditioning plant; More rapid deployment of new systems to meet client needs; More processors per rack resulting in less space demands in crowded city computer rooms. 11 Rodial – Renowned across the beauty world for their revolutionary plumpers and fixes, Rodial came to dotCommerce for help ‘plumping up’ their site. The result? A site who’s customers now put twice as much into their basket! www.rodial.co.uk Throgmorton – We built Throgmorton’s site from the ground up and implemented several different news services and RSS feeds to ensure Throgmorton’s clients and prospects can utilise their accounting and financial news service. The result is a clean, easy to use site that visitors love. www.throgmorton.co.uk HMV Curzon – We worked closely with Curzon and Winkreative to deliver a stylish and easy to use site which amalgamates data from various different sources. The website has surpassed Curzon’s expectations and they are delighted with the marriage of Winkreative’s design and dotAgency’s consultation and expertise in building a flexible site. We continue to work with Curzon Cinemas on a variety of projects, some of which utilise cutting edge technological trends. www.hmvcurzon.co.uk dotDigital Group Annual Report and Accounts 2009/2010 12 Corporate social responsibility report continued dotDigital is also committed to talent development through its work experience and graduate recruitment schemes. Our investment in the latest and most powerful virtualisation technology is consistent with our offering clients leading digital solutions whilst genuinely demanding fewer resources. Everyone at dotDigital Group Plc is focused on recycling and conserving power, but our new equipment really makes a significant positive contribution. Over the next few years, data-centre power and cooling demands will become a major issue and we are pleased to be at the forefront of addressing the challenge. Commitment to employees The Board recognises that the Group’s employees are critical to the overall delivery of its business strategy. All employees are kept informed of progress against the Group’s strategic plan through regular meetings, regular newsletters and informal Friday afternoon “Rah rah” sessions, where teams from across the business keep colleagues from other parts of the business up-to-date with issues and news. The Directors firmly believe that relations with staff are based on respect and trust. The Board is committed to creating a working environment where there is mutual trust and where everyone is accountable for their own actions and takes full responsibility for the performance and reputation of the business. The Board has a policy to ensure that at all times there are equal opportunities for all employees with no discrimination on account of race, age, gender, sexual orientation, disability and political or religious beliefs. Our philosophy is to ensure that ability, contribution to the business and potential to develop are the determining factors in the selection, training, career development and promotion of all employees. The Company operates in a highly competitive environment; therefore recruitment and retention of first-class employees is critical to the continued growth of the business. As a result of this need to recruit the best, the Company strives to ensure it’s salary packages are competitive and that there are opportunities for employees to earn bonuses linked to their performance and the Company’s performance. Every employee that has passed their probationary period is entitled to participate in the Company’s employee share option scheme. Excluding Directors, the total number of options available to employees at the end of the financial year amounts to 24m shares or 2% percentage of the total shares in issue. dotDigital is also committed to talent development through its work experience and graduate recruitment schemes. Health and safety dotDigital is committed to providing a safe and high-quality working environment for its staff. The Group engages an external health and safety consultancy firm to carry out periodic reviews of its offices and is committed to adopting any recommendations arising. The Group has complied with all applicable legislation and has not been subject to sanctions or fines for environmental, health and safety or other infringements. Business ethics The Board believes that operating ethically is vital to the long-term success of the business and to the well-being of all employees and stakeholders. All new employees are provided with formal codes of ethical behaviour as part of their contract of employment. The code provides guidelines covering personal conduct and gives advice on recognising and dealing with conflict of interest, business gifts, bribery and corruption. All employees are encouraged to report any suspected unethical behaviour to the Board. If necessary, there is an alternative channel of communication to the senior independent Director, should this be more appropriate. The Directors strive to ensure that the Company has a fair and very open culture where everyone’s views and contributions are actively encouraged and respected. Customers and business partners The Board firmly believes that the prerequisite for achieving a successful and sustainable business is integrity in dealing with customers and business partners. This principle governs all aspects of the business. The Company values its customers and at all times strives to safeguard the trust they have provided in the business by complying with all relevant laws and contractual commitments. The Company is continually seeking customer feedback through a variety of formal and informal channels such as user Groups, customer service surveys, in-depth customer interviews and client events. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 13 Stonewall – Stonewall’s youth programme offers an intensive mentoring programme and they needed a site that young people would engage with. Cue Young Stonewall, fresh, new and vibrant, which lets mentors and volunteers work together online. www.youngstonewall.org.uk WaterAid – “Thank you so much. The new website is a truly outstanding piece of work that we are very happy with. Well done all of you”. www.wateraid.org/uk Muscians Benevolent Fund – In 2010, this venerable musicians charity appointed dotAgency to design and build their brand new website, and chose dotCommerce to provide a complete new ecommerce solution for their online shop. The result was music to their eyes. www.helpmusicians.org.uk dotDigital Group Annual Report and Accounts 2009/2010 14 Our Board of Directors Peter Simmonds FCCA, aged 52, Chief Executive and Finance Director Peter Simmonds commenced his career in 1976 as a trainee accountant with Unilever Plc and has over 20 years of experience at senior management and Board level, principally in the areas of banking, insurance, finance, IT and outsourcing. He has considerable business entrepreneurial experience having been involved in the start up or early stage of a number of companies in various industry sectors including consultancy services, vehicle leasing, computer software and internet solutions sectors. Peter also has experience of business acquisition and post acquisition integration and management of acquired businesses. Simon Bird, aged 35, Technical Director Simon is a founding Director of dotDigital with a strong technical bias. His technical expertise stretches back to the beginning of his career when he was integral to the formation of a major internet access provider. Passionate about web software engineering, he strives to ensure the Group is always ahead of the technology game enabling dotDigital to build world class products for its customers. Tink Taylor, aged 38, Business Development Director Tink Taylor a founding Director has many years experience in the field of interactive electronic communications. Tink has wide ranging experience in introducing the concept of digital marketing to companies large and small. He is an elected member of the Direct Marketing Association’s Email Marketing Council and also a member of the Internet Advertising Bureaus E-communications Council. Tink is a judge for the Emails and Virals category at the DMA awards. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 15 “Skip” Gordon Fidura, aged 41, Client Services Director Gordon Fidura (Skip) brings to dotDigital extensive global experience and expertise in digital and direct marketing. A Director with Warehouse Marketing Limited since 2006, Skip is also Vice Chairman of the Email Marketing Council, part of the Direct Marketing Association in the UK. Prior to joining dotDigital in January 2009 as a senior manager, Skip launched the Email Marketing & Digital Dialogue consultancy within OgilvyOne Worldwide in London. Here he grew the consultancy team whilst successfully developing the agency’s email and digital practice. Skip has also held senior management roles within Digital Impact, a leading US digital marketing solutions agency, becoming Director of European Operations after helping establish the first overseas office in the UK. David Pacy, aged 67, Non Executive Chairman David Pacy founded MetroVideo Group in 1979, which was sold to WPP Group Plc in 1986 in addition to subsequently setting up Stockroom Archive Management Limited which specialises in the storage and retrieval of film and video material. David was also a founder of DigiReels, one of the UK’s earliest commercially available video on demand services, a joint venture between WPP Group Plc and Cable and Wireless Plc. He subsequently became a founder Director of ChillBean Limited, the digital asset management company hosting SohoSoho.tv, created specifically for the media world. David is a Director of Clockwork Capital a joint venture with WPP involved in equipment finance for the television industry. Nicholas Nelson, aged 45, Non Executive Director Nicholas Nelson commenced his career in 1985 as a trainee dealer on the floor of the London Stock Exchange accumulating approximately thirteen years experience as both dealer and investment manager. He has for the past twelve years continued his City career, working in corporate communications during which time he has assisted on many PLUS and AIM flotations. He is currently Managing Director of Nexus Finance Limited, a City of London based financial public relations consultancy. dotDigital Group Annual Report and Accounts 2009/2010 16 Corporate governance report Throgmorton “ Our website went live and it was a much smoother transition than I thought! The dotAgency team have been extremely helpful and supportive.” www.throgmorton.co.uk www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 The Board provides corporate governance disclosures in accordance with the principles and provisions of “The Combined Code: Principles of Good Governance and the Code of Best Practice” (“the Code”). As part of this process, Turnbull guidelines set out in “Guidance for Directors on the Combined Code” have also been reviewed and are covered under “Internal control” below. An explanation of how the Company has applied the principles and the extent to which the provisions in the Code have been complied with also appears below. Compliance statement (a) Directors The details of the Group’s Board, together with the Audit and Remuneration Committees, are set out on pages 18 and 20 respectively. The Board meets monthly and is responsible for strategy, performance, approval of major capital projects and the framework of internal controls. The Board has a formal schedule of matters reserved for specific review and decision. To enable the Board to discharge its duties, all Directors receive appropriate and timely information. Briefing papers are distributed to all Directors in advance of Board meetings. All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. At the period end there were four Executive Directors, one independent Non Executive Director and an independent Non Executive Chairman. The current constitution of the Audit and Remuneration Committees are shown on pages 18 and 20 respectively. Appointments to the Board are nominated by an Executive Director and then considered by the full Board. (b) Director’s remuneration As set out on pages 20 and 21, the remuneration of the Executive Directors is determined by the Remuneration Committee whilst that of the Non Executives is determined by the whole Board. The Directors are conscious of the importance of the performance related incentives and bonuses are paid based on performance as deemed appropriate by the Remuneration Committee. 17 (iii) Audit Committee and Auditors The Audit Committee comprises Tink Taylor and David Pacy and is chaired by Nicholas Nelson. The Auditors of the Group may also attend part or all of each meeting and they have direct access to the committee for independent discussions, without the presence of the Executive Director if required. The Audit Committee may examine any matters relating to the financial affairs of the Group, and to the Group’s audit. This includes reviews of the annual accounts and announcements, accounting policies, compliance with accounting standards, the appointment and fees of auditors and such other related functions as the Board may require. (iv) Going concern basis After making enquiries, the Directors have formed a judgment, at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements. (c) Relations with shareholders The Group encourages two-way communications with all its shareholders and responds quickly to all requests or queries received. All Shareholders have at least twenty one working days’ notice of the Annual General Meeting at which all of the Directors and the Chairman are normally available for questions. Comments and questions are encouraged from the Shareholders at the meeting. (d) Accountability and audit (i) Financial reporting Detailed reviews of the performance and financial position of the Group are included in the Chairman’s and Chief Executive’s statement. The Board uses this and the Directors’ report on pages 22 to 27 to present a balanced and understandable assessment of the Group’s position and prospects. The Directors’ responsibility for the financial statements is described on page 26. (ii) Internal control The Board confirms that it has established the procedures necessary to implement the guidance set out in “Internal Control: Guidance for Directors on the Combined Code”. The process of risk identification, evaluation and management has been considered by the Board. It is the intention that this will continue to be kept under constant review and will be considered at each Board meeting in the future. The Board is continuing to take steps to embed internal control and risk management further into the operations of the business and to deal with areas of improvement which come to management and the Board’s attention. The Directors acknowledge their responsibilities for the Group’s system of internal financial control. Such a system can provide reasonable but not absolute assurance against material misstatement or loss. The Board confirms that the procedures necessary to comply with the provisions of the code, including the guidance of Turnbull, have been in place throughout the period ended 30 June 2009 and up to the date of the Directors’ report. It has considered the major business risks and the control environment. Important control procedures, in addition to the day to day supervision of the business, include comparison of monthly management accounts to the budget. dotDigital Group Annual Report and Accounts 2009/2010 18 Audit Committee report Toys and Playthings Toys ‘n’ Playthings is one of six websites that publishing group Lema Publishing commissioned with dotAgency. We ensure that each site has prominent sign ups to the newsflash which is powered by dotMailer and allows the magazines to keep in frequent touch with their readers. www.toysnplaythings.co.uk www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 Role of the Audit Committee The Audit Committee is a sub-committee of the Board whose responsibilities include: • • • • • Reviewing the half-yearly and full year accounts and results announcements of the Company and any other formal announcements relating to the Group’s financial performance and recommending them to the Board for approval; Reviewing the Group’s systems for internal financial control and risk management; Monitoring and reviewing the effectiveness of the Group’s internal accounting function and considering regular reports which arise; Considering the appointment of the external auditors, overseeing the process for their selection and making recommendations to the Board in relation to their appointment to be put to shareholders for approval at a general meeting; Monitoring and reviewing the effectiveness and independence of the external auditors, agreeing the nature and scope of their audit, agreeing their remuneration, and considering their reports on the Group’s accounts, reports to shareholders and their evaluation of the systems of internal financial control and risk management. Composition of the Audit Committee The Audit Committee comprises the two independent Non Executive Directors, Nicholas Nelson and David Pacy and an Executive Director, Ian Taylor. The Chairman of the Audit Committee is Nicholas Nelson. The Committee meets separately with the external auditors. The Company Secretary is secretary to the Audit Committee. Main Activities of the Audit Committee At its meeting on the 9 November 2010 the Committee reviewed the Group’s preliminary announcement of its results for the financial year 30 June 2010 and the draft report and accounts for that year. The Committee received reports from the external auditors on the conduct of their audit, their review of the accounts; including accounting policies and areas of judgment, and their comments on risk management and control matters. The Group’s corporate social responsibility reporting arrangements and procedures were also reviewed. The external auditors also presented their proposed fees and scope for the forthcoming year’s audit. The Committee also reviewed the performance of both the internal accounting function and external auditors. The review of the external auditors was used to confirm the 19 Want the Look Want The Look use us for their development, email marketing and search engine optimisation. The fact that everything is driven through one specialised agency is a major plus for owner Oliver. www.wantthelook.com dotDigital Group Annual Report and Accounts 2009/2010 appropriateness of their reappointment and included assessment of their independence, qualifications, expertise, resources and effectiveness of their audit process. The Audit Committee also reviewed the effectiveness of the Group’s systems for internal financial control and risk management. The Committee reviewed the Group’s credit control procedures and risks concerning IT controls. Independence of external auditors Both the Board and the external auditors have safeguards in place to avoid the possibility that the auditors’ objectivity and independence could be compromised. dotDigital’s policy in respect of services provided by the external auditors is as follows: • Audit related services – the external auditors are invited to provide services which, in their position as auditors, they must or are best placed to undertake. This includes formalities relating to borrowings, shareholders’ and other circulars, various other regulatory reports and work in respect of acquisitions and disposals. Tax consulting – in cases where they are best suited, we use the external auditors. All other significant tax consulting work is put out to tender. • General consulting – in recognition of public concern over the effect of consulting services on auditors’ independence, our policy is that the external auditors are not invited to tender for general consulting work. Internal management accounting The Audit Committee reviewed the performance of the internal accounting function, the department’s resource requirements and also approved the internal budgets for the year ending 30th June 2011, which appeared both prudent and realistic in the context of the Group’s ambitions. On behalf of the Committee: Nicholas Nelson Chairman of the Audit Committee 20 Remuneration Committee report The Remuneration Committee The Remuneration Committee was established to keep under review the remuneration and terms of employment of Executive Directors and to recommend such remuneration and terms and changes thereof to the Board. The Committee’s composition, responsibilities and operation comply with the Combined Code. In forming its remuneration policy, the Committee has endeavoured to comply with the Combined Code. The Committee comprised of Nicholas Nelson (Chairman), David Pacy and Peter Simmonds. Peter Simmonds being an Executive Director cannot comment upon his own remuneration. Remuneration policy The Group’s executive remuneration policy objectives are: (a) To ensure that individual rewards and incentives are directly aligned with the performance of the Group and that of the interests of the shareholders; and (b) To maintain a competitive program which enables the Group to attract and retain high calibre executives. Service contracts On 7 January 2009, the Executive Directors each entered into a service contract with the Company, the terms of which commenced upon Admission to PLUS on the 2 February 2009. After an initial appointment of 12 months from admission each contract is terminable by the Company or the Director by six months notice. The agreement contains restrictive covenants. Upon termination, no benefits (other than those accruing during the notice period) are due to the Director. Directors’ interests The respective interests, all of which are beneficial, in the shares of the Company for the members of the Board at the year end and subsequent to that date are stated opposite. Directors’ Interests in Share Options Under the Group’s executive share option scheme the following Directors have the right to acquire Ordinary Shares (shown opposite). The options that were originally granted to Peter Simmonds on 1 April 2008 which were for Ordinary Shares in dotMailer Limited have been converted on 1 February 2009 upon the reverse acquisition of dotDigital Group Plc formerly known as West End Ventures PLC and are exercisable on or before 31 December 2012. The options for Gordon Fidura were granted as part of his performance based remuneration under the employee EMI approved option scheme. Employee Incentive Schemes The Group has awarded Share Options under EMI approved Share Option Schemes to key employees who had completed their probation period at the date of the reverse acquisition. The Board considers the performance of staff in conjunction with the performance of the Group during the bi-annual review process. Discretionary bonuses are awarded based on individual and Group performance. Approved by the Remuneration Committee Signed on its behalf by Nicholas Nelson Chairman of Remuneration Committee www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 21 Directors’ emoluments Executive Directors P Simmonds I Taylor S Bird G Fidura D Ivy (resigned 10/9/09) Executive Directors P Simmonds I Taylor S Bird G Fidura D Ivy Non Executive Directors’ emoluments Non Executive Directors N Nelson D Pacy Non Executive Directors N Nelson D Pacy Directors’ interests Executive Director Frank Nominees Ltd* I Taylor S Bird 12 month period ended 30 June 2010 Salary/Fees £ 88,000 95,000 95,000 76,000 35,249 Benefits £ 7,103 6,757 6,757 4,200 - Bonus £ 25,000 30,000 10,000 6,250 - Pension £ 8,808 9,500 9,500 - - Payment in Lieu of holiday £ 4,230 3,598 - - - Total £ 133,141 144,855 121,257 86,450 35,249 354,000 24,817 71,250 27,808 7,828 520,952 14 month period ended 30 June 2009 Salary/Fees £ 102,667 98,380 98,380 13,367 98,380 Benefits £ 13,356 - - - - 411,184 13,356 Bonus £ 25,000 20,000 20,000 - 20,000 85,000 Pension £ 3,667 7,269 7,269 - 7,269 25,474 Payment in Lieu of holiday £ - - - - - 0 Salary/Fees £ 20,000 20,000 40,000 Salary/Fees £ 23,333 23,333 46,666 12 month period ended 30 June 2010 Benefits £ Bonus £ Pension £ Payment in Lieu of holiday £ - - - - - - - - - - - - 14 month period ended 30 June 2009 Benefits £ Bonus £ Pension £ Payment in Lieu of holiday £ - - - - - - - - - - - - Total £ 144,690 125,649 125,649 13,367 125,649 535,014 Total £ 20,000 20,000 40,000 Total £ 23,333 23,333 46,666 as at 30.06.10 No. of Shares held % holding 65,300,000 304,300,000 264,300,000 5.05% 23.54% 20.45% 633,900,000 49.04% * Frank Nominees Limited acts as nominee for Alliance Trust Pensions Limited, which is the trustee of a SIPP established by Peter Anthony Simmonds. Frank Nominees is the vehicle used by Kleinwort Benson Limited to hold securities for clients, trusts, SIPP’s etc. The beneficiary of the SIPP is Peter Anthony Simmonds. Directors’ Interests in share options Executive Director P Simmonds G Fidura Grant date No. of share options granted 01/04/2008 41,666,667 01/04/2008 4,000,000 Option price (Pence) 0.24 1.0 Date first exercisable Expiry date 01/06/2008 31/12/2012 01/07/2010 01/02/2019 dotDigital Group Annual Report and Accounts 2009/2010 22 Report of the Directors’ The Directors present their report with the financial statements of the Company and the Group for the year ended 30 June 2010. Principal activity The principal activity of the Group in the period under review was that of digital marketing. Business review and future developments During the year the Group has shown significant growth in customer numbers, sales, and profits. Revenues grew from £4.2m in the 12 months ended June 2009 to £6.0m for the year ended June 2010, an increase of 43%. (See table on page 1). Post-tax profits grew from £0.77m in 12m to June 2009 to £1.14m for the year ended June 2010, an increase of 48%. (See table on page 1). Key performance indicators The operations as a whole and the individual business units are managed and controlled using a variety of key performance indicators appropriate to the goals they have been set. Examples of key performance indicators include: • • • • • • • New client wins; Sales targets by individual and business unit; Customer satisfaction; Headcount; Renewal and retention rates of customers; Product features released; Control of working capital. Key risks and uncertainties (i) Supplier, computer hardware and internet reliability related risks The Group rents space for its servers located at hosting centres and purchases bandwidth from service providers in the UK to run the software and services it supplies. Although, it spreads the risk of computer hardware failure across multiple servers in multiple hosting centres and to date, there have been no significant failures, there is no assurance of continuity of supply. An event resulting in a hosting centre going off-line for any significant period of time or the termination of provision of services by one of those hosting centres for any reason may result in significant loss of revenues and therefore materially harm the Group’s business, operating results and financial condition. Similarly, events preventing or obstructing the servers from communicating over the internet, such as the future availability of a finite number of IP addresses, may restrict the capacity of the business. (ii) ISP reputation related risks A significant proportion of the Group’s revenue is currently derived by charging a price per email for sending marketing emails on behalf of commercial marketing departments. The largest volume senders of emails tend to be companies sending to consumers. Consequently some of dotMailer’s largest customers send large numbers of emails to consumers. The EU anti-spam regulations and US CAN_SPAM laws place restrictions on what and when companies are allowed to send marketing emails to consumers. dotMailer rents the use of its software and servers for clients to upload their own email lists and send their email marketing campaigns. dotMailer acts as the data processor in all instances and neither owns lists nor provide third parties with data and is therefore not directly liable for any breaches of the EU or US anti-spam regulations. However, where clients are considered by email recipients to be sending unwanted emails, there is an inherent mechanism within most email clients to make a complaint against the sender. The level or number of complaints is recorded by the larger ISP’s (Hotmail, Yahoo, AOL etc) against the IP address of the server sending the email; this complaint rate record establishes the reputation of each IP address. An IP address with a poor reputation may not get a high level of delivery of emails. dotMailer closely monitors the complaint rates for each of its clients and reacts quickly and accordingly to stop rogue campaigns. However if too many new clients create and send campaigns which attracted high complaint rates, the reputation of dotMailer’s sending IP addresses could be diminished. This diminished reputation could affect dotMailer’s ability to win or retain new clients and therefore could significantly affect its planned growth in revenues. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 23 ‘ Post-tax profits grew from £0.77m in 12m to June 2009 to £1.14m for the year ended June 2010, an increase of 48%.’ dotMailer also faces risks from commercial and non-commercial anti spam services. There are a number of organisations who provide a service to individuals and companies to help them reduce spam in their inbox; examples include Spamhaus and Spamcop. These organisations allow individuals to report an email as spam. This reporting can rapidly propagate the blacklisting of an IP address or domain used to send the reported email. This could impact on dotMailer’s ability to deliver emails on behalf of other clients which could in turn impact on revenues. It is also to be noted that as the ISP communities adopt ever tougher measure to deal with the problem of spam there is a risk that genuine marketing emails could be falsely labelled as spam and do not get delivered to the intended recipients. (iii) Hacking & information security Although in the opinion of the Group’s Directors, the technical team at the Group takes sensible precautions against intrusions and loss of data and dotMailer employs a security manager to mitigate this risk, there is a possible risk that a hacking attack could result in a denial of service or loss of data. (iv) Competitive environment Although the Group’s revenues have consistently grown year on year, it competes in a competitive sector. Some of its competitors and potential competitors may have advantages over it in terms of financial backing, business size, broader brand recognition and coverage of other geographic markets globally. Their capacity to leverage their marketing expenditures across a broader range of potential customers, form relationships with brand owners or make acquisitions of complimentary products inherently increases the risk to the Group‘s business model. (v) Hire and retain key personnel The Group depends on the continued contributions of the Group’s senior management and other key personnel. The loss of the services of any of these executive officers or other key employees could harm the Group’s business. The future success of the Group also depends on its ability to identify, attract and retain highly skilled technical, managerial and sales personnel. The Group faces intense competition for qualified individuals from numerous technology and marketing companies. (vi) Development of products The digital marketing industry is fast paced and rapidly adopts developing technologies. In order to stay competitive the Group needs to deploy resources to research and development activity and to constantly innovate. The Group’s growth will depend upon the development, commercialisation and marketing of new products. If this is not done successfully, then the growth of the Group may be impaired. There is also a risk that this activity may not result in a leading edge or competitive products being brought to market in time to maintain a competitive advantage. The Group may be unsuccessful in its efforts to develop products. Whilst the Group will continue to strive to ensure it is able to deliver products and services that meet the needs of its target clients, there is a risk that competitors may be first to the market with products that entice clients away from dotMailer. Future outlook The Group provides digital marketing services across a range of areas. Each of these areas have shown market growth significantly above that of the general UK economy. The Board believes that our widespread brand recognition and strong product range will continue to present opportunities to expand and diversify profitably in the coming year. Dividends It is the Directors strategy to achieve capital growth on the strength of a consistently cash generative trading performance. During the last financial year cash reserves grew as a result of strong trading performance. However, the acquisition of Netcallidus means that overall cash and cash equivalents at £1.28m are down by approximately £400k compared to June 2009. It is the Board’s intention to utilise this cash to invest in new revenue generating opportunities for the business and to continue to seek further earnings enhancing acquisitions. Accordingly, the Directors believe that it is inappropriate to propose a dividend based on this strategy to invest in further growth. dotDigital Group Annual Report and Accounts 2009/2010 24 Report of the Directors’ continued The Directors during the period under review were: S Bird D Ivy N Nelson D Pacy P Simmonds I Taylor G Fidura - Resigned 10.9.09 - - - - Appointed 1.7.09 Directors’ interests The Directors who served during the period and their beneficial interests in the shares of the Group as recorded in the register of Directors’ interests at 30th June 2010 are as follows: Directors S Bird I Taylor P Simmonds N Nelson D Pacy D Ivy (resigned 10/9/09) G Fidura 30.6.10 Number of shares held 264,300,000 304,300,000 65,300,000 27,625,000 37,500,000 152,300,000 - Shareholding % 20.45 23.36 5.01 2.12 2.88 11.8 - 30.6.09 Number of shares held 304,300,000 304,300,000 65,300,000 27,625,000 37,500,000 304,300,000 - Shareholding % 23.36 23.36 5.01 2.12 2.88 23.36 - Peter Simmonds is beneficially entitled to 65,300,000 Ordinary Shares which are owned by Alliance Trust Pensions Limited. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 25 The Directors who served during the period and their beneficial interests in share options in the Group, as recorded in the register of Directors’ interests as at 30 June 2010 are as follows: Executive Directors P Simmonds G Fidura 30.6.10 Number of options held 41,666,667 4,000,000 Shareholding % 3.10* 0.30 30.6.09 Number of shares held 41,666,667 - Shareholding % 3.10 - * Percentage shareholding represents the percentage of the shares issued and should no more than the existing shares and those exercisable at the reporting period. Substantial interests On 30 October 2010, the following parties had notified the Group of a beneficial interest that represents 5% or more of the Company’s issued share capital at that date: Shareholders S Bird P Simmonds D Ivy Pershing Nominees Limited I Taylor Newedge Group SA 30.6.10 Number of shares held 264,300,000 65,300,000 152,300,000 69,769,429 304,300,000 192,000,000 Shareholding % 30.6.09 Number of shares held Shareholding % 20.45 304,300,000 5.05 65,300,000 11.82 304,000,000 5.40 23.54 14.85 64,769,429 304,300,000 - 23.54 5.05 23.54 5.00 23.54 - dotDigital Group Annual Report and Accounts 2009/2010 26 Report of the Directors’ continued Frank Nominees Limited act as nominee for Alliance Trust Pensions Limited which is the trust of a SIPP established by Peter Anthony Simmonds. Frank Nominees is a vehicle used by Kleinwort Benson Limited to hold securities for clients, trusts, SIPP’s etc. The beneficiary of the SIPP is Peter Anthony Simmonds. Newedge Group are holding the shares on behalf of the Helium Special Situations Fund, a single manager hedge fund focussing on UK long- bias small and micro caps. Group’s Policy on payment of creditors The Group does not have a formal code that it follows with regard to payments to suppliers. It agrees payment terms with its suppliers at the time it enters into binding purchasing contracts for the supply of goods and services. The Company seeks to abide by these payment terms whenever it is satisfied that the supplier has provided the goods or services in accordance with agreed terms and conditions. The average credit days for the year is 34 (2009: 25 days). Publication of accounts on company website Financial statements are published on the Company’s website. The maintenance in and integrity of the website is the responsibility of the Directors. The Directors responsibility also extends to the financial statements contained therein. Indemnity of officers The Group purchases insurance to cover its Directors and Officers against their costs in defending themselves in legal proceedings taken against them in that capacity, and in respect of damages resulting from the unsuccessful defence of any proceedings. Financial Instrument Details of the Group’s risk management objectives and policies together with its exposure to financial risk are set out in note 22 to the financial statements. The purpose of the policies is to ensure that adequate cost-effective funding is available to the Group and exposure to financial risk, interest rate, liquidity and credit risk, is minimised. Research and development In the markets in which the Group operates, effective research and development is vital to maintaining competitive advantage and securing future income streams. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 Going concern After making appropriate enquiries, the Directors consider that the Company and the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt a going concern basis in the preparation of financial statements. Auditors The auditors, Jeffreys Henry LLP, will be proposed for reappointment at the forthcoming annual general meeting. Statement of Director’s responsibilities The Directors are responsible for preparing the Report of the Directors’ and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the Group and parent Company financial statements in accordance with International Financial Reporting Standards as adopted for use in the European Union. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group, for that period. In preparing these financial statements, the Directors are required to: • • • • Select suitable accounting policies and then apply them consistently; Make judgments and accounting estimates that are reasonable and prudent; Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Parent Company will continue in business; State whether the Group and parent Company Financial statements have been prepared in accordance with IFRSs as adopted by the European Union subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies 27 dotDigital Group Annual Report and Accounts 2009/2010 Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence, for taking reasonable steps for the prevention and detection of fraud and other irregularities. Statement as to disclosure of information to auditors So far as the Directors are aware, there is no relevant audit information (as defined by Section 418 of the Companies Act 2006) of which the Group’s Auditors are unaware, and each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Group’s Auditors are aware of that information. Events after the reporting period On 17 May 2010 the Company acquired Netcallidus Limited and as part of the purchase agreement an initial cash payment of £1,000,000 and a share issue valuing £152,660 (see note 14). £1,000,000 was transferred into an escrow account to be transferred to the previous owner on the completion of three individual transfer stages. As at 31 August 2010 two of the three stages had been fulfilled by the previous owners with only the completion of the statutory financial statements remaining £763,000 from the funds in escrow was transferred to the previous owners with the balance of £234,000 remaining in escrow. The final of the three stages was completed after the reporting date and the balance remaining in escrow has been settled. Given the nature of the transaction and the level of control the Group were involved in the final stage, the Directors have elected to report the entire £1,000,000 investment in goodwill in the report (see note 14). The value of the shares to be issued have been classified as unpaid share capital in the statements of financial position with the shares to be issued mid November 2010. On behalf of the Board: Peter Simmonds Director 11 November 2010 28 Independent Auditors’ report We have audited the Group and Company financial statements of dotDigital Group Plc for the year ended 30 June 2010 which comprise of the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows, company statement of financial position, company statement of changes in equity, company statement of cash flows and related notes on pages 36 to inside back cover. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted for use in the European Union, and as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with chapter 3 of part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in a Report of the auditors and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors’ responsibilities set out on page 26, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. Opinion on financial statements In our opinion: • • • • The financial statements give a true and fair view of the state of the Group’s and the parent Company’s affairs as at 30 June 2010 and of the Group’s profit for the year then ended; The Group financial statements have been properly prepared in accordance with IFRSs as adopted for use in the European Union; The parent Company financial statements have been properly prepared in accordance with IFRSs as adopted for use in the European Union and as applied in accordance with the provisions of the Companies Act 2006; and The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and as regards the Group financial statement, Article 4 of the IAS regulation. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Report of the Directors for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • • • • Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or The parent Company financial statements are not in agreement with the accounting records and returns; or Certain disclosures of Directors’ remuneration specified by law are not made; or We have not received all the information and explanations we require for our audit. Sanjay Parmar (Senior Statutory Auditor) for and on behalf of Jeffreys Henry LLP Chartered Accountants and Registered Auditors Finsgate 5-7 Cranwood Street, London, EC1V 9EE 11 November 2010 29 dotDigital Group Annual Report and Accounts 2009/2010 30 Consolidated income statement for the year ended 30 June 2010 Continuing operations Revenue Administrative expenses Operating profit Finance costs Finance income Profit before income tax Income tax expense Profit for the period Profit attributable to: Owners of the parent Earnings per share expressed in pence per share: Basic Diluted Consolidated statement of comprehensive income for the year ended 30 june 2010 Profit for the period Other comprehensive income Total comprehensive income for the period Total comprehensive income attributable to: Owners of the parent Year ended 30.6.10 £ Notes Period 1.5.08 to 30.6.09 £ 3 6 5 5 6 7 10 6,014,101 (4,638,328) 4,718,290 (3,652,199) 1,375,773 1,066,091 (1,607) 3,088 1,377,254 (233,104) 1,144,150 (864) 15,088 1,080,315 (184,808) 895,507 1,144,150 895,507 0.09 0.08 0.14 0.13 Year ended 30.6.10 £ 1,144,150 - 1,144,150 Period 1.5.08 to 30.6.09 £ 895,507 - 895,507 1,144,150 895,507 www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 Consolidated statement of financial position for the year ended 30 June 2010 Assets Non-current assets Goodwill Intangible assets Property, plant and equipment Current assets Trade and other receivables Cash and cash equivalents Total assets Equity attributable to the owners of the parent Called up share capital Share premium Reverse acquisition reserve Other reserves Unissued share capital Retained earnings Total equity Liabilities Non-current liabilities Trade and other payables Financial instruments Financial liabilities – borrowings Interest bearing loands and borrowings Current liabilities Trade and other payables Financial liabilities – borrowings Interest bearing loans and borrowings Tax payable Total liabilities Total equity and liabilities 31 Notes 30.6.10 £ 30.6.09 £ 11 12 13 15 16 17 18 18 18 18 18 22 20 19 20 4,120,561 559,082 173,120 4,852,763 1,234,645 1,277,617 2,512,262 608,503 259,675 119,052 987,230 655,304 1,677,902 2,333,206 7,365,025 3,320,436 1,292,500 4,533,754 (4,695,465) 29,493 152,660 2,696,522 1,292,500 4,533,754 (4,695,465`) 5,302 - 1,552,372 4,009,464 2,688,463 2,366,320 - 6,319 18,228 668,763 416,811 12,152 302,007 982,922 12,152 184,782 613,745 3,355,561 631,973 7,365,025 3,320,436 The financial statements were approved and authorised for issue by the Board of Directors on 11 November 2010 and were signed on its behalf by: Peter Simmonds Director Company registration number: 06289659 (England &Wales) dotDigital Group Annual Report and Accounts 2009/2010 32 Company statement of financial position for the year ended 30 June 2010 Assets Non-current assets Investments Current assets Trade and other receivables Cash and cash equivalents Total assets Equity attributable to the owners of the parent Called up share capital Share premium Other reserves Unissued share capital Retained losses Total equity Liabilities Non-current liabilities Trade and other payables Financial instruments Current liabilities Trade and other payables Total liabilities Total equity and liabilities Notes 30.6.10 £ 30.6.09 £ 14 15 16 17 18 18 18 18 22 19 8,704,468 8,704,468 5,183,488 5,183,488 4,826 385,332 390,158 2,712 564,531 567,243 9,094,626 5,750,731 1,292,500 4,533,754 29,493 152,660 (329,205) 1,292,500 4,533,754 5,302 - (148,728) 5,679,202 5,682,828 2,366,320 - 1,049,104 3,415,424 67,903 67,903 9,094,626 5,750,731 The financial statements were approved and authorised for issue by the Board of Directors on 11 November 2010 and were signed on its behalf by: Peter Simmonds Director Company registration number: 06289659 (England &Wales) www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 Consolidated statement of changes in equity for the year ended 30 June 2010 Balance at 1 May 2008 Changes in equity Issue of share capital Dividends Total comprehensive income Balance at 30 June 2009 Changes in equity Total comprehensive income Balance at 30 June 2010 Balance at 1 May 2008 Changes in equity Issue of share capital Dividends Total comprehensive income Reverse acquisition Share option charge Balance at 30 June 2009 Changes in equity Total comprehensive income Share option charge Equity on acquisition (see note 14) Balance at 30 June 2010 33 Called up share capital £ 292,500 1,000,000 - - Retained earnings £ 775,665 - (118,800) 895,507 Share premium £ 533,754 4,000,000 - - 1,292,500 1,552,372 4,533,754 - 1,144,150 - 1,292,500 2,696,522 4,533,754 Unissued share capital £ - - - - - - - Reverse acquisition reserve £ (826,162) - - - (3,896,303) - Other reserves £ Totals equity £ - 775,757 - - - - 5,302 - (118,800) 895,507 (3,869,303) 5,302 (4,695,495) 5,302 2,688,463 - - 152,660 - - - - 24,191 - 1,144,150 24,191 152,660 152,660 (4,695,495) 29,493 4,009,464 • • • • • • Share capital is the amount subscribed for shares at nominal value. Share premium represents the excess of the amount subscribed for share capital over the nominal value of the net of share issue expenses. Retained earnings represents the cumulative earnings of the Group attributable to equity shareholders. Unissued share capital relate to the shares due to be issued in relation to the acquisition of Netcallidus (see note 14). The reverse acquisition reserve relates to the adjustment required to account the reverse acquisition in accordance with International Financial Reporting Standard. Other reserves relate to the charge for share based payment in accordance with International Financial Reporting Standard 2. dotDigital Group Annual Report and Accounts 2009/2010 34 Company statement of changes in equity for the year ended 30 June 2010 Balance at 1 May 2008 Changes in equity Issue of share capital Total comprehensive income Balance at 30 June 2009 Changes in equity Total comprehensive income Balance at 30 June 2010 Balance at 1 May 2008 Changes in equity Issue of share capital Total comprehensive income Share option charge Balance at 30 June 2009 Changes in equity Total comprehensive income Share option charge Equity on acquisition (see note 14) Balance at 30 June 2010 Called up share capital £ 292,500 1,000,000 - Retained earnings £ (85,372) - (63,356) Share premium £ 533,754 4,000,000 - 1,292,500 (148,728) 4,533,754 - (180,477) - 1,292,500 (329,205) 4,533,754 Unissued share capital £ - - - - - Other reserves £ Totals equity £ - 740,882 - - 5,302 5,000,000 (63,356) 5,302 5,302 5,682,828 - - 152,660 152,660 - 24,191 - (180,477) 24,191 152,660 29,493 5,679,202 • • • • • Share capital is the amount subscribed for shares at nominal value. Share premium represents the excess of the amount subscribed for share capital over the nominal value of the net of share issue expenses. Retained earnings represents the cumulative earnings of the Group attributable to equity shareholders. Unissued share capital relate to the shares due to be issued in relation to the acquisition of Netcallidus (see note 14). Other reserves relate to the charge for share based payment in accordance with International Financial Reporting Standard 2. The notes form part of the financial statements. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 Consolidated statement of cash flows for the year ended 30 June 2010 Cash flows from operating activities Cash generated from operations Interest paid Tax paid Net cash generated from operating activities Cash flows from investing activities Purchase of goodwill Purchase of intangible fixed assets Purchase of tangible fixed assets Interest received Funds acquired from acquisition 35 Period 1.5.08 to 30.6.09 £ 948,297 (864) (180,435) 766,998 (39,183) (295,670) (62,371) 15,088 765,105 Notes 28 Year ended 30.6.10 £ 1,275,938 (1,607) (182,614) 1,091,717 (1,000,000) (405,725) (115,556) 3,088 41,407 Net cash (used)/generated from investing activities (1,476,786) 382,969 Cash flows from financing activities New loans in year Loan repayments in period Amount repaid to Directors Equity dividends paid Net cash used from financing activities (Decrease)/Increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Company statement of cash flows for the year ended 30 June 2010 Cash flows from operating activities Cash generated from operations Net cash used from operating activities Cash flows from investing activities Purchase of fixed asset investments Interest received Net cash used from investing activities Cash flows from financing activities Loan from Group Net cash generated from financing activities Decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The notes form part of the financial statements. - (11,912) (3,304) - 23,441 - (61,199) (118,800) (15,216) (156,558) (400,285) 1,677,902 993,409 684,493 1,277,617 1,677,902 29 29 Notes 30.6.10 £ 30.6.09 £ 28 (139,637) (112,523) (139,637) (112,523) (1,000,000) - (183,488) 15,347 (1,000,000) (168,141) 960,438 960,438 23,638 23,638 (179,199) (257,026) 564,531 385,332 821,557 564,531 29 29 dotDigital Group Annual Report and Accounts 2009/2010 36 Notes to the consolidated financial statements for the year ended 30 June 2010 1. General information dotDigital Group Plc (“dotDigital”) is a company incorporated England and Wales and quoted on the PLUS Markets. The address of the registered office is disclosed on inside back cover of the financial statements. The principal of activity of the Group is described on page 22. 2. Accounting policies Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. The Group has applied all accounting standards and interpretations issued by the International Accountancy Standards Board and International Accounting Interpretations Committee effective at the time of preparing the financial statements. The financial statements are presented in sterling (£), rounded to the nearest pound. Issued International Financial Reporting Standards (IFRS’s) and interpretations (IFRICS) relevant to the Group’s operations. The following interpretations to published standards is mandatory for accounting periods beginning on or after 1 July 2009. • IAS 1 (Revised) ‘Presentation of financial statements’ (effective from 1 January 2010). Key changes include, the requirement to aggregate information in the financial statements on the basis of shared characteristics, the introduction of a statement of comprehensive income and changes in titles of some of the financial statements. a) b) c) Preparers of financial statements will have the option of presenting income and expense and components of other comprehensive income either in a single statement or in two separate statements (a separate income statement followed by a statement of comprehensive income). The new titles for the financial statements (for example ‘statement of financial position’ instead of balance sheet) will be used in the accounting standards but are not mandatory for use in financial statements. The expected impact is still being assessed in detail by management as the IASB is involved in discussions to examine more fundamental questions about the presentation of information in financial statements. • IFRS 3 (Revised), ‘Business combinations’ (effective from 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Group will apply IFRS 3 (Revised) prospectively to all business combinations from 1 January 2010. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 The revised standard was applied to the acquisition of the entire interest in Netcallidus Limited on 17 May 2010. This acquisition will occur in stages. The revised standard requires goodwill to be determined only at the acquisition date rather then at the relevant stages consideration is calculated with any gain or loss recorded in the income statement. Contingent consideration of £3,518,980 has been recognised at fair value on 17 May 2010 and acquisition related costs of £66,163 have been recognised in the consolidated income statement. • • IFRS7 ‘Financial instruments: Disclosures’ and the complementary amendment to IAS1 ‘Presentation of financial statements - Capital disclosures’ (effective 1 January 2010). IFRS 7 introduces new disclosure relating to financial instruments. The standard does not have any impact on the classification and valuation of the Company’s financial instruments (see note 22). IFRS 8 (Revised) ‘Operating segments’ (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, “Disclosures about segments of an enterprise and related information”. The new standard requires a “management approach”, under which segment information is presented on the same basis as that used for internal reporting purposes. The expected impact is still being assessed in detail by management, but it appears likely that the number of reportable segments, as well as the manner in which segments are reported, will change in a manner that is consistent with the internal reporting provided to the chief operating decision-maker. Issued International Financial Reporting Standards (IFRS’s) and interpretations (IFRICS) not relevant to Group operations. The following interpretations to published standards is mandatory for accounting periods beginning on or after 1 July 2009 but are not relevant to the Group’s operations: • • IFRS 2 (Amendment) ‘Share based payments’ (effective from 1 May 2009). The amendment considers vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share based payment are not vesting conditions. As such these features would need to be included in the grant date fair value for transactions with employees and others providing similar services, that is, these features would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. IFRS 5 (Amendment), ‘Non-current assets held-for-sale and discontinued operations’ (and consequential amendment to IFRS 1, ‘First-time adoption’) (effective from 1 July 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that all of a subsidiary’s assets and liabilities are classified as held for sale if a partial disposal sale plan results in loss of control. Relevant disclosure should be made for this subsidiary if the definition of a discontinued operation is met. A consequential amendment to IFRS 1 states that these amendments are applied prospectively from the date of transition to IFRSs. The Group will apply the IFRS 5 (Amendment) prospectively to all partial disposals of subsidiaries from 1 January 2010. 37 • • • • • • • • • IAS 23 (Revised) ‘Borrowing costs’ (effective 1 May 2009). main change from the version previous the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The IAS 27 Consolidated and separate financial statements (Amendment) (effective 1 July 2009). Amendment to the valuations of the cost of investment in a subsidiary, joint venture or associate. IAS 32 ‘Financial instruments: Presentation’ and IAS 1 ‘Presentation of financial statements - Puttable financial instruments and obligations arising on liquidation’. Amendments to the standards improve the accounting for particular types of financial instruments that have characteristics similar to ordinary shares but are at present classified as financial liabilities for accounting periods on or after 1 January 2009. IAS 39 ‘Financial instrument: Recognition and measurement’ and IAS 7 ‘Financial Instruments’ - Disclosures regarding reclassifications of financial instruments - These permit an entity to reclassify non-derivative financial assets and assets available for sale under limited circumstances. This clarify that IFRIC 13 ‘Customer loyalty programmes’ where goods are sold together with a customer loyalty incentive the arrangement is a multiple element arrangement and the consideration receivable from the customer should be allocated between the components of the arrangement in proportion to their fair values. IFRIC 15 ‘Agreements for the construction of real estates’ The interpretation clarifies which standard should be applied to particular transactions pertaining to construction of real estates. IFRIC 16 ‘Hedges of a net investment in a foreign operation’. This clarifies the following: a) Whether risk arises from foreign currency exposure to the functional currencies of a foreign operation, or from foreign currency exposure to functional currency of a foreign operation. b) How an entity should determine the amounts to be reclassified from equity to profit and loss for both the hedging instrument and the hedged item when an entity disposes the investment. IFRIC 17 ‘Distributions of non cash assets to owners’. Standardises practice in the measurement of distributions of non cash assets to owners for accounting periods beginning on or after 1 July 2009. This clarifies the IFRIC 18 ‘Transfers of assets from customers’. requirements of IFRS’s for the agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to network or to provide the customer with on going access to a supply of goods or services. This applies to transfers of assets from customers received on or after 1 July 2009. Issued International Financial Reporting Standards (IFRS’s) and interpretations (IFRICS) that are not yet effective. At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue, mandatory for the Group’s accounting periods beginning on or after 1 July 2009 but not early adopted: • • • IFRS9 ‘Financial instruments’ (effective from 1 January 2013 with early adoption from 2009) - Introduced to replace IAS 39 ‘Financial Instrument’ Recognition and Measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets. Under the new standard only two possible classifications arise, rather then the four existing classifications currently available under IAS39 and will result in all financial assets being valued at amortised cost or fair value through the income statement. Financial liabilities are excluded from the scope of the standard. IFRIC 19 ‘Extinguishing financial liabilities’ (effective from 1 July 2010) addresses the accounting by an entity that issues equity instruments in order to settle, in full or part a financial liability. IASB’s 2009 annual improvement project. considers minor amendments to IFRSs in an annual improvements project. The amendments are proposed in an omnibus Exposure Draft. Each year the Board Basis of consolidation & comparatives In the prior period the Company acquired via a share for share exchange the entire issued share capital of dotMailer Limited, whose principal activity is that of web and email based marketing. Under IFRS 3 ‘Business combinations’ the dotMailer Limited share exchange has been accounted for as a reverse acquisition. Although these consolidated financial statements have been issued in the name of the legal parent, the Company it represents in substance is a continuation of the financial information of the legal subsidiary, dotMailer Limited. The following accounting treatment has been applied in respect of the reverse acquisition: • • • • • • The assets and liabilities of the legal subsidiary, dotMailer Limited are recognised and measured in the consolidated financial statements at their pre combination carrying amounts, without restatement to their fair value; The retained reserves recognised in the consolidated financial statements for the beginning of the prior period reflect the retained reserves of dotMailer Limited to 30 April 2008. However, in accordance with IFRS3 ‘Business combinations’ the equity structure appearing in the consolidated financial statements reflects the equity structure of the legal parent dotDigital Plc, including the equity instruments issued under the share exchange to effect the business combination; A reverse acquisition reserve has been created to enable the presentation of a consolidated balance sheet which combines the equity structure of the legal parent with the non statutory reserves of the legal subsidiary; Comparative numbers are based upon the consolidated financial statements of the legal subsidiary, dotMailer Limited for the period ended 30 June 2009 apart from the equity structure which reflects that of the parent. The following accounting treatment has been applied in respect of the acquisition of dotDigital Group Plc: The assets and liabilities of dotDigital Group Plc are recognised and measured in the consolidated financial statements at their fair value at the date of acquisition. dotDigital Group Annual Report and Accounts 2009/2010 38 Notes to the consolidated financial statements continued for the year ended 30 June 2010 2. Accounting policies continued • The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the date of acquisition, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less then the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Subsidiaries A subsidiary is an entity whose operating and financing policies are controlled by the Group. Subsidiaries are consolidated from the date on which control was transferred to the Group. Subsidiaries cease to be consolidated from the date the Group no longer has control. Intercompany transactions, balances and unrealised gains on transactions between Group companies have been eliminated on consolidation. As a result of applying reverse acquisition accounting in the prior period, the consolidated IFRS financial information of dotDigital Group Plc is a continuation of the financial information of dotMailer Limited. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value added tax, returns, rebates and discounts after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can reliably measured, it is probable that the future economic benefits will flow to the entity. The Group bases it’s estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. The Group sells web based marketing services to other businesses and services are either provided on a usage basis or fixed price bespoke contract. Revenue from contracts are recognised under the percentage of completion method based on the percentage of services performed to date as a percentage of the total services to be performed. Goodwill Goodwill represents the excess of the fair value of the consideration over the fair values of the identifiable net tangible and intangible assets acquired. Under IFRS 3 “Business Combinations” goodwill arising on acquisitions is not subject to amortisation but is subject to annual impairment testing. Any impairment is recognised immediately in the income statement and not subsequently reversed. Intangible assets (other then goodwill) Intangible assets are recorded as separately identifiable assets and recognised at historical cost less any accumulated amortisation. These assets are amortised over their useful economic lives (4-5 years), with the charge included in administrative expenses in the income statement. Intangible assets are reviewed for impairment annually. Impairment is measured by determining the recoverable amount of an asset or cash generating unit (CGU) which is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are Grouped together into the smallest Group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU. • • • Domain names Acquired domain names are shown at historical cost. Domain names have a finite life and are carried at cost less accumulated amortisation. Amortisation is calculated using straight line method to allocate the cost of domain names over their useful lives of four years. Software Acquired software and websites are shown at historical cost. They have a finite life and are carried at cost less accumulated amortisation. Amortisation is calculated using straight line method to allocate the cost of software and websites over their useful lives of four years. Product development Product development expenditure is capitalised when it is considered that there is a commercially and viable technically product, the related expenditure is separably identifiable and there is a reasonable expectation that the related expenditure will be exceeded by future revenues. Following initial recognition, product developments are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of these intangible assets are assessed to have a finite life of five years. Amortisation is charged on assets with finite lives, this expense is taken to the income statement and useful lives are reviewed on an annual basis. Amortisation is provided commencing from the date the asset is developed to a stage at which the Company can receive economic benefits from the asset Property, plant and equipment Tangible non current assets are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the assets carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits are associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is provided at the following rates in order to write off each asset over its estimated useful life and are based on the cost of assets less residual value. Significant of components individual assets are assessed and if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately. Short leasehold Fixtures and fittings Computer equipment 25% on cost 25% on cost 25% on cost www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 39 The asset’s residual values and useful economic lives are reviewed and adjusted, if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater then its estimated recoverable value. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within other (losses) or gains in the income statement. When revalued assets are sold, the amounts included in other reserves are transferred to retained earnings. Borrowings Borrowings are recognised at their fair value net of transaction costs incurred. They are classified as current liabilities unless the Group has an unconditional right to defer the settlement of the liability of at least 12 months after the balance sheet date. Borrowing costs are recognised in the income statement in the period in which they are incurred. Taxation Current taxes are based on the results shown in the financial statements and are calculated according to local tax rules, using tax rates enacted or substantially enacted by the balance sheet date. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary difference will be utilised. Deferred income tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when they related deferred income asset is realised or deferred income tax liability is settled. Research and development Research expenditure is recognised as an expense when incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled: • • • • • • It is technically feasible to complete the intangible asset so that it will be available of use or resale; Management intends to complete the intangible asset and use or sell it; There is an ability to use or sell the intangible; It can be demonstrated how the intangible asset will generate possible future economic benefits; Adequate technical, financial and other resource to complete the development and to use or sell the intangible asset are available and; The expenditure attributable to the intangible asset during its development can be reliably measured. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which they are ready for use on a straight line basis over its useful life. Operating leases Leases in terms of which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance the accounting policy applicable to that asset. Other leases are operating leases and are not recognised in the Company’s statement of financial position on a straight line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total expense, over the term of the lease. Use of estimates and judgments The Group makes judgments, estimates and assumptions that effect the application of policies and reported amounts of assets and liabilities, income and expenses. The resulting accounting estimates calculated using these judgments and assumptions will, by definition, seldom equal the related actual results but are based on historical experience and expectations of future events. The estimates and underlying assumptions are reviewed on a ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision effects only that period, or in the period of revision and future periods if the revision affects both current and future periods. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below: (a) Impairment of goodwill The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a suitable discount rate in order to calculate the present value of these cash flows. Actual outcomes could vary. (b) Impairment of intangibles (other than goodwill) Intangible assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value in use calculations prepared on the basis of management’s assumptions and estimates. (c) Impairment of property, plant and equipment Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is determined based on value in use calculations prepared on the basis of management’s assumptions and estimates. (d) Amortisation of intangibles Amortisation is provided so as to write down the assets to their residual values over their estimated useful lives as set out above. The selection of these residual values and estimated lives requires the exercise of management judgment. (e) Depreciation of property, plant and equipment Depreciation is provided so as to write down the assets to their residual values over their estimated useful lives as set out above. The selection of these residual values and estimated lives requires the exercise of management judgment. dotDigital Group Annual Report and Accounts 2009/2010 40 Notes to the consolidated financial statements continued for the year ended 30 June 2010 2. Accounting policies continued (f ) Share-based compensation The fair value of options and warrants are determined by reference to the fair value of the options granted, excluding the impact of any non- market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. (g) Contingent Considerations The future consideration payable to the vendors of Netcallidus in respect to contingent consideration (earnouts) is based on the Directors’ best estimates of future obligations which are dependent on the future anticipated profits after tax. It is assumed that the operating company improves profits in line with Directors’ estimates. When earnouts are to be settled by both cash and equity consideration, the fair value of the consideration is obtained by discounting the amounts expected to be payable in the future to their present value. The Directors’ best estimate the future mid-market price of the share to be issued in Ordinary Shares. Reviews of the fair values are undertaken at each period end with any resulting adjustments being made through the Group’s Income Statement. Contingent consideration Contingent consideration is measured at fair value at the time of the acquisition. If the amount of the contingent consideration changes as a result of a post acquisition event (such as meeting profits target) the accounting for the change in consideration depends on whether the additional consideration is in cash or equity. If it is in equity the original amount is not recalculated but if the change is in cash or other assets the change is recorded in the income statement. Trade receivables Trade receivables are recognised initially at the lower of their original invoiced value and recoverable amount. A provision is made when it is likely that the balance will not be recovered in full. Terms on receivables range from 30 to 90 days. Equity Share capital is the amount subscribed for shares at their nominal value. Share premium represents the excess of the amount subscribed for the share capital over the nominal value of the respective shares net of share issue expenses. Retained earnings represent the cumulative earnings of the Group attributable to equity shareholders. The reverse acquisition reserve relates to the adjustment required by accounting for the reverse acquisition in accordance with IFRS3 ‘Business combinations’. Other reserves relate to the charge for share based payments in accordance with IFRS2 ‘Share based payments’. Share based payments For equity settled share based payment transactions the Group, in accordance with IFRS 2 “Share Based Payments” measuring their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. The fair value of those www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 equity instruments is measured at the grant date using the trinomial method. The expense is apportioned over the vesting period of the financial instrument and is based on the number which are expected to vest and the fair value of those financial instruments at the date of grant. If the equity instruments granted vested immediately, the expense is recognised in full. The assumptions on the expected life of share options, volatility of shares and risk free yield to maturity and expected dividend yield on shares are used in the fair value calculation of the share options outstanding at the year end (see note 28). Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Terms on accounts payables range from 10 to 90 days. Functional currency translation • Functional and presentation currency Items included in the financial statements if the Company are measured using the currency of the primary economic environment in which the entity operates (functional currency), which is mainly pounds sterling (£) and it is this currency the financial statements are presented in. • Transaction and balances Foreign currency transactions are translated in to the presentation currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Employee benefit costs The Company operates a defined contribution pension scheme. Contributions payable by the Company’s pension scheme are charged to the income statement in the period in which they relate. Segment reporting A business segment is a Group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environment. Pension contributions The Group operates a defined contribution pension scheme. Contributions payable by the Group’s pension scheme are charged to the income statement in the period in which they relate. 3. Segmental reporting The Group’s primary reporting format is business segments and it’s secondary format is geographical segments. The Group only operates in a single business and geographical segment. The Group’s single line of business is the provision of web based marketing services, whilst the geographical segment in which it operates is currently restricted to the UK. Accordingly no segmental information for business segment or geographical segment is required. 4. Employees and Directors Wages and salaries Social security costs Other pension costs The average monthly number of employees during the period was as follows: Directors Sales Web designers and developers Administration Information regarding Directors’ emoluments is as follows: Directors fees Salaries Other benefits Pension costs 41 Year ended 30.6.10 £ 2,639,741 270,902 23,111 Period 1.5.08 to 30.6.09 £ 2,057,204 220,437 38,369 2,933,754 2,316,010 Year ended 30.6.10 6 21 31 16 74 Year ended 30.06.10 £ 38,333 486,627 8,185 36,846 Period 1.5.08 to 30.6.09 6 12 12 25 55 Period 1.5.08 to 30.6.09 £ 16,665 482,807 13,356 25,474 569,991 538,302 The number of Directors for whom retirement benefits are accruing under the money purchased pension schemes amounted to 3 (2009: 4). Information regarding the highest paid Director for the year is as follows: Salaries Other benefits Pension costs Payment in lieu of holiday Year ended 30.06.10 £ 131,000 757 9,500 3,598 Period 1.5.08 to 30.6.09 £ 127,666 3,667 13,356 - 144,855 144,689 dotDigital Group Annual Report and Accounts 2009/2010 42 Notes to the consolidated financial statements continued for the year ended 30 June 2010 5. Net finance income Finance income: Deposit account interest Finance costs: Bank loan interest Loan Net finance income 6. Profit before income tax Costs by nature Profit from continuing operations has been arrived at after charging/(crediting):- Staff related costs (inc Directors emoluments) Operating leases: Land and buildings Operating leases: Other Audit remuneration Amortisation of intangibles Depreciation charge Legal, professional and consultancy fees Computer expenditure Research costs Marketing costs Bad debts Other costs Total administration expenses Audit remuneration During the year period the Group obtained the following services from the Group’s auditor at costs detailed below: Fees payable to the Company’s auditor for the audit of parent company and consolidated financial statements Fees payable to the Company’s auditor and its associates for other services - The audit of Company’s subsidiaries pursuant to legislation Year ended 30.6.10 £ Period 1.5.08 to 30.6.09 £ 3,088 15,088 - 1,607 1,607 1,481 192 672 864 14,224 Year ended 30.6.09 £ 3,084,799 227,285 19,726 24,505 106,318 66,634 284,544 200,086 12,822 239,835 55,140 316,634 Period 1.5.08 to 30.6.09 £ 2,450,858 169,242 12,862 20,000 48,276 69,180 154,381 136,657 20,842 275,932 64,801 229,168 4,638,328 3,652,199 Year ended 30.6.10 £ Period 1.5.09 to 30.6.09 £ 13,506 5,000 11,000 24,506 15,000 20,000 www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 43 6. Profit before income tax continued Acquisitions On 17 May 2010 the Company acquired the entire share capital of Netcallidus Limited therefore only 6 weeks of Netcallidus Limited has been consolidated into the Group’s consolidated Income Statement. The total consolidated in the Income Statement for the 6 weeks period was: Revenue Profit after tax £ 110,012 38,800 If the acquisition of Netcallidus had happened at the beginning of the Financial Year (1.7.09) the management estimate that their contribution to the Consolidated Income Statement would have been: Revenue Profit after tax £ 671,594 230,532 In determining the above values the management have assumed that the fair value adjustments, determined provisionally, that arose on the date of the acquisition would have been the same if the acquisition had occurred on 01 July 2009. Income tax 7. Analysis of the tax charge Current tax: Tax Total tax charge in income statement Year ended 30.6.10 £ 233,104 233,104 Period 1.5.08 to 30.6.09 £ 184,808 184,808 Factors affecting the tax charge The tax assessed for the year is lower than the standard rate of corporation tax in the UK. The difference is explained below: Profit on ordinary activities before tax Profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 28% (2009 - 28%) Effects of: Expenses not deductible Research and development enhanced claim Effect of profits within marginal rate Capital allowances in excess of depreciation Total income tax Year ended 30.6.10 £ Period 1.5.08 to 30.6.09 £ 1,377,254 1,080,315 385,631 302,488 24,036 (165,365) - (11,198) 233,104 5,095 (118,947) (3,546) (282) 184,808 8. Loss of Parent Company As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the parent Company is not presented as part of these financial statements. The parent Company’s loss for the financial year was £(180,477) (2009 - £(63,356)). 9. Dividends Ordinary Shares of £0.01 each Interim Year ended 30.6.10 £ Period 1.5.08 to 30.6.09 £ - 118,800 dotDigital Group Annual Report and Accounts 2009/2010 44 Notes to the consolidated financial statements continued for the year ended 30 June 2010 10. Earnings per share Earnings per share data is based on the consolidated profit using and the weighted average number of shares in issue of the parent Company. Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of Ordinary Shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of shares adjusted to assume the conversion of all dilutive potential Ordinary Shares. Reconciliations are as follows:- Year to 30.6.10 Weighted average number of shares Earnings £ 1,144,150 1,292,500,000 - 89,433,450 Per share amount pence 0.09 - 1,144,150 1,381,933,450 0.08 1.5.08 to 30.6.09 Weighted average number of shares Earnings £ 895,507 643,318,750 - 55,121,118 Per share amount pence 0.14 - 895,507 698,439,868 0.13 £ 608,503 3,512,058 4,120,561 4,120,561 £ - 608,503 608,503 608,503 Basic EPS Earnings attributable to owners of the Parent Effect of dilutive shares Options & Warrants Diluted EPS Adjusted earnings Basic EPS Earnings attributable to owners of the Parent Effect of dilutive shares Options & Warrants Diluted EPS Adjusted earnings 11. Goodwill Group Cost At 1 July 2009 Additions (note 14) At 30 June 2010 Net book value At 30 June 2010 Group Cost At 1 July 2008 Additions At 30 June 2009 Net book value At 30 June 2009 www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 45 11. Goodwill continued Impairment test for goodwill Goodwill is allocated to the Group’s single cash generating units identified, that being dotMailer Limited and Netcallidus Limited. dotMailer Limited The recoverable amount of a cash generating unit is determined based on value in use calculations. These calculations use pre tax cash flow projections based on financial budgets approved by management covering the five year period to 30 June 2015. The key assumptions use to prepare the financial budgets are as follows: Revenue growth rates: Pre tax discount rate: Income tax rate: 2011 2012 2013 2014 2015 All years All years 26.00% 25.00% 20.00% 20.00% 20.00% 4.00% 28.00% The key assumptions used to prepare the financial budgets are based on a combination of historical experience and current industry knowledge and trends. Netcallidus Limited Revenue growth rates: Pre tax discount rate: Income tax rate: 2011 2012 2013 2014 2015 All years All years 167% 84% 30.00% 30.00% 30.00% 4.00% 28.00% The key assumptions used to prepare the financial budgets are based on a combination of historical experience and current industry knowledge and trends. The cash flow forecasts used in the value in use calculations have not been extended beyond the five year period covered by management’s financial budgets. Based on the above the Directors are of the opinion that the carrying value of goodwill has not been impaired. 12. Intangible assets Group Cost At 1 July 2009 Additions At 30 June 2010 Amortisation At 1 July 2009 Amortisation for year At 30 June 2010 Net book value At 30 June 2010 Computer software £ Development costs £ 57,056 68,245 125,301 242,060 337,480 579,540 12,407 20,418 32,825 33,624 83,656 117,280 Domain names £ 8,836 - 8,836 2,246 2,244 4,490 Totals £ 307,952 405,725 713,677 48,277 106,318 154,595 92,476 462,260 4,346 559,082 dotDigital Group Annual Report and Accounts 2009/2010 46 Notes to the consolidated financial statements continued for the year ended 30 June 2010 12. Intangible assets continued Cost At 1 May 2008 Additions At 30 June 2009 Amortisation Amortisation for period At 30 June 2009 Net book value At 30 June 2009 Computer software £ Development costs £ 6,407 50,649 57,056 12,407 12,407 - 242,060 242,060 33,624 33,624 Domain names £ 5,875 2,961 8,836 2,246 2,246 Totals £ 12,282 295,670 307,952 48,277 48,277 44,649 208,436 6,590 259,675 Development cost additions represents resources the Group have invested in the development of unique computer programming with the intention of re sale once complete. 13. Property, plant and equipment Group Short leasehold £ 11,875 - 11,875 6,160 2,940 9,100 Plant and machinery £ - 5,578 5,578 - 1,719 1,719 Fixtures and fittings £ 120,990 23,984 144,974 67,455 26,264 93,719 Computer equipment £ 198,874 91,572 290,446 139,072 36,143 175,215 Totals £ 331,739 121,134 452,873 212,687 67,066 279,753 2,775 3,859 51,255 115,231 173,120 Short leasehold £ 8,398 3,477 Fixtures and fittings £ 93,760 27,230 11,875 120,990 Computer equipment £ 167,210 31,664 198,874 Totals £ 269,368 62,371 331,739 3,738 2,422 6,160 40,852 26,603 67,455 98,917 40,155 143,507 69,180 139,072 212,687 5,715 53,535 59,802 119,052 Cost At 1 July 2009 Additions At 30 June 2010 Depreciation At 1 July 2009 Charge for year At 30 June 2010 Net book value At 30 June 2010 Cost At 1 May 2008 Additions At 30 June 2009 Depreciation At 1 May 2008 Charge for period At 30 June 2009 Net book value At 30 June 2009 www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 14. Investments Company Cost At 1 July 2009 Additions At 30 June 2010 Net book value At 30 June 2010 Cost At 1 July 2008 Additions At 30 June 2009 Net book value At 30 June 2009 The Group or the Company’s investments at the balance sheet date in the share capital of companies include the following: Subsidiaries dotMailer Limited Nature of business: Web and email based marketing Class of shares: Ordinary Ordinary A Aggregate capital and reserves Profit for the year/period dotAgency Limited Nature of business: Dormant Class of shares: Ordinary Aggregate capital and reserves 47 Shares in Group undertakings £ 5,183,488 3,520,980 8,704,468 8,704,468 Shares in Group undertakings £ 5,183,488 5,183,488 5,183,488 % holding 100.00 100.00 30.6.10 £ 3,645,246 1,285,966 30.6.09 £ 2,166,978 921,663 % holding 100.00 30.6.09 £ 1,000 30.6.10 £ 1,000 dotDigital Group Annual Report and Accounts 2009/2010 48 Notes to the consolidated financial statements continued for the year ended 30 June 2010 14. Investments continued dotCommerce Limited Nature of business: Dormant Class of shares: Ordinary Aggregate capital and reserves Profit for the period/year dotSEO Nature of business: Dormant Class of shares: Ordinary Aggregate capital and reserves Profit for the period/year The Company subscribed to 1,000 share of £1 each on 11 March 2010 with a paid up share capital of £1,000 Netcallidus Limited Nature of business: Internet and website services Class of shares: Ordinary, B, C & D Aggregate capital and reserves Profit for the year/period % holding 100.00 30.6.09 £ 1,000 - % holding 100.00 30.6.09 £ - - % holding 100.00 30.6.09 £ 49,654 57,112 30.6.10 £ 1,000 - 30.6.10 £ 1,000 - 30.6.10 £ 236,135 230,532 Acquisition of dotMailer On 30 January 2009 the Company acquired via a share for share exchange the entire issued share capital of dotMailer Limited, a Company registered in England and Wales. Details of the purchase consideration and fair values of the assets acquired are outlined below and been calculated using the Group’s accounting policies. Value of equity released in exchange for the entire equity in dotMailer Ltd Costs directly attributable to the business combination Consideration Value £ 5,000,000 181,488 5,181,488 www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 14. Investments continued The fair value of assets and liabilities as of 30 January 2009 arising from the acquisition are as follows: Fixed asset investment Trade and other receivables Deposits, cash and cash equivalents VAT repayable Trade and other payables Net assets 49 Book and Fair Value £ 142,305 10,803 740,856 24,141 (214,424) 703,681 Acquisition of Netcallidus On 17 May 2010 the Group acquired the entire share capital of Netcallidus Limited a company registered in England and Wales for an initial consideration of £1,152,660 and an additional contingent consideration of £2,366,320 totalling £3,518,980. The Company’s principal activity is the provision of internet and website services. Obtaining control of Netcallidus Limited allows the Group to market SEO services to its existing customer base as well as exploiting opportunities with new customers. The knowledge and expertise within Netcallidus will enable it to further develop and market its SEO products and services. The following summarises the major classes of consideration transferred and the recognised amounts of assets and liabilities assumed at the acquisition date: Consideration transferred: Cash Equity instruments (14,200,930 shares) Contingent consideration: Cash Equity instruments (160,456,559 shares) Consideration Value Note £ 1,000,000 152,660 1,152,660 641,412 1,724,908 3,518,980 The number of shares to be issued in respect of the consideration transferred is based on the expected list price of 1.075p per share which is the mid market price at the reporting period. The number of shares to be issued as contingent consideration is based on the expected present value of the Group’s share price. Identifiable assets acquired and liabilities assumed: Goodwill Property, plant and equipment Trade and other receivables Deposits, cash and cash equivalents Taxation Trade and other payables Net assets Goodwill: Purchase consideration: Fair value of net assets acquired Goodwill acquired Goodwill acquired from purchase of subsidiary Book and Fair Value £ 45,000 2,532 88,349 41,407 (84,598) (40,768) 51,922 Note £ 3,518,980 (51,922) 3,467,058 45,000 3,512,058 The acquisition costs related to external legal fees and due diligence totalling £66,163, have been included in administrative expenses in the consolidated statement of comprehensive income. dotDigital Group Annual Report and Accounts 2009/2010 50 Notes to the consolidated financial statements continued for the year ended 30 June 2010 14. Investments continued The contingent consideration arrangement requires the Group to pay the former owners of Netcallidus Limited an estimated additional consideration of £2,366,320 in a combination of cash and equity in the Group. The final payment will be based on 3 times the Profit after Tax in the year ended 30 June 2012 less any amounts previously paid. The management’s estimates are based on the business plan prepared by the Directors of Netcallidus and reviewed by the Board of dotDigital. An interim payment will be made on finalising the PAT figures based on 4 times Profit After tax in the year ended 30 June 2011 less any amounts that have previously been paid. The Board have assessed a range of outcomes of future profit for the years 2011 and 2012. Based on this analysis we have arrived at an estimated future deferred consideration as shown in the table below. This consideration will be paid on 40% cash and 60% equity combination. The shares will be issued at the mid-market price quoted on the Plus Markets on the date of the sign off by the Board of Netcallidus’ financial statements. The Board estimate that the split of the payment to be as follows: Less then one year Between one to two years Nominal value Discounted fair value Cash £ 266,827 746,264 Shares £ 400,241 1,119,397 Cash £ 256,565 689,963 Shares £ Total £ 384,847 1,034,945 641,412 1,724,908 946,528 1,419,792 2,366,320 The fair value of the contingent consideration arrangement of £2,366,320 was estimated by applying the income approach utilising a discount rate of 4%. See note 22 for further information on the acquisition of Netcallidus. 15. Trade and other receivables Current: Trade receivables Other receivables VAT Prepayments and accrued income 16. Cash and cash equivalents Cash in hand Bank accounts 17. Called up share capital Allotted, issued and fully paid Number 1,292,500,000 30.6.10 £ 1,108,231 10,986 - 115,428 Group 30.6.09 £ 591,199 4,098 - 60,007 1,234,645 655,304 30.6.10 £ - - - 4,826 4,826 Group 30.6.10 £ 124 1,277,493 30.6.09 £ - 1,677,902 1,277,617 1,677,902 Company 30.6.10 £ - 385,332 385,332 Company 30.6.09 £ - - 650 2,062 2,712 30.6.09 £ - 564,531 564,531 Class Ordinary Nominal value £0.001 30.6.10 £ 30.6.09 £ 1,292,500 1,292,500 1,292,500 1,292,500 The holders of Ordinary Shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 18. Reserves Group As at 1 July 2009 Total comprehensive income Equity on acquisition Balance at 30 June 2010 Balance at 1 July 2009 Total comprehensive income Equity on acquisition Share option fair value Balance at 30 June 2010 Company At 1 July 2009 Profit for the year Share option fair value Equity on acquisition At 30 June 2010 19. Trade and other payables Current: Trade payables Amounts owed to Group undertakings Social security and other taxes Other payables Accruals and deferred income Directors’ current accounts VAT 51 Retained earnings £ 1,552,372 1,144,150 Share premium £ 4,533,754 - Unissued Share capital £ - - 152,660 2,696,522 4,533,754 152,660 Reverse acquisition reserve £ (4,695,465) - - - Other reserves £ 5,302 - - 24,191 Total equity £ 1,395,963 1,168,341 152,660 24,191 (4,695,465) 29,493 2,716,964 Unissued share capital £ - - 152,660 155,660 30.6.09 £ 114,813 - 139,878 8,069 68,210 3,304 82,537 Other reserves £ 5,302 24,191 - Totals £ 1,395,963 1,144,150 24,191 152,660 29,493 2,716,964 Company 30.6.10 £ 52,527 984,076 - 2,000 8,333 - 2,168 30.6.09 £ 35,543 23,638 - - 8,722 - - Retained earnings £ 1,552,372 1,144,150 - - Share premium £ 4,533,754 - - 2,696,522 4,533,754 Group 30.6.10 £ 133,764 - 172,089 18,483 112,444 - 231,983 668,763 416,811 1,049,104 67,903 dotDigital Group Annual Report and Accounts 2009/2010 52 Notes to the consolidated financial statements continued for the year ended 30 June 2010 20. Financial liabilities – borrowings Current: Bank loans Non-current: Bank loans - 1-2 years Terms and debt repayment schedule Group Bank loans 21. Leasing agreements Minimum lease payments under non cancellable operating leases fall due as follows:- Within one year Between two to five years Within one year Between two to five years Group 30.6.10 £ 30.6.09 £ Company 30.6.10 £ 30.6.09 £ 12,152 12,152 - - Group 30.6.10 £ 6,319 6,319 30.6.09 £ 18,228 18,228 1 year or less £ 12,152 12,152 Company 30.6.10 £ - - 30.6.09 £ - - 1-2 years £ 6,319 6,319 Totals £ 18,471 18,471 Land and Buildings £ 160,496 149,986 310,482 Land and Buildings £ 109,207 167,745 276,952 As at 30.6.10 Others £ 30,567 26,686 57,253 As at 30.6.09 Others £ 22,833 27,960 50,793 Total £ 191,063 176,672 367,735 Total £ 132,040 195,705 327,745 22. Financial instruments The Group’s activities exposes it to a number of financial risks that include credit risk, liquidity risk and cash flow interest rate risk. These risks, and the Group’s policies for managing them have been applied consistently throughout the year, are set out below: The Group hold no financial or non other financial instruments other then those utilised in the working operations of the Group and that listed in this note. Interest rate risk The Group’s interest rate risk arises from interest baring assets and liabilities. The Group has in place a policy of maximising finance income by ensuring that cash balances earn a market rate of interest; offsetting where possible, cash balances and by forecasting and financing its working capital requirements. As at the end of the reporting period the Group were exposed not exposed to any movement in interest rates in regard to loans and achieved less then 1% interest on cash holdings. During the year the Group entered in to an agreement to purchase the entire share capital of Netcallidus Limited. The contingent consideration arrangement requires the Group to pay the former owners of Netcallidus Limited an estimated additional consideration of £2,366,320 in a combination of cash and equity in the Group. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 53 22. Financial instruments continued The final payment will be based on 3 times the Profit after Tax in the year ended 30 June 2012 less any amounts previously paid. The management’s estimates are based on the business plan prepared by the Directors of Netcallidus and reviewed by the Board of dotDigital. An interim payment will be made on finalising the PAT figures based on 4 times Profit After tax in the year ended 30 June 2011 less any amounts that have previously been paid. The Board have assessed a range of outcomes of future profit for the years 2011 and 2012. Based on this analysis we have arrived at an estimated future deferred consideration as shown in the table below. This consideration will be paid on 40% cash and 60% equity combination. The shares will be issued at the mid-market price quoted on the Plus Markets on the date of the sign off by the Board of Netcallidus’ financial statements. The notional and fair value of the expected payments to the former owners are outline below in their composite elements. In all cases the post tax discount factor utilised is 4%. Less then one year Between one to two years Year ended 30.6.10: Nominal value Discounted fair value Cash £ 266,827 746,264 Shares £ 400,241 1,119,397 Cash £ 256,565 689,963 Shares £ 384,847 1,034,945 Total £ 641,412 1,724,908 946,528 1,419,792 2,366,320 The term “shares” indicates the value of ordinary share capital to be issued should targets be met and discount factors not change. Any changes resulting in revaluations of the consideration due in following reporting period will be charged to the income statement. The Group had no such agreement in the previous period. Liquidity risk The Group’s working capital requirements are managed through regular monitoring of the overall cash position and regularly updated cash flow forecasts to ensure there are sufficient funds available for its operations. Management forecasts indicate no new borrowing facilities will be required in the upcoming financial period. As described above Group entered in to an agreement to purchase the entire share capital of Netcallidus Limited. The contingent deferred consideration arrangement requires the Group to pay the former owners of Netcallidus Limited further payments of cash and shares in October 2011 and October 2012. The final payment in October 2012 will be based on 3 times the Profit after Tax in the year ended 30 June 2012 less any amounts previously paid. The management’s estimates of deferred consideration are based on a range of scenarios prepared by the Directors of Netcallidus and reviewed by the Board of dotDigital. An interim payment will be made in October 2011. The two tranches of deferred consideration will be paid in the ratio 40% cash and 60% equity. The shares will be issued at the mid-market price quoted on the Plus Markets on the date of the sign off by the Board of Netcallidus’ financial statements. In arriving at and negotiating the structure of the acquisition the Board were mindful of the need to ensure the proposed deferred consideration did not create liquidity risk for the Group. The structure of the deferred consideration element is such that under all the scenarios which could be envisaged the cash flows generated by the profit stream of the Netcallidus business will be sufficient to fund the cash element of the deferred consideration. Credit risk Credit risk arises principally from the Group’s trade receivables which comprise amounts due from customers. Prior to accepting new customers a credit check is obtained. As at 30 June 2010 there were no significant debts pass their due period which had not been provided for. The maturity of the Groups trade receivables is as follows: 0 – 30 days 30-60 days More the 60 days As at 30.6.10 £ 747,730 251,565 108,936 1,108,231 As at 30.6.09 £ 500,514 77,439 13,246 591,199 dotDigital Group Annual Report and Accounts 2009/2010 54 Notes to the consolidated financial statements continued for the year ended 30 June 2010 22. Financial instruments continued The Group minimises its risk by credit profiling all new customers and monitoring existing clients of the Group for changes in their initial profile. The level of trade receivables passed due the average collection period consisted of a value of £108,936 of which £53,000 was provided for. The Group felt that the remainder would be collected post year end as they were with long standing relationships, the risk of default is considered to be low and write-offs due to bad debts are extremely low. The Group has no significant concentration of credit risk, with the exposure spread over a large number of customers. The credit risk on liquid funds is low as the counterparties are banks with high credit ratings assigned by international credit rating agencies. Details as to maximum fair values the Groups financial assets and liabilities can be found in the consolidated statement of financial position (see page 31). Capital Policy The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide optimal returns for shareholders and to maintain an efficient capital structure to reduce the cost of capital. In doing so the Group’s strategy is to maintain a capital structure commensurate with a strong credit rating and to retain appropriate levels of liquidity headroom to ensure financial stability and flexibility. To achieve this, the Group monitors key credit metrics, risks and fixed charge cover to maintain this position. In addition the Group ensures a combination of appropriate short-term and long-term liquidity headroom. During the year the Group had a short-term loan balance of £12,152 and amounts payable greater than one year of £6,319. The Group had a strong cash reserve to utilise for any short-term capital requirements that were needed by the Group. The Group has continued to look for further long term investments or acquisitions and therefore to maintain or re-align the capital structure, the Group may adjust when dividends are paid to shareholders, return capital to shareholders, issue new shares or borrow from lenders. 23. Capital commitments The Group has no capital commitments as at the end of the reporting period. 24. Transactions with Directors The following transactions were carried out with the Directors of the Company. Loans from Directors:- Beginning of the period Loans advanced in the year Loans repaid in the year End of period The above loans are provided to the Group on a interest free basis. 25. Related party disclosures The following transactions were carried out with related parties during the year: Year ended 30.6.10 £ 3,304 - (3,304) - Purchase of services Financial public relations Suppliers Haggie Financial LLP 30.6.10 £ 20,701 N Nelson, a Director, is a partner of Haggie Financial LLP. At the end of the year there was no outstanding fee owed to Haggie Financial LLP. Supply of services Website Email marketing services Customers The Stockroom Limited Chillibean Limited 30.6.10 £ 4,795 4,395 Period 1.5.08 to 30.6.09 £ 64,503 - (61,199) 3,304 30.6.09 £ 6,064 30.6.09 £ - - D Pacy, a Director, is a Director of the Stockroom Limited and Chillibean Limited. The above transactions were made with dotMailer Limited. At the end of the reporting period, the amount outstanding to dotMailer due from The Stockroom Limited were £4,796 and £586 respectively. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 55 26. Ultimate controlling party As at the end of the reporting period there was no ultimate controlling party. 27. Share-based payment transactions The measurement requirements of IFRS 2 have been implemented in respect of share options that were granted after 7 November 2002. The expense is recognised for share based payments made during the year is £24,191 (2009: £5,302) Also on 20 October 2009 the Board of Directors also granted 21,250,000 options to employees of the Group exercisable on or after 1 July 2010 until 1 February 2019. Vesting conditions of the options dictate that employees must remain in the employment of the Group for the whole period to qualify. Of the options issued in the year 4,000,000 option were issued to G Fidura a Director in the Group. Movement in issued share options during the yea The table illustrates the number and weighted average exercise price (WAEP) of, and movements in share options during the period Outstanding at the beginning of the period Granted during the year Forfeited/cancelled during the period Exchanged for options in subsidiary Outstanding at the end of the period Exercisable at the end of the period No of options 74,226,667 21,250,000 1,550,000 - 93,926,667 - 30.06.10 WAEP No of options 0.27p 1.00p 1.00p - 0.42p - 25,000,000 7,600,000 - 41,666,667 74,226,667 - 30.6.09 WAEP 0.10p 1.00p - 0.24p 0.27p - Of the 93,926,667 options outstanding at the end of the year 25,000,000 (2009: 25,000,000) represent share warrants exercisable on or before 27 June 2012. The fair value of the options granted in the year have been calculated using the Black Scholes model assuming the inputs shown below: - Grant date - Number of options granted - Share price at grant date - Exercise price at grant date - Risk free rate - Option life - Expected volatility - Expected dividend yield - Fair value of option 28. Reconciliation of profit before income tax to cash generated from operations Consolidated Profit before income tax Depreciation charges Share options Finance costs Finance income Increase in trade and other receivables Increase/(decrease) in trade and other payables Cash generated from operations 20 October 2009 21,250,000 1.00p 1.00p 2.55% 8.67 12% 0% 0.7p Year ended 30.6.10 £ 1,377,254 170,338 24,191 1,607 (3,088) Period 1.5.08 to 30.6.09 £ 1,080,315 117,456 5,302 864 (15,088) 1,570,302 1,188,849 (490,992) 196,628 1,275,938 (199,833) (40,719) 948,297 dotDigital Group Annual Report and Accounts 2009/2010 56 Notes to the consolidated financial statements continued for the year ended 30 June 2010 28. Reconciliation of profit before income tax to cash generated from operations continued Company Loss before income tax Share option Finance income (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Cash (used) from operations 30.6.10 £ (180,477) 24,191 - (156,286) (2,114) 18,763 30.6.09 £ (63,356) 5,302 (15,347) (73,401) 8,091 (47,213) (139,637) (112,523) 29. Cash and cash equivalents Consolidated The amounts disclosed on the cash flow statement in respect of cash and cash equivalents are in respect of these balance sheet amounts: Year ended 30 June 2010 Cash and cash equivalents Period ended 30 June 2009 Cash and cash equivalents 30.6.10 £ 1.7.09 £ 1,277,617 1,677,902 30.6.09 £ 1.5.08 £ 1,677,902 684,493 Company The amounts disclosed on the cash flow in respect of cash and cash equivalents are in respect of these balance sheet amounts: Year ended 30 June 2010 Cash and cash equivalents Year ended 30 June 2009 Cash and cash equivalents 30.6.10 £ 1.7.10 £ 385,332 564,531 0.6.09 £ 1.7.08 £ 564,531 821,557 30. Research & development During the period the Group incurred £12,822 (2009: £20,842) in research costs and £337,480 (2009: £242,060) in development investments. All resources utilised in research and development has been categorised as outline in the accounting policy governing this area. www.dotdigitalgroup.com Annual Report and Accounts 2009/2010 Company information Directors S Bird N C P Nelson D J Pacy P A Simmonds I Taylor G Fidura (Appointed 1 July 2009) D Ivy (Resigned 10 September 2009) Secretary M Patel Registered office Finsgate 5-7 Cranwood Street London EC1V 9EE Registered number 06289659 (England and Wales) Corporate adviser Alfred Henry Corporate Finance Limited Finsgate 5-7 Cranwood Street London EC1V 9EE Auditors Jeffreys Henry LLP Finsgate 5-7 Cranwood Street London EC1V 9EE Solicitors Lawrence Stephens Morley House 26 Holborn Viaduct London EC1A 2AT Principal bankers National Westminster Bank plc Charing Cross, London Branch PO Box 113 Cavell House 2a Charing Cross Road London WC2H 0PD Registrars Share Registrars Limited Craven House West Street Farnham Surrey GU9 7EN Website www.dotdigitalgroup.com Croydon No. 1 Croydon 12-16 Addiscombe Road CR0 0XT T: 020 8662 2762 Manchester Pall Mall Court 61-67 King Street Manchester M2 4PD T: 0161 618 1070 London Bridge 6-8 Emerson Street London SE1 9DU T: 020 7654 8686 Northampton Units 10-11 Hall Farm Sywell Aerodrome Sywell Northampton NN6 0BN T: 01604 781 044 Design and production by philosophy www.philosophydesign.com Photography by Layton Bennett Print by Moore Print www.mooreprint.co.uk www.dotdigitalgroup.com
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