Fresh Del Monte Produce
Annual Report 2012

Plain-text annual report

F I RST DER IVATIVES P LC Annual Report & Accounts 2012 www.firstderivatives.com First Derivatives is a leading provider of products and consulting services to the capital markets industry Contents Page Chairman’s statement Chief Executive’s statement Directors and advisors Directors’ report Statement of directors’ responsibilities in respect of the directors’ report and the financial statements Corporate governance Independent auditors’ report to the members of First Derivatives plc Consolidated statement of comprehensive income Consolidated balance sheet 02 04 06 07 10 10 11 12 13 14 Company balance sheet Consolidated statement of changes in equity 15 Company statement of changes in equity 17 19 Consolidated cash flow statement Company cash flow statement Notes forming part of the consolidated Financial statements Directories 20 21 80 ANNUAL REPORT (cid:129) 1 Financial highlights Performance indicators 2012 Performance In 2012 First Derivatives delivered record performance in revenue profit, earnings per share and operating cashflow. £46.1 million revenue Up 25.4% from 2011 Up25.4% £46.1m £36.7m 2011 2012 FD’s revenue from both divisions is expected to continue to increase. Revenue per division (Figures in £millions) 2012 2011 £8.0million operating profit Up 21% on 2011 £6.9 million profit before tax Up 7% on 201 £8.2 million 36.0p operating cashflow eps Up 52% from 2011 Up 8% on 2011 32,629 13,458 24,229 12,511 0 4 8 12 16 20 30 40 50 Consulting Software Geographical Locations Revenue figures in millions America Australasia 39.9% 41.2% 43.0% 40.3% Rest of Euroope 2012 2011 UK 7.2% 9.5% 8.2% 10.7% 2 • FIRST DERIVATIVES PLC Chairman’s statement I am pleased to report another year of continued growth in profitability for the group, the sixteenth year of continued progression. This achievement is all the more satisfying given the market backdrop where we are seeing market trends that are significantly altering the economics of the financial services industry. In response to these market opportunities and building upon prior years, we have continued to implement the Board’s strategy of continued investment into the group’s technology, infrastructure and operations in order to create a platform for continued success and future growth. Our ability to generate continued growth in this challenging market, while implementing our investment growth strategy, demonstrates the strength of the organisation. Financials Revenues for the year ended 29 February 2012 increased by 25.4% to £46.087 million from £36.740 million in the previous year. Normalised pre-tax profits (after adjusting for currency translation and associate) increased by 25.0% to £7.315 million compared to £5.852 million in 2011 reported pre-tax profits increased by 7.0% to £6.947 million (2011: £6.495 million). Normalised basic earnings fully diluted earnings per share increased by 40.2% to 34.2p per share (2011: 24.4p). Dividend The group continues to generate strong operating cash flow and this, along with our retained cash at the year end, allows the Board to recommend a final dividend of 8.15p per share which together with the interim dividend of 3.0p per share paid on 8 December 2011, totals 11.15p and is covered approximately three times by earnings. This will be paid on 6 July 2012 to those shareholders on the register on 8 June 2012. The shares will be marked ex-dividend on 6 June 2012. Software Software sales at £13.458million (2011: £12.511 million) were up 7.6% on the previous year. While this revenue stream increased it does not reflect the progress made in revenue generated from the Delta Suite. Transactional and recurring revenues were up 102.2% on the previous year showing the significant progress achieved. This was partly offset by a reduction of 54.1% in one off license fee income and a reduction of 68.9% in technology income stream (Auto Deal+) obtained as part of the acquisition of “Cognotec” in 2010. The technical challenges are extensive in the capital markets particularly when dealing with complex instruments on a global scale. This complexity, in combination with continually increasing data volumes and the subsequent IT processing requirements, create many challenges for the industry. Our products are all developed on the common Delta technology platform which is specifically engineered to meet the complex calculations and large volume of data issues that exist in the capital markets sector. We also have made a significant investment in establishing the physical infrastructure necessary to operate the software in the ‘cloud’ or on a Software as a Service model (“SaaS”) to meet the growing trend and desire of our clients to operate this model. This allows clients to seek economies of scale by outsourcing elements of their infrastructure, while removing the need for internal expertise in the support of the software. The investment in expanding this capability enables many of our products to be sold under annual license or transactional revenue based pricing models. Both models allow us to secure a continued and visible stream of software revenue. Sales success has been achieved across all our key products in the year with contract wins for our complex event processing (“CEP”) engine (Delta Stream), algorithmic trading engine (Delta Algo), data management engine (Delta Data Factory) and FX trading platform (Delta Flow). As our customer base has expanded, our opportunity to cross sell to our consulting and software clients has been enhanced. At the year-end we concluded the sale of our CEP, Algorithmic engine and FX platform to one customer and are in further discussions with a number of other existing customers for the provision of other products within our suite. We have a healthy pipeline of prospects within our specific domain and are actively looking for partners to help bring the products to new markets and new industries. This continuing investment in our platform, increasing the channels to market and the successful deployment of our solutions, allied with our flexible licensing and service model, gives us CHAIRMAN’S STATEMENT • 3 confidence in our ability to deliver continued growth in software revenues. Consulting Consulting revenues increased 34.7% to £32.629 million from £24.229 million in the previous year. It has been another year of continued growth across the division, both in our client base, expansion of the number of assignments undertaken with new and existing customers and our penetration into the global market place. The key to this continued growth continues to be the quality of our people, our commitment to training and the quality and the flexibility of our service. Selling services to the market continued to be a challenge this year with ongoing regulatory changes, continued globalisation challenges, increasing complexity, fast moving technology innovation and margin pressures affecting our customer base. To meet the challenges facing our customers, we have continued to invest in our service offerings, launching three major initiatives in the period, in addition to the continual reinvestment and refinement of our existing portfolio. We undertook a new legal services initiative aimed at providing resources to banks in areas such as non-core asset disposal, regulatory compliance and securitisation, where personnel with a combination of IT, finance and legal skills are in short supply. Secondly, we have launched a strategic vendor service practice focused on the delivery of global, large scale implementation and support services for leading third party trading technology platforms. Finally we have formed a dedicated data management team, bringing together a group of highly experienced and respected professionals from the data management industry. Market reaction has proven positive with a number of engagements already underway and we expect that these new initiatives combined with continued development of existing services will have the company well positioned in the changing market. We undertake complex assignments for our clients and our inherent knowledge of their systems leads to repeat business from upgrades and ongoing development. This repeat recurring business model is a key focus for us. We are able to achieve this by our ability to ensure that our services are integrated into our customers’ strategy and operations assisting them to streamline their services and products. We do this while ensuring we provide the relevant market or domain expertise along with a competitive cost operating model to ensure that we maximize the recurring revenue stream. Accommodation No further acquisition of employee residential accommodation has been made. Disposal of four individual properties was made in the year with a resulting profit on sale of £528k. At year end three properties were listed for sale with selling agents and have been classified as such in the accounts. We will continue to dispose of properties when suitable profitable opportunities arise. The remaining properties held by the group have a carrying value of £15.524 million and at the year-end were independently valued by external valuers at £18.915 million on an open market basis. Outlook This year has seen continued strong growth across the Group’s activities with total revenues up over 25%. As the economic recovery has been taking a fragile hold we have continued to make a substantial investment in the development of all the group’s activities. The goal of this investment has been to ensure that we build a robust organisation with a strong asset base and service offering to ensure future growth. We expect the market in coming years will continue to be challenging as the full effects of budget constraints, regulation and globalisation continue to impinge our customers. With the improvements made to the Delta Suite and its revenue stream and the positioning and improvements to our service offerings, we feel that the group is well positioned to continue to grow. We continue to have a strong pipeline of prospects and have made a strong start to the current year and expect to be able to report further progress in the year to 28 February 2013. I would like to thank Brian Conlon and his team for making it another successful year for the group. David Anderson Chairman 4 • FIRST DERIVATIVES PLC Chief Executive’s statement I am pleased to report that First Derivatives has had another successful year, despite continuing uncertainty in the financial markets resulting largely from the European sovereign debt crisis. We have continued to expand and consider that we are well positioned to continue to grow our operations and customer base. Review of activities First Derivatives sells software products to the capital markets and provides a range of associated consulting services. Our customer base continues to grow and this year we provided services to 91different investment banks, brokers, exchanges and hedge funds. We continue to expand our global reach with assignments underway in countries such as Chile, Russia, Hungary, Turkey and South Africa as well as in major financial centres such as New York, London, Toronto, Chicago, Singapore, Hong Kong, Tokyo and Sydney. The broad but yet focused nature of our product and consulting offerings and our geographical spread is key to our continued organic growth. Our target industry segment is extensive and gives us a vast potential market to penetrate and our success has been built on treating our customers as partners to build strong recurring revenue streams both in consulting and software. In consulting we target assignments that are vital to the customers’ infrastructure that will be in existence for years. We sell software on a subscription model or on a Software as a Service basis. Software We continue to invest heavily in improving our Delta technology platform and applications. We have made significant scientific progress in areas such as messaging and in-memory capacity. Our Delta technology platform is designed to work with large volumes of data analytics in the cloud on any desktop or handheld device. Allied with our hosting and data centre expertise this means that we are well placed to take advantage of the wider trends in the technology market - Cloud computing, “Big Data” and mobile devices. We continue to add new features to our existing flagship products and have successful reference implementations. Delta Stream for example is now in use at several large financial institutions including ANZ and Singapore Exchange and Delta Algo is firmly embedded in one of the largest investment banks in the world. We are very excited about the prospects for Delta Data Factory which has been successfully deployed by Thomson Reuters. The sales pipeline is very healthy and we are cautiously optimistic for the year ahead. We have successfully migrated RealStream - an acquired legacy technology – to our architecture and relaunched this as Delta Flow. We believe that this product has the potential to be a disruptive technology in the FX trading arena. It is a hosted technology and we have mobile (iPhone, iPad and Android) and desktop versions. This view has been further reinforced during recent preliminary demos with a number of leading players in the market and our order book for this product is very encouraging. Indeed we have recently signed up one of the biggest banks in Asia and one of the biggest brokers in Russia. Although our software revenue has only grown by a small amount in total relative to 2011 the mix has changed considerably. As expected there has been a tapering off of revenue from a legacy technology Auto Deal+, with recurring transactional revenue now accounting for 44% of our software revenue (2011: 23%). We will continue to endeavour to sell our software on an annual recurring or transactional model. Our common technology platform makes it easier to develop new products and bring them quickly to market. In addition, the problems at which we excel – analysing large volumes of data in millisecond periods of time – are issues which are common to many industry sectors. The success of our technology in the capital markets industry should make it easier to sell in other areas. We have had some success in this respect and I am pleased to report that we have secured our first customers of Delta in the telecoms and utilities markets. We have launched a new prototype of a bandwidth exchange (in partnership with BT and Nokia at the recent TM Forum) and are launching an alpha version of a carbon credits trading platform at the Rio+ Earth Summit in June this year. This follows the success of an initial prototype at the recent Clinton Global Initiative in New York. This gives further validation as to the flexibility of our technology and gives us confidence that the market for our software is extensive. We have further cemented our relationship with Kx Systems by recently signing an OEM and hosting agreement which gives us increased access to the kdb+ database for all products in a hosted CHIEF EXECUTIVE’S STATEMENT • 5 or installed basis. We have been working with Kx Systems for 14 years and they had another profitable year last year. As a 20% shareholder we will continue to benefit from their success and continued investment in making their technology the world’s leading time series database. Their products are used by some of the world’s largest financial institutions and Kx Systems lists organisations such as JP Morgan, Goldman Sachs, Zurich Financial Group, Morgan Stanley, Fidelity Investments and Total Gas & Power. Consulting First Derivatives provides highly skilled resources to the capital markets in the areas of consulting, support and development services. We have ongoing contracts with many of the leading global banks, supporting their activities across a range of asset classes including credit, interest rate, foreign exchange, equity cash and derivatives markets. The Company has been working in this area for sixteen years and we have seen a trend in the last year for us to work on increasingly large projects. The major trends in the industry at the moment are around outsourcing and trying to implement various regulatory initiatives introduced throughout the world as a response to the global crisis in 2008. We have launched three major initiatives to respond to these trends:– • A legal stream offering services around the disposal of non-core assets by banks and the impact of regulations and compliance • A managed services for outsourced third party product support and • The creation of a dedicated data management team. The market has responded positively to these initiatives and we have been able to draw upon the strength of our brand to win new customers in these areas. We continue to derive significant recurring revenue in this division from the long- term nature of the projects we undertake and these three new initiatives will also generate long- term work. Our consultants continue to work closely with our development team by providing market intelligence and competitor analysis. They can also assist the product team with business analyst work and testing. The fungible nature of our resource pool gives us significant operational efficiencies. Management and Personnel The Company now employs almost 700 people and our success in retaining staff and senior management means that the experience profile of our consultants continues to improve. We continue to enhance our Capital Markets Training Programme and have now included legal stream modules which gives employees the opportunity to qualify for the New York Bar. Once again I would like to pay tribute to all First Derivatives employees who are hard working, talented, flexible and dedicated. Our customer retention rates are evidence of this. Financial Review The group has reported revenues and profits significantly higher than last year. Post-tax profit for the year was £5.946 million (2011: £5.112 million) on turnover of £46.087 million (2010: £36.740 million). Our balance sheet is strong with equity attributable to shareholders up to £32.236 million (2011: £24.888 million), an increase of 29.5%. This, and our confidence in the Group’s ability to generate cash, enables the Board to recommend a final dividend of 8.15p per share (2011: 7.25p) which means that we will have paid a total dividend of 11.15p (2011: 10.15p) per share for the full year. Outlook Based on the health of our current sales pipeline we anticipate reporting further growth in the year to 28 February 2013. As well as organic growth the Board will continue to pursue acquisition opportunities where we see a strategic fit and have access to the necessary sources of finance. On a macro level we are confident that we have positioned ourselves to benefit from global trends in technology and consulting and that with our recurring revenue model and continued reinvestment in the business we will deliver further significant benefits in the years ahead. Brian Conlon Chief Executive Officer 6 • FIRST DERIVATIVES PLC Directors and advisors Directors R D Anderson – Non-executive chairman*+ B G Conlon – Chief Executive Officer R G Ferguson – Chief Financial Officer A Toner - Chief Operating Officer K Cunningham – Executive director M G O’Neill – Non-executive director* P Brazel – Non-executive director*+ Secretary Richard Fulton LLB Registered Office 3 Canal Quay Newry Co Down BT35 6BP Auditors KPMG Chartered Accountants Stokes House 17/25 College Square East Belfast BT1 6DH Solicitors Mills Selig 21 Arthur Street Belfast BT1 4GA Bankers Bank of Ireland Corporate Headquarters Donegall Place Belfast BT1 5LU Nominated Advisor/EMI Advisor and Joint Brokers Charles Stanley Securities Ballsbridge Park Ballsbridge Dublin 4 Goodbody Corporate Finance 131 Finsbury Pavement London EC2A 1NT Company registration number NI 30731 Registrar and Transfer Office Neville Registrars Limited Neville House 18 Laurel Lane Halesowen West Midlands B63 3DA * Members of the audit committee + Members of the remuneration committee DIRECTORS’ REPORT • 7 Directors’ report The directors have pleasure in submitting to the shareholders their annual report and the audited financial statements of the group and company for the year ended 29 February 2012. Results and dividend The group’s profit after taxation attributable to the shareholders for the year to 29 February 2012 was £5,946k (2011: £5,112k). Principal risks and uncertainties The group operates in a changing economic and technological environment. The directors propose the payment of a final dividend of 8.15 pence per share (previous year: 7.25 pence which, together with the interim dividend of 3.00 pence per share (2011: 2.90 pence), totals 11.15 pence (2011: 10.15 pence) per share. The final dividend has not been included in payables as it was not approved before the year end. Dividends paid during the year comprised of a final dividend of 7.25 pence per share for the year ended 28 February 2011 and an interim dividend of 3.0 pence per share for the year ended 29 February 2012. Principal activities and review of the business The principal activities of First Derivatives plc are the provision of a range of software and consulting services to the investment bank market, the derivatives technology industry, the foreign exchange market and the provision of technology sales services to the IT sector. The group offers a range of services to various clients across the world. These services interlink and complement each other, which enables the group to be managed on an overall basis. Reviews of the business and likely future developments are set out below and in the Chairman’s and Chief Executive’s statements on pages 2 to 5. Investments In recent periods a number of investments have been made to establish subsidiary entities or strategic associate holdings. First Derivatives will continue to try to identify acquisitions or investments to expand its range of services and offerings available to its various clients. The focus of these acquisitions or investment remain to be that the new services or offerings interlink and complement each other, which enables the group to be managed on an unified basis. The key business risks affecting the group are set out below and in the Chairman’s statement on page 2 and 3 and Chief Executive’s statement on page 4 and 5. Risks are formally reviewed by the board and appropriate processes put in place to monitor and mitigate them. If more than one event occurs, it is possible that the overall effect of such events would compound the possible adverse effects on the group. Personnel As a software and services provider, the group is a people based business and its growth depends largely on growing staff numbers and training staff to meet the diverse requirements of our customer base. The group continues to refine its recruitment process to ensure a constant intake of suitable new staff and the internal training programme for each company is constantly evolving. Staff retention remains a key focus with initiatives such as mentoring programmes being employed, in addition to incentives schemes which include share options that are geared towards rewarding and motivating staff. Market risk The group operates in a competitive and often cyclical market environment. We address these risks by focussing sales campaigns on generating assignments with long-term visibility, continuing to increase the human capital of our consultants and diversifying our software and services portfolio offerings. Technological changes Technology in the software industry can change rapidly. It is important that our products remain up to date and that our development plans are flexible. We make a significant ongoing investment in research and development to allow us to identify and adapt to any technological changes that do occur, thereby ensuring that our products continue to meet the demands of our customers. 8 • FIRST DERIVATIVES PLC Directors’ report (continued) Financial risk management The group’s financial risk management objective is broadly to seek to make neither a profit nor loss from exposure to currency or interest rate risk. The policy is to finance working capital and the acquisitions of property, plant and equipment through retained earnings and through borrowings at prevailing market interest rates. The group does not use derivatives to manage its financial risk investment. The group’s main cash flow, credit and liquidity risks are those associated with selling on credit. This is managed through credit control procedures. The group is also exposed to the impact of fluctuations in exchange rates as it generates income and incurs expenses in currencies other than Sterling (GBP). The group has exposure to the US dollar (USD), Euro (EUR) and Canadian Dollar (CAD). In addition, the group has exposure as a result of mortgage financing apartment purchases, trade receivables and activities carried on by subsidiary undertakings. The group’s financial position is structured to take advantage of a natural foreign currency hedge using excess cash generated from operations to repay the associated capital and interest on US dollar borrowings. In addition, by funding the acquisitions of Market Resource Partners LLC (MRP), Reference Data Factory Inc (RDF) and the investment in Kx Systems in US dollars, the group can achieve a net investment hedge against a significant portion of its translation exposure of the net assets of its foreign operations. Key relationships with partners and customers First Derivatives maintains successful relationships with Kx Systems, a key partner, and several key customers. Its relationship with Kx Systems is governed by a partnership agreement for the marketing of the kdb+ database to end customers whilst the use of this database within the First Derivatives product suite is governed by a perpetual OEM agreement. A small number of key customers are important to the success of the group, our continued expansion will reduce this reliance. Other information The other information required to be disclosed in respect of the review of the group’s business as required under Section 417 of the Companies Act 2006 is given in the Chairman’s statement on pages 2 and 3 and the Chief Executive’s statement under the heading ‘Financial Review’ on page 5. The directors do not consider any other risks attaching to the use of financial instruments to be material to an assessment of its financial position or profit. Further information is set out in note 39. Property, plant and equipment The details of property, plant and equipment are given in note 16 of the financial statements. During the year the group disposed of 4 properties with a net book value of £2,253k. The properties were sold at a total profit of £528k. Directors and secretary The directors and secretary who held office during the year were as follows: R D Anderson B G Conlon R G Ferguson A Toner K Cunningham M G O’Neill P Kinney (resigned 11 March 2011) P Brazel Richard Fulton (Company Secretary) Directors and their interests The interests held in shares of the company by the directors who held office at the end of the financial year, all of which are beneficial holdings, were as follows: DIRECTORS’ REPORT • 9 Ordinary shares of £0.005 each 2012 number Ordinary shares of £0.005 each 2011 number R D Anderson B G Conlon R G Ferguson A Toner K Cunningham M G O’Neill P Brazel 140,000 7,853,953 117,647 10,000 341,710 640,000 - 140,000 7,748,953 117,647 10,000 168,108 740,000 - The directors interests in the contracts with the company is disclosed in note 37. Details of share options granted to directors of the company are disclosed at note 12. Substantial shareholdings At 24 May 2012, the group had received no notification of any interests in 3% or more of the ordinary share capital, other than those disclosed by B G Conlon (47.2%), Standard life Investments Limited (9.3%), M G O’Neill (3.85%) and Janet Lustgarten (3.1%). Research and development The group’s policy is to invest in product innovation and engage in research and development activities geared toward the development of products primarily for the use of the financial services industry. During the year costs of £4,819k (2011: £3,475k) were capitalised in respect of activities which were deemed to be development activities in accordance with the group’s accounting policies. Research and development costs of £1,360k (2011: £989k) were expensed during the year. Employees It is the group’s policy to ensure that equal opportunity is given for the employment, training and career development of disabled persons, including persons who become disabled whilst in the group’s employment. The group is committed to keeping employees as fully informed as possible, on matters which affect them as employees. The group’s policy on employees remains to adopt a very open management style, keeping employees informed of all matters affecting them as employees including key financial and economic factors affecting the group’s performance. This is achieved through meetings and informal consultation at all levels. £18.9 million based on independent valuations performed in the prior year by external market valuers on an open market basis (see note 16 to the financial statements). Political and charitable donations The group and company made charitable donations of £41k (2011:Nil) during the period. The group and company made no political donations during the year (2011:Nil). Supplier payment policy The group does not have a standard code which deals specifically with the payment of suppliers. However, suppliers are made aware of payment terms and how any disputes are to be settled and payment is made in accordance with those terms. At 29 February 2012 the group had 20 days purchases outstanding (28 February 2011: 20 days). Disclosure of information to auditors The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the company’s auditor is unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the company’s auditor is aware of that information. Auditors In accordance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG as auditors of the company is to be proposed at the forthcoming Annual General Meeting. Market value of land and buildings The directors consider that the market value of land and buildings is significantly higher than its carrying value. The estimated market value is By order of the board Richard Fulton Secretary 10 • FIRST DERIVATIVES PLC Statement of directors’ responsibilities in respect of the directors’ report and the financial statements The directors are responsible for preparing the directors' report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare consolidated and company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and applicable law and have elected to prepare the company financial statements on the same basis. 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 group and company and of their profit or loss for that period. In preparing each of the consolidated and company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Corporate governance As an AIM-quoted company, the group is not required to produce a corporate governance report that satisfies all the requirements of the UK Corporate Governance Code 2010. However, certain corporate governance procedures have been put in place which reflects the group’s size and structure. The main features of the group’s corporate governance procedures are: • The board meets on a regular basis and brings independent judgement to bear. It approves budgets, long term plans and significant contracts. There is a formal schedule of matters reserved for decision by the board in place. • The board has three non-executive directors; they all take an active role in board matters. • The group has an audit committee and a remuneration committee. These committees consist of the non-executive directors. They have written constitutions and terms of reference. • The audit committee meets twice each year, prior to the publication of the half-yearly and final results. The auditors attend the audit committee meeting prior to the publication of the final results. • The remuneration committee meets annually to determine the remuneration of the senior executives. Levels of remuneration are set in order to attract and retain the senior executives needed to run the company without paying more than is necessary for this purpose. • The board of directors recognises its overall responsibility for the group’s system of internal control and for monitoring its effectiveness. All activity is organised within a defined structure with formal lines of responsibility and delegation of authority. The group produces information packs on a weekly and monthly basis. These packs, together with annual budgets, enable the board to monitor operational performance and cash position each month and allocate the group’s resources. • Share options have been granted to certain non-executive directors (see note 12). DIRECTORS’ STATEMENT • 11 Independent auditor’s report to the members of First Derivatives plc We have audited the financial statements of First Derivatives plc for the year ended 29 February 2012 which comprise the consolidated statement of comprehensive income, the consolidated and company balance sheets, the consolidated and company statements of changes in equity, the consolidated and company cash flow statements and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the 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 an auditors' report 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 Directors' Responsibilities Statement set out on page 10, 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 (APB's) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the group's and of the company's affairs as at 29 February 2012 and of the group's profit for the year then ended; • the consolidated financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU 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. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors' Report 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 company, or returns adequate for our audit have not been received from branches not visited by us; or • the 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. Arthur O’Brien (Senior Statutory Auditor) For and on behalf of KPMG, Statutory Auditor Chartered Accountants Stokes House 17/25 College Square East Belfast BT1 6DH 25 May 2012 12 • FIRST DERIVATIVES PLC The notes on pages 21 to 73 form part of these financial statements. Consolidated statement of comprehensive income Year ended 29 February 2012 2012 2011 Note £’000 £’000 Continuing operations Revenue 5 46,087 36,740 Cost of sales (30,172) (23,423) Gross profit 15,915 13,317 Other operating income 6 1,414 1,974 Administrative expenses 7 (9,368) (8,723) Results from operating activities 7,961 6,568 Finance income 9 2 7 Finance expense 9 (648) (723) Loss on foreign currency translation 9 (455) (198) Net financing expense (1,101) (914) Share of profit of associate using the equity method, net of tax 18 458 841 Share of loss on dilution in associate using the equity method 18 (371) - Profit before income tax 6,947 6,495 Tax expense 11 (1,001) (1,383) Profit for the year 5,946 5,112 Other comprehensive income Deferred tax on share options outstanding 24 (309) 1,030 Net exchange gains/(losses) on net investment in foreign subsidiaries and associate 27 214 (1,091) Net (loss)/gain on hedge of net investment in foreign subsidiaries and associate 27 (121) 594 Other comprehensive income for the period, net of tax (216) 533 Total comprehensive income for the period attributable to equity holders’ of the company 5,730 5,645 Earnings per share Pence Pence Basic 15a 36.0 33.2 Diluted 15a 32.8 29.0 All profits are attributable to the owners of the part and relate to continuing activities. ACCOUNTS • 13 Consolidated balance sheet Year ended 29 February 2012 The notes on pages 21 to 73 form part of these financial statements. 2012 2011 Note £’000 £’000 Assets Property, plant and equipment 16 14,738 18,292 Intangible assets and goodwill 17 30,053 26,732 Investment in associate 18 7,059 7,447 Trade and other receivables 19 437 - Deferred tax asset 29 1,750 1,860 Non current assets 54,037 54,331 Trade and other receivables 19 13,767 12,563 Cash and cash equivalents 20 1,318 3,501 Assets held for sale 21 1,598 - Current assets 16,683 16,064 Total assets 70,720 70,395 Equity Share capital 22 83 80 Share premium 23 10,502 7,846 Share option reserve 24 2,673 2,384 Revaluation reserve 26 167 174 Currency translation adjustment reserve 27 290 197 Retained earnings 18,521 14,207 Equity attributable to shareholders 32,236 24,888 Liabilities Loans and borrowings 28 18,598 21,544 Deferred tax liabilities 29 2,224 1,319 Contingent deferred consideration 30 - 1,993 Provisions 33 - 344 Trade and other payables 31 2,901 2,034 Non-current liabilities 23,723 27,234 Loans and borrowings 28 3,603 1,124 Trade and other payables 31 7,456 7,955 Current tax payable 32 702 1,176 Employee benefits 40 2,110 2,401 Contingent deferred consideration 30 890 5,617 Current liabilities 14,761 18,273 Total liabilities 38,484 45,507 Total equity and liabilities 70,720 70,395 These financial statements were approved by the board of directors on 25 May 2012. David Anderson Brian Conlon Chairman Chief Executive Officer Chief Financial Officer Graham Ferguson Registered company number: NI 30731 14 • FIRST DERIVATIVES PLC The notes on pages 21 to 73 form part of these financial statements. Company balance sheet Year ended 29 February 2012 2012 2011 Note £’000 £’000 Assets Property, plant and equipment 16 13,849 17,725 Intangible assets 17 5,933 3,183 Investment in subsidiaries 18 14,549 14,217 Investment in associate 18 7,196 7,196 Trade and other receivables 19 2,198 1,919 Deferred tax asset 29 1,084 1,468 Non current assets 44,809 45,708 Trade and other receivables 19 14,787 14,219 Cash and cash equivalents 20 962 2,956 Assets held for sale 21 1,598 - Current assets 17,347 17,175 Total assets 62,156 62,883 Equity Share capital 22 83 80 Share premium 23 10,502 7,846 Share option reserve 24 2,673 2,384 Fair value reserve 25 131 126 Retained earnings 16,266 13,406 Equity attributable to shareholders 29,655 23,842 Liabilities Loans and borrowings 28 17,147 21,544 Deferred tax liabilities 29 1,539 914 Trade and other payables 31 1,820 1,570 Non-current liabilities 20,506 24,028 Loans and borrowings 28 3,447 1,098 Trade and other payables 31 5,590 5,037 Current tax payable 32 798 1,489 Employee benefits 40 1,901 2,121 Contingent deferred consideration 30 259 5,268 Current liabilities 11,995 15,013 Total liabilities 32,501 39,041 Total equity and liabilities 62,156 62,883 These financial statements were approved by the board of directors on 25 May 2012. David Anderson Brian Conlon Chairman Chief Executive Officer Chief Financial Officer Graham Ferguson Registered company number: NI 30731 ACCOUNTS • 15 Consolidated statement of changes in equity Year ended 28 February 2011 Share Share Share Fair Revaluation Currency Retained Total capital premium option value reserve translation earnings equity The notes on pages 21 to reserve reserve adjustment 73 form part of these £000 £000 £000 £000 £000 £000 £000 £000 financial statements. Balance at 1 March 2010 72 3,906 983 Total comprehensive income for the year Profit for the year Other comprehensive income Deferred tax on share options outstanding Net exchange gains on net investment in foreign subsidiaries and associate Net exchange loss on hedge of net investment in foreign subsidiaries and associate Total other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Exercise of share options Issue of shares as purchase consideration Other issue of shares Share based payment charge Transfer on forfeit of share options Dividends to equity holders Total contributions by and distributions to owners - - - - - - 2 - 6 - - - 8 - - - - - - 445 251 3,244 - - - - 1,030 - 1,030 1,030 (118) - - 538 (49) - 3,940 371 Balance at 28 February 2011 80 7,846 2,384 - - - - - - - - - - - - - - - 174 694 10,481 16,310 - - - - - - - - - - - - - - - 5,112 5,112 - 1,030 (1,091) - (1,091) 594 (497) (497) - 594 - 533 5,112 5,645 - - - - - - - - 329 - 251 - 3,250 - 538 49 - (1,435) (1,435) (1,386) 2,933 174 197 14,207 24,888 16 • FIRST DERIVATIVES PLC Consolidated statement of changes in equity Year ended 29 February 2012 Share Share Share Revaluation Currency Retained Total The notes on pages 21 to capital premium option reserve translation earnings equity 73 form part of these reserve adjustment financial statements. £000 £000 £000 £000 £000 £000 £000 Balance at 1 March 2011 80 7,846 2,384 174 197 14,207 24,888 Total comprehensive income for the year Profit for the year Other comprehensive income Deferred tax on share options outstanding Change in effective rate of deferred tax Net exchange gains on net investment in foreign subsidiaries and associate Net exchange loss on hedge of net investment in foreign subsidiaries and associate Transfer on dilution of investment in associate Total other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Exercise of share options Issue of shares as purchase consideration Share based payment charge Transfer on forfeit of share options Dividends to equity holders Total contributions by and distributions to owners Balance at 29 February 2012 - - - - - - - - 1 2 - - - 3 83 - - - - - - - - 442 2,214 - - - - (309) - - - - (309) (309) (83) - 725 (44) - 2,656 10,502 598 2,673 - - 5 - - (12) (7) (7) - - - - - - - - - 214 (121) - 93 93 - - - - - - 167 290 5,946 5,946 - (5) - - 12 7 5,953 - - 44 (309) 214 (121) - (216) 5,730 360 2,216 725 - (1,683) (1,683) (1,639) 18,521 1,618 32,236 ACCOUNTS • 17 Company statement of changes in equity Year ended 28 February 2011 The notes on pages 21 to 73 form part of these financial statements. Share capital £000 Share premium £000 Share option reserve £000 Fair value reserve Retained earnings £000 £000 Total equity £000 Balance at 1 March 2010 72 3,906 983 126 10,328 15,415 Total comprehensive income for the year Profit for the year Other comprehensive income Net change in fair value of available for sale asset Deferred tax on share options outstanding Total other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Exercise of share options Issue of shares as purchase consideration Other issue of shares Share based payment charge Transfer on forfeit of share options - - - - 2 - 6 - - - - - - 445 251 3,244 - - - 1,030 1,030 1,030 (118) - - 538 (49) - - - - - - - - - 4,464 4,464 - - 4,464 - - - - 49 1,030 1,030 5,494 329 251 3,250 538 - Dividends to equity holders (1,435) Total contributions by and distributions to owners 8 3,940 371 - (1,386) 2,933 Balance at 28 February 2011 80 7,846 2,384 126 13,406 23,842 (1,435) - - - - 18 • FIRST DERIVATIVES PLC Company statement of changes in equity Year ended 29 February 2012 The notes on pages 21 to 73 form part of these financial statements. Share capital £000 Share premium £000 Share option reserve £000 Fair value reserve Retained earnings £000 £000 Total equity £000 Balance at 1 March 2011 80 7,846 2,384 126 13,406 23,842 Total comprehensive income for the year Profit for the year Other comprehensive income Change in effective rate of deferred tax Deferred tax on share options outstanding Total other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Exercise of share options Issue of shares as purchase consideration Share based payment charge Transfer on forfeit of share options Dividends to equity holders Total contributions by and distributions to owners Balance at 29 February 2012 - - - - - 1 2 - - - 3 83 - - - - - 442 2,214 - - - 2,656 10,502 - - (309) (309) (309) (83) - 725 (44) - 598 - 5 - 5 5 - - - - - - 4,504 4,504 (5) - (5) 4,499 - - - 44 - (309) (309) 4,195 360 2,216 725 - (1,683) (1,639) (1,683) 1,618 2,673 131 16,266 29,655 ACCOUNTS • 19 Consolidated cash flow statement Year ended 29 February 2012 The notes on pages 21 to 73 form part of these financial statements. 2012 2011 £’000 £’000 Cashflows from operating activities Profit for the year 5,946 5,112 Adjustments for: Net finance costs 1,101 914 Share of profit of associate (458) (841) Share of loss on dilution in associate 371 - Provision release (266) - Depreciation 592 475 Amortisation of intangible assets 1,821 1,532 Gain on sale of property, plant & equipment (528) - Equity settled share-based payment transactions 486 340 Tax expense 1,001 1,383 10,066 8,915 Changes in: Trade and other receivables (1,331) (2,711) Trade and other payables 196 880 Onerous provisions (78) (301) Taxes paid (699) (1,422) Net cash from operating activities 8,154 5,361 Cash flows from investing activities Interest received 2 7 Acquisition of subsidiaries, net of cash acquired - (585) Acquisition of property, plant and equipment (866) (842) Disposal of property, plant and equipment 2,705 - Acquisition of intangible assets (4,636) (3,477) Dividend received from associate 570 654 Payment of deferred consideration (3,316) (1,795) Net cash used in investing activities (5,541) (6,038) Cash flows from financing activities Proceeds from issue of share capital 360 3,579 Receipt of new long term loan 1,553 19,878 Repayment of borrowings (3,602) (19,426) Payment of finance lease liabilities (26) (66) Interest paid (767) (537) Dividends paid (1,683) (1,435) Net cash from financing activities (4,165) 1,993 Net (decrease)/increase in cash and cash equivalents (1,552) 1,316 Cash and cash equivalents at 1 March 2011 3,501 1,711 Effects of exchange rate changes on cash held (631) 474 Cash and cash equivalents at 29 February 2012 1,318 3,501 20 • FIRST DERIVATIVES PLC The notes on pages 21 to 73 form part of these financial statements. Company cash flow statement Year ended 29 February 2012 Cashflows from operating activities Profit before tax Adjustments for: Finance income Finance expense and foreign exchange loss Depreciation Amortisation of intangible assets Dividend from associate Equity settled share-based payment transactions Profit on disposal Tax expense Changes in: Trade and other receivables Trade and other payables Taxes paid Net cash from operating activities Cash flows from investing activities Interest received Acquisition of subsidiaries, net of cash acquired Acquisition of property, plant and equipment Disposal of property, plant and equipment Acquisition of intangible assets Dividend received from associate Payment of deferred consideration Net cash used in investing activities 2012 £’000 2011 £’000 4,504 - 1,279 293 277 (570) 392 (528) 918 6,565 (1,442) 1,420 (830) 5,713 - - (268) 2,705 (2,844) 570 (3,100) (2,937) 4,464 (6) 241 267 110 (654) 340 - 1,631 6,393 (3,089) 756 (1,053) 3,007 6 (585) (339) - (1,638) 654 (1,550) (3,452) Cash flows from financing activities Proceeds from issue of share capital 360 3,579 Receipt of new long term loan 1,553 19,878 Repayment of borrowings (3,602) (19,426) Interest paid (767) (529) Dividends paid (1,683) (1,435) Net cash from financing activities (4,139) 2,067 Net (decrease)/increase in cash and cash equivalents (1,363) 1,622 Cash and cash equivalents at 1 March 2011 2,956 860 Effects of exchange rate changes on cash held (631) 474 Cash and cash equivalents at 29 February 2012 962 2,956 NOTES • 21 Notes (forming part of the consolidated financial statements) 1 Significant accounting policies First Derivatives plc (“FDP” or the “company”) is a company incorporated and domiciled in Northern Ireland. The address of the company’s registered office is 3 Canal Quay, Newry, BT35 6BP. The company is primarily involved in the provision of a range of software and consulting services to the investment bank market, the derivatives technology industry and the provision of technology sales services to the IT sector. The financial statements were authorised by the Board of Directors for issuance on 25 May 2012. (a) Basis of preparation The consolidated financial statements consolidate those of the company and its subsidiaries (together referred to as the “group”) and equity account for the group’s interest in associates. The company financial statements present information about the company as a separate entity and not about its group. Both the consolidated financial statements and the company financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (“IFRSs”). On publishing the group financial statements together with the company financial statements, the company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by the group. The financial statements are presented in GBP, rounded to the nearest thousand, which is also the company’s functional currency. They are prepared on the historical cost basis, except that financial instruments classified as available-for-sale are stated at their fair value where this can be reliably measured. Going concern The group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the directors’ report on pages 7 to 9. The financial position of the group, its cash flows, liquidity position and borrowing facilities are described in the Chief Executive’s Review on pages 4 and 5 and below. In addition, note 2 to the financial statements includes the group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk, liquidity risk and market risk. The group meets its day to day working capital requirements through generated cash flows and loan facilities most of which are due for renewal in 2016. The group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the group should be able to operate within the level of its facilities. After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. Critical accounting estimates and judgements The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed and revised on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. 22 • FIRST DERIVATIVES PLC Notes (continued) 1 Significant accounting policies (continued) Information about critical judgements in applying accounting policies that have the most significant impact on the amounts recognised in the financial statements are as follows: • It is noted that management have assessed that all residences owned by the group are held for use within the business (except those classified as held for sale) and as such are classified as property, plant and equipment, rather than investment property • Management have estimated the amount of deferred consideration payable on the acquisitions of subsidiaries which is based on forecast results and certain other criteria as required by the terms of the sale and purchase agreements. Management have made prudent estimates of deferred consideration payable based on the relevant share purchase agreement. • Management have estimated the fair value of intangibles (including goodwill) acquired on acquisitions based on the projected profitability expected to be generated. The useful economic lives of the intangibles are assessed as being critical and are based on management’s estimate of the life over which revenue can be generated and taking cognisance of the useful economic lives of similar competitor products. Where an intangible asset has been created by the group, the value has been derived by establishing the current cost associated with generating this asset based on direct costs and reasonable allocations of indirect costs. • Useful economic lives of internally generated intangibles are assessed as being critical and are based on management’s estimate of the life over which revenue can be generated and taking cognisance of the useful economic lives of similar competitor products. • Goodwill on acquisitions is not amortised but is tested for impairment on an annual basis. Management have assessed goodwill for impairment based on the projected profitability of the individual cash generating unit to which the goodwill relates. No impairments have been identified. Other intangibles are tested for impairment if an indicator of impairment is identified. Management have assessed that there are no other estimates or judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities recognised in the financial statements. New standards and interpretations not adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 March 2011 and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements except for IFRS 9 Financial Instruments, which becomes mandatory for the group’s and company’s 2016 financial statements and could change the classification and measurement of financial assets. The group does not plan to adopt this standard early and the extent of this impact has not yet been determined. The standard and interpretations not adopted are outlined below: • Amendments to IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (mandatory for the year commencing on or after 1 July 2011). • Amendments to IFRS 7 Disclosures – Transfers of Financial Assets (mandatory for the year commencing on or after 1 July 2011). • Amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets (mandatory for the year commencing on or after 1 January 2012). • Amendments to IFRS 9 Financial Instruments (mandatory for the year commencing on or after 1 January 2015). NOTES • 23 Notes (continued) 1 Significant accounting policies (continued) • IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interest in other Entities and IFRS 13 Fair Value Measurement (mandatory for the year commencing on or after 1 January 2013). • IAS 27 Separate Financial Statements (2011) which supercedes IAS 27 (2008) and IAS 28 Investments in Associates and Joint Ventures (2011) which supercedes IAS 28 (2008) (mandatory for the year commencing on or after 1 January 2013). • Amendments to IAS 19 Employee Benefits (mandatory for the year commencing on or after 1 January 2012). • Amendments to IAS 1 Presentation of Financial Statements – Presentation of Items of Other Comprehensive Income (mandatory for the year commencing on or after 1 January 2012). (b) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the group. Control exists when the group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the group. In the company’s financial statements, investments in subsidiaries are carried at cost less any provision made for impairment. Investments in associates (equity accounted investees) Associates are those entities in which the group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method (equity accounted investees) and are initially recognised at cost. The group’s investment includes goodwill identified on acquisition, net of any subsequent accumulated impairment losses and fair value of intangibles (these amounts are not recognised separately in the consolidated financial statements but included in the group’s net investment in the associate (note 18)). The consolidated financial statements include the group’s share of the profit or loss and other comprehensive income, after adjustments to align the accounting policies with those of the group, from the date that significant influence commences until the date that significant influence ceases. When the group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments is reduced to nil and the recognition of further losses is discontinued except to the extent that the group has incurred legal or has constructive obligations or has made payments on behalf of an investee. In the company’s financial statements, investments in associates are carried at cost less any provision made for impairment. Transactions eliminated on consolidation Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 24 • FIRST DERIVATIVES PLC Notes (continued) 1 Significant accounting policies (continued) (c) Foreign currency i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency of the group entities at the exchange rate ruling at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Monetary liabilities designated as a hedge of net investments are treated as set out in note 1(c)(ii) below. Non-monetary assets and liabilities denominated in foreign currencies that are measured at historical cost are translated using the exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at exchange rate ruling at the date the fair value was determined. Foreign exchange differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of a financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective, which is recognised in other comprehensive income. Gains or losses arising on the retranslation of foreign currency contingent deferred consideration estimated as payable at the year end on acquisitions prior to 1 March 2011 are accounted as an adjustment to goodwill. On acquisitions on or after 1 March 2011 the gain or loss is accounted for in profit or loss. ii) Foreign operations The assets and liabilities of foreign subsidiaries, including goodwill and fair value adjustments arising on consolidation, are translated to the group’s presentational currency, GBP, at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at the foreign exchange rates ruling at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income and presented in the currency translation adjustment reserve in equity. However, if the operation is a non-wholly owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of, such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. Certain exchange differences arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and presented in the currency translation adjustment reserve in equity. Foreign currency differences arising on the retranslation of foreign currency loans designated as a hedge of net investments in a foreign operation are recognised in other comprehensive income to the extent the hedge, when designated in a hedge relationship which has been formally documented and performed in line with IAS 39:(Recognition and Measurement), is effective and are presented within other comprehensive income in the currency translation adjustment reserve. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged part of a net investment is disposed of, the associated cumulative amount in equity is transferred to profit or loss as an adjustment to the profit or loss on disposal. (d) Property, plant and equipment (i) Owned assets Items of property, plant and equipment are measured at cost less accumulated depreciation (see below) and accumulated impairment losses (see accounting policy on impairment, note 1(h) below). Cost includes expenditure that is directly attributable to the acquisition of the asset. NOTES • 25 Notes (continued) 1 Significant accounting policies (continued) When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment. The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of the property, plant and equipment and is recognised net within other expenses in profit or loss. When revalued assets are sold, any related amount included in the revaluation reserve is transferred to retained earnings. (ii) Leased assets Leases in terms of which the group 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 the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and are not recognised in the group’s statement of financial position. (iii) Subsequent costs The group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the group and the cost of the item can be measured reliably. All other costs are recognised in profit or loss as an expense as incurred. (iv) Depreciation Depreciation is calculated to write down the costs of parts of items to their residual values and is charged to profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives are as follows: Office furniture and equipment Plant and equipment Buildings – long leasehold and freehold - - - 25% straight line 25-50% straight line 2% straight line Items of property, plant and equipment are depreciated from the date that the asset is completed and ready for use. Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (e) Non-current assets held for resale Non-current assets that are expected to be recovered primarily through sale or distribution rather than through continuing use, are classified as held for sale or distribution. Immediately before classification as held for sale or distribution, the assets or components of a disposal group, are remeasured in accordance with the group’s accounting policies. Thereafter, generally the assets are measured at the lower of their carrying value and fair value less costs to sell. Impairment losses on initial classification as held for sale or distribution and subsequent gains and losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Intangible assets and property plant and equipment once classified as held for sale or distribution are not amortised or depreciated. 26 • FIRST DERIVATIVES PLC Notes (continued) 1 Significant accounting policies (continued) (f) Intangible assets and goodwill i) Goodwill Goodwill that arises on the acquisition of subsidiaries is recognised in intangible assets. Goodwill represents the difference between the fair value of consideration transferred and the net recognised amount of the identifiable assets acquired and the liabilities assumed. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable. Goodwill is measured at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee. Goodwill arising on subsidiaries and associates is not amortised. Negative goodwill arising on an acquisition is recognised immediately in profit or loss. ii) Research and development Expenditure on research activities undertaken with the prospect of gaining new technical knowledge and understanding, is recognised in profit or loss as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised in respect of software assets includes the cost of materials, direct labour and an appropriate proportion of overheads that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy impairment note 1(h)). Tax credits for research and development are recognised at their fair value based on amounts recoverable from the tax authorities in current and future years. A credit is recognised in the income statement against the related expense or recognised in the period in which the expenditure is amortised where the related expenditure is capitalised. iii) Other intangible assets Intangible assets other than goodwill that are acquired by the group are stated at cost less accumulated amortisation (see (v) below) and impairment losses (see accounting policy on impairment note 1(h)). The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return of all other assets that are part of creating the related cash flows. The fair value of other intangible assets acquired in a business combination is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. iv) Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognised in profit or loss as incurred. v) Amortisation Except for goodwill, intangible assets are amortised based on the cost of an asset less its residual value. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets, from the date that the asset is available for use as follows: NOTES • 27 Notes (continued) 1 Significant accounting policies (continued) Customer lists Acquired software Brands Developed software - - - - 12.5% straight line 12.5% straight line 12.5% straight line 12.5% straight line Amortisation methods, useful lives and residual values reviewed at each reporting dates and adjusted if appropriate. (f) Trade and other receivables Trade and other receivables are stated at amortised cost less impairment losses (see accounting policy impairment note 1(h). (g) Cash and cash equivalents Cash and cash equivalents comprises cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (h) Impairment (i) Non-derivative financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the assets and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the group on terms that the group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers in the group, economic conditions that correlate with defaults or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. (ii) Loans and receivables The group considers evidence of impairment for loans and receivables at both a specific asset and collective level. All individually significant receivables are assessed for specific impairment. All individually significant loans and receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables that are not individually significant are collectively assessed for impairment by grouping together loans and receivables with similar risk characteristics. In assessing collective impairment the group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. (iii) Non-financial assets The carrying amounts of the group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and assets that have an indefinite useful life or that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds its estimated recoverable amount. 28 • FIRST DERIVATIVES PLC Notes (continued) 1 Significant accounting policies (continued) (iii) Non-financial assets (continued) The recoverable amount of an asset or CGU 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 individually tested 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. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGU’s to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination, is allocated to the legal entity or business that has been acquired in a business combination. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and (group of CGUs) and then to reduce the carrying amount of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (i) Earnings per share The group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the group by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees, directors and as part of business combinations. (j) Loans and borrowings Loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, loans and borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over the period of the borrowings on an effective interest basis. (k) Employee benefits (i) Defined contribution plans The group operates a defined contribution (pension) plan for employees. A defined contribution plan is a post- employment benefit plan under which the group pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. (ii) Share-based payment transactions The share option programme allows group employees to acquire shares of the group. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using an adjusted Black-Scholes model, taking into account the terms and conditions upon which the options were granted. Measurement inputs include the share price on the measurement date, the exercise price of the instrument, expected volatility (based on an evaluation of the Company’s historic volatility, particularly over the historic period commensurate with the expected term and adjusted for recent volatility changes) expected term of the instruments (based on historical ACCOUNTS • 29 Notes (continued) 1 Significant accounting policies (continued) experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. On the lapse of share options on the vesting date the amount recognised in shares to be issued is transferred to retained earnings. On the exercise of share options, the amount recorded in shares to be issued is transferred to the share premium reserve. (iii) Short term benefits Liabilities for employee benefits for wages, salaries and annual leave entitlements represent present obligations resulting from employees’ services provided up to the reporting date and are calculated at undiscounted amounts based on remuneration wage and salary rates that the group expects to pay as at the reporting date. A liability is recognised for the amount expected to be paid under short-term cash bonus plans if the group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (l) Provisions A provision is recognised in the balance sheet when the group has a present legal or constructive obligation as a result of a past event, that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability. The unwinding of the discount is recognised as finance cost. (m) Trade and other payables Trade and other payables are stated at the discounted present value of the estimated outflows of funds. Where the maturity is six months or less they are not discounted and are shown at cost. (n) Revenue (i) Product and Services rendered Revenue from product and services rendered is measured at the fair value of the consideration received or receivable and is recognised in profit or loss in proportion to the stage of completion of the transaction at the balance sheet date. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due. The group does not have contracts involving a combination of products and services and negotiates prices separately for each component. Revenue in respect of each product or service is as follows: • Revenue from perpetual software licensing is recognised upon delivery to the customer where there are no significant vendor obligations remaining following delivery, the client has accepted the software and the collection of the resulting receivable is considered probable. • Revenue from annual licensing is recognised over the period to which the contract relates. • Revenue from consulting services is recognised in the month the service is performed, upon acceptance by the customer and the collection of the resulting receivable is considered probable. • In respect of customisation of software, revenue is recognised upon acceptance by the customer and the collection of the resulting receivable is considered probable. • Revenue from data management hosting, other hosting and transactional activities are recognised over the period to which the contract relates or the transaction occurs which gives rise to the receivable. In instances where a non-refundable fee is paid by the customer, the fair value of any significant obligations are deferred and recognised over the life of the contract and the remaining balance is recognised following delivery and the resulting receivable is considered probable. 30 • FIRST DERIVATIVES PLC Notes (continued) 1 Significant accounting policies (continued) (ii) Commissions When the group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognised is the net amount of commission earned by the group. Revenue is recognised upon acceptance by the customer of the sale. (iii) Government grants An unconditional government grant is recognised in the income statement as other operating income when the grant becomes receivable. Any other government grant is recognised in the balance sheet initially as deferred income and when there is reasonable assurance that it will be received and that the group has complied with the conditions attaching to it, a release is then made to the profit and loss as other income. Grants that compensate the group for expenses incurred are recognised as other operating income in profit or loss on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the group for the cost of an asset are recognised in profit or loss as other operating income on a systematic basis over the useful life of the asset. (o) Lease payments (i) Operating lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense, over the terms of the lease. (ii) Finance lease payments Minimum lease payments made under finance leases are apportioned between the finance charge and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (iii) Determining whether an arrangement contains a lease At inception of an arrangement, the group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the group the right to control the use of the underlying asset. At inception or upon reassessment of the arrangement, the group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the group’s incremental borrowing rate. (p) Finance income and expenses Finance income comprises interest receivable on funds invested and dividend income. Interest income is recognised in profit or loss as it accrues, using the effective interest method. The interest expense component of finance lease payments is recognised in profit or loss using the effective interest rate method. When an available for sale asset is derecognised, the cumulative gain or loss in equity is transferred to finance income or expense. Financing expenses comprises interest payable on borrowings calculated using the effective interest rate method, and foreign exchange gains and losses. NOTES • 31 Notes (continued) 1 Significant accounting policies (continued) (q) Taxation Tax expense on the profit or loss for the period presented comprises current and deferred tax. Current and deferred tax is recognised in profit or loss except to the extent that it relates to a business combination or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, those arising from the initial recognition of assets or liabilities acquired in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable they will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. In determining the amount of current and deferred tax the group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the company to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realised. (r) Classification of financial instruments issues by the group Following the adoption of IAS 32, financial instruments issued by the group are treated as equity only to the extent that they meet the following two conditions: • they include no contractual obligations upon the company (or group as the case may be) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the company (or group); and • where the instrument will or may be settled in the company’s own equity instruments, it is either a non- derivative that includes no obligation to deliver a variable number of the company’s own equity instruments or is a derivative that will be settled by the company’s exchanging a fixed amount of cash or other financial asset for a fixed number of its own equity instruments. To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. 32 • FIRST DERIVATIVES PLC Notes (continued) 1 Significant accounting policies (continued) (s) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. The nominal value of shares issued is recognised as share capital. The value of the consideration received in excess of the nominal value is recognised as share premium. (t) Segmental reporting An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the group’s other components. The operating results are regularly reviewed by the board and comprise one segment; however the information provided records revenue split between the various consulting and software activities. 2 Financial risk management Overview The group has exposure to the following risks from its use of financial instruments: • Credit risk • Liquidity risk • Market risk This note presents information about the group’s exposure to the above risks, the group’s objectives, policies and processes for measuring and managing risk, and the group’s management of capital. Further quantitative disclosures are included throughout these financial statements. Risk management framework The board of directors has overall responsibility for the establishment and oversight of the group’s risk management framework. The board is responsible for monitoring the group’s risk management policies, which are established to identify and analyse the risks faced by the group, to set appropriate risk limits and to monitor adherence to those policies. Credit risk Credit risk is the risk of financial loss to the group if a counterparty fails to meet its contractual obligation and principally arises from the group’s receivables from customers through selling on credit. This is managed through credit control procedures. Regular contact is made with customers when debts are overdue with follow up procedures carried out as required. Concentration of credit risk is disclosed in note 39 to the financial statements Liquidity risk Liquidity risk is the risk that the group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or other financial assets. The group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under normal and stressed conditions, without incurring unacceptable losses or risking damage to the group’s reputation. The group generates positive operating cash flows, and is able to meet its liabilities as they fall due. In addition the group has lines of credit identified in note 28 to the financial statements. NOTES • 33 Notes (continued) 2 Financial risk management (continued) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The group currently does not use derivative financial instruments to hedge its exposure to currency or interest rate risk. All loans are currently variable rate in nature, with the terms being at prevailing market interest rates. The level of trading and borrowings in foreign currency produces a natural hedge of a large proportion of the group's exposures to foreign currency movements on trading and investments. Certain borrowings in foreign currencies are designated as net investment hedges of foreign operations. Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business (capital is defined as share capital, share premium, retained earnings and shares to be issued). The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders. The group is not subject to external requirements in respect of its capital, with the exception of the need to comply with the level of ordinary shares available for trading on the Alternative Investment Market and Enterprise Securities Market, with which the group has complied in the current year. Additional shares in the group are made available to staff by the use of share option schemes as disclosed in the notes to the financial statements and as purchase consideration in business combinations. The Board seeks to maintain a balance between the higher returns that might be possible with higher level of borrowings and the advantages and security afforded by a sound capital position. 3 Acquisitions of subsidiaries and associates There were no acquisitions completed in 2012. 2011 acquisitions On 6 August 2010 the company obtained control of LakeFront Data Ventures Inc by acquiring all of the ordinary shares of the company. Acquiring LakeFront Data Ventures Inc enabled the group to establish a presence in Canada and expand its overall offering to its client base. In the 7 months to 28 February 2011 the subsidiary contributed revenue of £241k and net profit of £24k to the consolidated net profit for the year. If the acquisition had occurred on 1 March 2010, management estimates that revenue for the group would have been £37,153k and net profit would have been an estimated £5,153k. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 March 2010. The following summarises the major classes of consideration transferred and the recognised amounts of assets acquired and liabilities assumed at the acquisition date. 34 • FIRST DERIVATIVES PLC Notes (continued) 3 Acquisitions of subsidiaries and associates (continued) Effect of aquisitions The acquisitions had the following effect on the group’s assets and liabilities. Pre-acquisition carrying amounts £000 Fair value adjustments £000 Recognised values on acquisition £000 Acquiree’s net assets at the acquisition date: Intangible assets Trade and other receivables Deferred tax liability Net identifiable assets and liabilities Goodwill on acquisition Consideration paid, satisfied as follows: Cash Shares issued (82,602 shares) Cash consideration paid Cash (acquired) Net cash outflow - 16 - 16 419 - (119) 300 419 16 (119) 316 520 836 585 251 836 585 - 585 The trade and other receivables comprised gross contractual amounts of £16k of which no amounts were expected to be uncollectable at the acquisition date. Shares issued The number of ordinary shares issued (82,602 shares) was derived based on the average price of shares on the 20 days prior to 30 July 2010 (303.5 pence per share). The fair value of the ordinary shares issued based on the listed share price on the 6 August 2010, the effective date of control (312.5 pence per share) was not materially different. The impact would be to increase goodwill by £7k. Goodwill has arisen on the acquisition and reflects the future economic benefits arising from assets that are not capable of being identified individually and recognised as separate assets. The goodwill reflects the anticipated profitability and synergistic benefits arising from the combination and the ability to leverage off client relationships and knowhow. The group has carried out an impairment review of goodwill as at 28 February 2011 and 29 February 2012 has not identified any impairment (see note 17). NOTES • 35 Notes (continued) 3 Acquisitions of subsidiaries and associates (continued) Acquisition related costs The group incurred acquisition-related costs of £68k related to external legal fees and due diligence costs. The legal fees and due diligence costs have been included in administrative expenses in the group’s consolidated statement of comprehensive income. 4 Operating segments Business segments The group’s board of directors reviews internal management reports on a monthly basis. The reports provided to the board of directors focus on group performance. The information provided to the board does not report performance on a segmented income statement basis, however, contained within the group management accounts is a split of revenue, detailing the various consulting and software sales revenue figures throughout the group. This level of information is consistent with the directors’ view of the nature of the group’s business. Staff work in both areas of the business with substantial investment being made by the group in developing highly technical training which is provided to all staff to allow them to cover both software and consulting skills. Costs and assets are therefore not segmented nor presented on a segmental basis to the board of directors. The group has disclosed below certain information on its revenue by geographical location. Details regarding total revenues are presented in note 5. The group’s two revenue streams are separated as follows: • Consulting activities which includes services to capital markets; and • Software activities which includes the sale of intellectual property and related services. Revenue by division Total Segment Revenue Consulting 2011 £’000 2012 £’000 2012 £’000 Software 2011 £’000 2012 £’000 Total 2011 £’000 32,629 24,229 13,458 12,511 46,087 36,740 Geographical location analysis 2012 £’000 UK Rest of Europe 2012 2011 £’000 £’000 2011 £’000 America Australasia 2012 £’000 2011 2012 2011 2012 £’000 £’000 £’000 £’000 Total 2011 £’000 18,387 15,811 20,873 22,376 3,795 2,627 18,969 14,812 4,936 3,490 46,087 36,740 8,655 5,930 22,727 24,333 1,782 1,692 54,037 54,331 Revenue from external customers Non Current Assets Revenue generated and non-current assets located in Northern Ireland, the group’s country of domicile are not material and as such, have not been separately disclosed for either the current or prior year. Major customers The group has a key customer who individually generated more than 10% of group revenue in 2012. Revenue from this customer represents approximately £14,882k of the group’s total revenue. The revenue from this customer has been derived from 28 different independent decision making business units across seven global locations with no other unit accounting for more than 2.0%. In the prior year the same key customer accounted for more than 10% of group revenue. Revenues from this customer accounted for approximately £12,518k of the group’s total revenue. 36 • FIRST DERIVATIVES PLC Notes (continued) 5 Revenue Sale of goods Rendering of services Commissions 6 Other operating income Government grants Other income 2012 £’000 7,216 38,472 399 46,087 2012 £’000 1,411 3 1,414 2011 £’000 5,584 30,287 869 36,740 2011 £’000 1,890 84 1,974 During the year, employment grant income of £2,424k (2011: £646k) was claimed from Invest Northern Ireland. 7 Administrative expenses Rent, rates and insurance Telephone Accountancy, audit and legal expenses Advertising and marketing Depreciation and amortisation Payroll costs Listing expenses Bad debts (recovered)/written off Profit on disposal of property, plant and equipment Other 2012 £’000 1,259 360 623 418 2,413 3,669 131 (60) (528) 1,083 9,368 2011 £’000 939 327 378 263 2,007 3,315 175 381 - 938 8,723 NOTES • 37 Notes (continued) 8 Personnel expenses and numbers The average weekly number of persons (including the directors) employed by the group during the year is set out below: 2012 2011 Average no. Average no. Administration 65 58 Technical 544 397 609 455 The aggregate payroll costs of these persons were as follows: 2012 2011 £’000 £’000 Wages and salaries 24,699 19,159 Share based payments (see note 41) 669 340 Social security costs 2,459 1,386 Other pension costs 650 308 Less capitalised costs in research and development (4,622) (3,475) 23,855 17,718 Disclosed as: 2012 2011 £’000 £’000 Cost of sales 20,186 14,401 Administrative expenses 3,669 3,317 23,855 17,718 9 Finance income and expense 2012 2011 £’000 £’000 Interest income on bank deposits 2 7 Finance income 2 7 Loss on foreign currency translation of monetary assets (455) (198) Interest expense on bank loans (620) (649) Other interest (28) (74) Finance expense (648) (723) (914) Net finance expense recognised in profit or loss (1,101) Exchange gains and losses on net investments in foreign subsidiaries and associates and related effective hedges are recognised in the foreign currency translation reserve. 38 • FIRST DERIVATIVES PLC Notes (continued) 10 Statutory and other information Depreciation on property, plant and equipment: Owned assets Assets held under finance lease (Reversal of)/provision for impairment of trade receivables Amortisation of intangibles Rents payable in respect of operating leases Research and development costs expensed Auditor’s remuneration: KPMG Ireland Audit of these financial statements Audit of the subsidiary undertakings included in the consolidation Other services: Amounts receivable by the auditor (KPMG Ireland) in respect of: Audit of financial statements of subsidiaries pursuant to legislation All other services Other services relating to taxation Services relating to corporate finance transactions 2012 £’000 592 - (60) 1,821 513 1,360 52 15 11 - 130 - 2011 £’000 402 73 381 1,532 348 989 55 13 12 16 51 2 Amounts receivable by the company’s auditor in relation to 2011/2012 activities are £208k. 11 Tax expense 2012 2011 £’000 £’000 Income tax recognised in the income statement Current tax expense Current year 757 1,350 Adjustment for prior periods (365) 6 392 1,356 Deferred tax expense Origination and reversal of temporary differences 542 176 Adjustment for prior periods 159 (121) Change in tax rates (92) (28) 609 27 Total tax expense in income statement 1,001 1,383 NOTES • 39 Notes (continued) 11 Tax expense (continued) 2012 £’000 2011 £’000 Reconciliation of effective tax rate Profit excluding income tax 6,947 6,495 Income tax using the company’s domestic tax rate (26.2%) (2011: 28%) 1,818 1,819 Tax exempt income (148) (54) Expenses not deductible for tax purposes 34 60 Over provision in prior year (206) (28) Other differences 4 20 Profit of associate (23) (236) Foreign tax rate differences (422) (203) Reduction in tax rates (92) (28) Unrelieved overseas taxes 36 33 1,001 1,383 Following the 2012 budget statement, the main rate of UK corporation tax was reduced from 26% directly to 24% with effect from the 1 April 2012 and to 23% from 1 April 2013. Thereafter the main rate of UK corporation tax will continue to reduce by 1% per annum to 22% by 2014. It is expected that this gradual fall in the main corporation tax rate will result in a reduction of the groups future current tax charge. 12 Remuneration of directors The remuneration paid to the directors was: Aggregate emoluments (including benefits in kind) Company pension contributions Fees for provision of services Share option payment charge 2012 £’000 823 49 - 225 1,097 2011 £’000 454 42 285 88 869 During the period there were 4 directors accruing benefits under a defined contribution pension scheme (28 February 2011: 4). The aggregate emoluments and company pension contributions of the highest paid director (excluding fees paid for provision of services) amounted to £329k and £15k respectively during the year (2011: £125k and £21k respectively). 40 • FIRST DERIVATIVES PLC Notes (continued) 12 Remuneration of directors (continued) The directors are deemed to be the key management of the group. Directors emoluments Salary and Benefits (1) fees £’000 £’000 Share based payment £’000 2012 Total 2011 Total excluding excluding 2012 2011 Bonus pension pension Pension £’000 £’000 £’000 £’000 R D Anderson B G Conlon R G Ferguson A Toner K Cunnigham M G O’Neill P Brazel Total 42 150 150 120 126 50 29 667 - - - - 9 - - 9 5 - 119 100 - - 1 225 - 60 60 27 - - - 147 47 210 329 247 135 50 30 1,048 35 125 120 80 135 59 - 554 - 21 15 12 1 - - 49 Pension £’000 - 21 12 8 1 - - 42 1 Benefits include health and life assurance. Paul Kinney (resigned 11 March 2011) provided services to the company in the prior year amounting to £273k. No services were provided in the current year while he was a director. Directors interests Directors’ rights to subscribe for shares in the company are indicated below: Number of options At start Granted during the year of year At end of year Exercise Exercise price £ period Adrian Toner David Anderson Graham Ferguson - 175,000 60,000 - 10,000 175,000 175,000 175,000 - - 50,000 - - - Pat Brazel - 25,000 175,000 175,000 60,000 50,000 10,000 175,000 175,000 25,000 4.80 4.15 1.79 4.80 1.79 4.15 1.77 2014-2021 2014-2020 2011-2019 2014-2021 2013-2019 2014-2020 2013-2019 4.80 2014-2021 The average share price during the year was £4.93 (2011: £3.53) and the closing price at year end was £4.75 (2011: £4.24). NOTES • 41 Notes (continued) 13 Dividends 2012 2011 £’000 £’000 Final dividend relating to the prior year 1,187 976 Interim dividend paid 496 459 1,683 1,435 The dividends recorded in each financial year represent the final dividend of the preceding financial year and the interim dividend of the current financial year. The final dividend relating to the prior year amounted to 7.25 (previous year: 6.75) pence per share and the interim dividend paid during the year amounted to 3.00 (previous year: 2.90) pence per share. The cumulative dividend paid during the year amounted to 10.25 (previous year: 9.65) pence per share. After the respective reporting dates, the following dividends were proposed by the directors. The dividends have not been provided for and there are no income tax consequences. 2011 £’000 £’000 2012 8.15 pence per ordinary share (2011: 7.25 pence) 1,370 1,185 14 Company result Under Section 408 of the Companies Act 2006, the company is exempt from the requirement to present its own income statement. The profit after tax (after subtraction of foreign currency loss of £631k (2011: gain of £474k)) for the financial year of the company as approved by the Board was £4,504k (2011: £4,464k). 15(a) Earnings per ordinary share Basic The calculation of basic earnings per share at 29 February 2012 was based on the profit attributable to ordinary shareholders of £5,946k (2011: £5,112k), and a weighted average number of ordinary shares ranking for dividend of 16,510k (2011: 15,415k). Basic earnings per share 36.0 33.2 2012 Pence per share 2011 Pence per share 42 • FIRST DERIVATIVES PLC Notes (continued) 15(a) Earnings per ordinary share (continued) Weighted average number of ordinary shares 2012 Number ’000 2011 Number ’000 Issued ordinary shares at beginning of period Effect of share options exercised Effect of shares issued as purchase consideration Effect of shares issued for cash Weighted average number of ordinary shares at end of period 15,924 170 416 - 16,510 14,421 132 46 816 15,415 Diluted The calculation of diluted earnings per share at 29 February 2012 was based on the profit attributable to ordinary shareholders of £5,946k (2011: £5,112k) and a weighted average number of ordinary shares after adjustment for the effects of all dilutive potential ordinary shares of 18,128k (2011: 17,606k). Diluted earnings per share Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares (basic) Effect of dilutive share options in issue Weighted average number of ordinary shares (diluted) at end of period 2012 Pence per share 32.8 2011 Pence per share 29.0 2012 Number ‘000 16,510 1,618 18,128 2011 Number ‘000 15,415 2,191 17,606 The average market value of the group’s shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period the options were outstanding. At 29 February 2012, 600k options (2011: 315k) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive. NOTES • 43 Notes (continued) 15(b) Earnings before tax per ordinary share Earnings before tax per share are based on profit before taxation of £6,947k (2011: £6,495k). The number of shares used in this calculation is consistent with note 15(a) above. 2012 Pence per share 2011 Pence per share Basic earnings before tax per ordinary share Diluted earnings before tax per ordinary share 42.1 38.3 42.1 36.9 Reconciliation from earnings per ordinary share to earnings before tax per ordinary share. 2012 Pence per share 2011 Pence per share Basic earnings per share Impact of taxation charge Adjusted basic earnings before tax per share Diluted earnings per share Impact of taxation charge Adjusted diluted earnings before tax per share 36.0 6.1 42.1 32.8 5.5 38.3 33.2 8.9 42.1 29.0 7.9 36.9 Earnings before tax per share has been presented to facilitate pre-tax comparison returns on comparable investments. 15(c) Normalised earnings after tax per ordinary share Normalised earnings after tax per share are based on profit after taxation of £6,195k (2011: £4,415k). The adjusted profit after tax has been calculated by adjusting for the Group’s share of loss on dilution of investment in associate £371k (2011: nil), share of profit of associate £458k (2011: £841k) and loss on foreign currency translation after tax effect £336k (2011: £143k). The number of shares used in this calculation is consistent with note 15(a) above. Basic earnings after tax per ordinary share Diluted earnings after tax per ordinary share 37.5 34.2 28.6 24.4 2012 Pence per share 2011 Pence per share 44 • FIRST DERIVATIVES PLC Notes (continued) 16 Property, plant and equipment Group Land and buildings £’000 Plant and equipment £’000 Office furniture £’000 Total £’000 Cost At 1 March 2011 Additions Disposals Reclassification to assets held for sale Exchange adjustments At 29 February 2012 Depreciation At 1 March 2011 Charge for the year Disposals Reclassification to assets held for sale Exchange adjustments At 29 February 2012 Net book value At 29 February 2012 18,592 320 (2,352) (1,734) 29 14,855 922 242 (99) (136) - 929 13,926 1,143 545 - - - 1,688 587 326 - - 6 919 769 127 1 - - - 128 61 24 - - - 85 43 19,862 866 (2,352) (1,734) 29 16,671 1,570 592 (99) (136) 6 1,933 14,738 Land and buildings £’000 Plant and Office furniture Total equipment £’000 £’000 £’000 Cost At 1 March 2010 Additions Exchange adjustments At 28 February 2011 Depreciation At 1 March 2010 Charge for the year Exchange adjustments At 28 February 2011 Net book value At 1 March 2010 At 28 February 2011 18,296 297 (1) 18,592 696 227 (1) 922 17,600 17,670 696 489 (42) 1,143 385 232 (30) 587 311 556 72 56 (1) 127 45 16 - 61 27 66 19,064 842 (44) 19,862 1,126 475 (31) 1,570 17,938 18,292 The basis by which depreciation is calculated is stated in note 1. Land and buildings in the group of £15,524k (including £1,598k held as available for sale) have been independently valued by qualified external valuers at £18,915k on an open market basis. Details of security provided for borrowing in respect of property, plant and equipment are disclosed in note 28 NOTES • 45 Total £’000 18,990 268 (2,352) (1,734) 15,172 1,265 293 (99) (136) 1,323 Notes (continued) 16 Property, plant and equipment (continued) Company Land and buildings £’000 Plant and Office furniture equipment and equipment £’000 £’000 Cost At 1 March 2011 Additions Disposals Reclassification to assets held for sale At 29 February 2012 Depreciation At 1 March 2011 Charge for the year Disposals Reclassification to assets held for sale At 29 February 2012 Net book value At 29 February 2012 Cost At 1 March 2010 Additions At 28 February 2011 Depreciation At 1 March 2010 Charge for the year At 28 February 2011 Net book value At 1 March 2010 At 28 February 2011 18,567 179 (2,352) (1,734) 14,660 908 237 (99) (136) 910 13,750 Land and buildings £’000 18,283 284 18,567 682 226 908 17,601 17,659 67 1 - 68 52 8 - 60 356 88 - - 444 305 48 - - 353 91 8 13,849 Plant and Office furniture equipment and eequipment £’000 £’000 310 46 356 270 35 305 40 51 58 9 67 46 6 52 12 15 Total £’000 18,651 339 18,990 998 267 1,265 17,653 17,725 The basis by which depreciation is calculated is stated in note 1. No assets are held under finance leases. Details of security in respect of property, plant and equipment are disclosed in note 28. 46 • FIRST DERIVATIVES PLC Notes (continued) 17 Intangible assets and goodwill Group Goodwill Customer lists Acquired Brand name Software £’000 £’000 £’000 £’000 Internally developed software £’000 Total £’000 29,990 4,819 1,340 (1,354) 357 Cost Balance at 1 March 2011 Development costs Additions Adjustment to deferred consideration Exchange adjustments Balance at 29 February 2012 13,941 - - (1,354) 303 2,327 - - - 35 7,252 - 1,340 - 53 302 - - - 2 6,168 4,819 - - (36) 12,890 2,362 8,645 304 10,951 35,152 - - - Amortisation and impairment losses Balance at 1 March 2011 Exchange adjustment Amortisation for the year Balance at 29 February 2012 Carrying amounts At 29 February 2012 12,890 - 617 14 293 924 1,424 6 1,003 2,433 1,438 6,212 65 4 38 107 197 1,152 (4) 487 1,635 3,258 20 1,821 5,099 9,316 30,053 NOTES • 47 Total £’000 24,057 3,475 2 2,302 1,109 (955) Notes (continued) 17 Intangible assets and goodwill (continued) Goodwill Customer lists Acquired Brand name Software £’000 £’000 £’000 £’000 Internally developed software £’000 Cost Balance at 1 March 2010 Development costs Additions Adjustment to deferred consideration Acquisition through business combinations Exchange adjustments Balance at 28 February 2011 11,427 - - 2,302 690 (478) 13,941 Amortisation and impairment losses - - - Balance at 1 March 2010 Exchange adjustment Amortisation for the year Balance at 28 February 2011 Carrying amounts At 1 March 2010 11,427 At 28 February 2011 13,941 - 2,039 - - - 401 (113) 2,327 372 (30) 275 617 1,667 1,710 7,590 - 2 - - (340) 7,252 447 (21) 998 1,424 7,143 5,828 300 - - - 18 (16) 302 30 (2) 37 65 270 237 2,701 3,475 - - - (8) 6,168 29,990 930 - 222 1,152 1,771 5,016 1,779 (53) 1,532 3,258 22,278 26,732 The basis by which amortisation is calculated is stated in note 1. Amortisation is recognised in administration expenses. Included within development costs is £4,622k (2011: £3,475k) of capitalised employees costs, including £183k of capitalised share option costs (2011: £nil) together with £197k of capitalised consultancy costs (2011:£nil) for the year. Developed software includes £4,414k (2011: £2,913k) of software under development at 29 February 2012 not yet commissioned. The amortisation charge is recognised within the following line in the income statement: Administration expenses 2012 £000 1,821 2011 £000 1,532 During the year, the group conducted a review of the useful economic life of the intangible assets of First Derivatives (Ireland) Limited. Certain intangible assets, which management previously assessed as having a useful economic life of five years are now reassessed as having an eight year life. The effect of these changes on amortisation charge is recognised in administration expense, in both the current and future years. Amortisation has decreased by £103k in the current year, followed by a decrease of £70k per annum over years 2 to 4 and this will reverse in years 5 to 8. 48 • FIRST DERIVATIVES PLC Notes (continued) 17 Intangible assets and goodwill (continued) Impairment testing of goodwill The group tests goodwill annually for impairment on 28/29 February, or more frequently if there are indications that goodwill might be impaired. For the purposes of impairment testing, goodwill is allocated to divisions which represent the lowest level within the group at which goodwill is monitored, which is not higher than the statutory entity level summary. A statutory entity level summary of the goodwill is presented below: Subsidiaries Market Resource Partners LLC Reference Data Factory LLC Lepton Pty Limited First Derivatives (Ireland) Limited LakeFront Data Ventures Inc. Associate Kx Systems Inc. (included in note 18) 2012 £’000 9,602 1,100 1,493 166 529 12,890 4,008 2011 £’000 9,329 2,527 1,386 170 529 13,941 3,933 The recoverable amount of each cash generating unit (CGU) has been determined based on a value-in-use (VIU) calculation using cash flows derived from financial projections over a fifteen year period, with cash flows thereafter calculated using a terminal value methodology. A growth rate of 2% (2011: 2%) is assumed. The pre- tax discount rates applied to cash flow projections of the CGUs was 15% (2011: 15%). Projected cash flows are most sensitive to assumptions regarding future profitability and working capital investment. The values applied to these key assumptions are derived from a combination of external and internal factors, based on past experience together with management’s future expectations about business performance. Discount rates reflect the current market assessment of the risk specific to each CGU. The discount rate was estimated based on past experience and industry average weighted average cost of capital adjusted to reflect the market assessment of risks specific to each CGU for which the cash flow projections have not been adjusted. There was no impairment charge for the year ended 29 February 2012 (2011: Nil). For the purposes of performing sensitivity analysis, a change in the assumption to increase the discount rate by 0.5% or, separately, to reduce the terminal growth by 0.5% would not result in any indication of impairment. No reasonable change in assumption would indicate any impairment. NOTES • 49 Notes (continued) 17 Intangible assets and goodwill (continued) Company Internally developed software £’000 Cost Balance at 1 March 2011 Development cost Balance at 29 February 2012 Amortisation and impairment losses Balance at 1 March 2011 Amortisation for the year Balance at 29 February 2012 Carrying amounts At 29 February 2012 Cost Balance at 1 March 2010 Development cost Balance at 28 February 2011 Amortisation and impairment losses Balance at 1 March 2010 Amortisation for the year Balance at 28 February 2011 Carrying amounts At 1 March 2010 At 28 February 2011 4,222 3,027 7,249 1,039 277 1,316 5,933 2,584 1,638 4,222 929 110 1,039 1,655 3,183 Included within development costs is £3,027k (2011: £1,638k) of capitalised employees costs including £183k of capitalised share option costs (2011:£Nil) for the year. Developed software includes £2,784k (2011: £2,442k) of software under development at 29 February 2012 not yet commissioned. 50 • FIRST DERIVATIVES PLC Notes (continued) 18 Investment in subsidiaries and associate The group and company have the following investments in subsidiaries: Group Market Resource Partners LLC First Derivatives Holdings Pty Limited First Derivatives Pty Limited First Derivatives (Ireland) Limited Reference Data Factory LLC First Derivatives Holdings Inc First Derivatives US Inc First Derivatives No.1 Inc LakeFront Data Ventures Inc Market Resource Partners Limited Country of incorporation share held Class of Ownership 2011 2012 United States Australia Australia Ireland United States United States United States United States Canada N. Ireland Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Country of incorporation share held Class of Ownership 2011 2012 Company Market Resource Partners LLC First Derivatives Holdings Pty Limited First Derivatives (Ireland) Limited First Derivatives Holdings Inc First Derivatives No.1 Inc LakeFront Data Ventures Inc Market Resource Partners Limited United States Australia Ireland United States United States Canada N. Ireland Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% First Derivatives Holdings Pty Limited holds 100% of the ordinary shares of First Derivatives Pty Limited. First Derivatives Holdings Inc. holds 100% of the ordinary shares of Reference Data Factory LLc and First Derivatives US Inc. Market Resource Partners NI Limited was incorporated on 7th July 2010. Company Unlisted investments in subsidiaries at cost At 1 March 2011 Additions Increase of contingent deferred consideration Additional expenses from previous acquisitions Foreign exchange movement in contingent deferred consideration At 29 February 2012 2012 £’000 14,217 - 133 - 199 14,549 2011 £’000 11,652 836 1,981 11 (263) 14,217 NOTES • 51 Notes (continued) 17 Investment in subsidiaries and associate (continued) The increase in contingent deferred consideration in the prior year arises from a revaluation of contingent deferred consideration in line with increased performance of the subsidiary as per the terms of the relevant sale and purchase agreement. Associate The group’s share of profit in associates for the year was £458k (2011: £841k). The associate is not publically listed and consequently does not have a published share price. During the year, the group received dividends of £570k (2011: £654k) from its associate. Summary financial information for the year to 29 February 2012 for the associate for total assets, total liabilities, revenue and net profit was £11,345k (2011: £10,404k), £5,748k (2011: £6,083k), £9,586k (2011: £11,375k) and £3,329k (2011: £5,776k) respectively. The group has the following investment in an associate: Country of incorporation Class of Ownership share held 2012 2011 Group and Company Kx Systems Inc United States Ordinary 20.4% 21.9% Group At 1 March 2011 Dividends received Share of associate profit Share of loss on dilution in associate using the equity method Exchange adjustment At 29 February 2012 £’000 7,447 (570) 458 (371) 95 7,059 The directors are of the view that the fair value of the investment in Kx Systems is substantially in excess of its carrying value. The loss on dilution arises on the exercise of share options in Kx Systems at an exercise price less than the carrying value per share at which the group acquired its investment. £’000 At 1 March 2010 7,710 Dividend received (654) Share of associate profit 841 Exchange adjustment (450) At 28 February 2011 7,447 Company £’000 At 28 February 2011 and 29 February 2012 7,196 Goodwill arising on the associate was tested for impairment, see note 17. 52 • FIRST DERIVATIVES PLC Notes (continued) 19 Trade and other receivables Non current assets Receivables from subsidiaries Grant income receiveable 2012 £’000 - 437 437 Group 2011 £’000 - - - 2012 £’000 2,198 - 2,198 The repayment terms of the receiveable has been agreed as falling due after more than one year. Current assets Trade receivables Receivables from associates Receivables from subsidiaries Sundry receivables Prepayments Grant income receivable 2012 £’000 9,299 64 - 2,379 1,159 866 13,767 Group 2011 £’000 8,021 454 - 942 718 2,428 12,563 2012 £’000 4,871 64 7,832 180 753 1,087 14,787 Company 2011 £’000 1,919 - 1,919 Company 2011 £’000 4,698 454 5,995 1 643 2,428 14,219 At 29 February 2012 group and company trade receivables are shown net of an allowance for doubtful debts of £379k and £230k respectively (2011: group £440k; company £350k) arising from on-going invoice disputes and the risk of companies defaulting. The impairment loss reversal in the year was £60k (2011: charge £381k) for group and £120k (2011: charge £211k) for the company. The group’s and company’s exposure to credit and currency risks and impairment losses related to trade and other receivables is disclosed in note 39. 20 Cash and cash equivalents Bank balances 2012 £’000 1,318 Group 2011 £’000 3,501 2012 £’000 962 Company 2011 £’000 2,956 See note 39 for discussion of interest rate risk and sensitivity analysis. NOTES • 53 Notes (continued) 21 Assets held for resale Three properties are presented as held for sale following the commitment of management to a plan to dispose of the properties. Efforts to sell the properties have commenced and are expected to be concluded by August 2012. No impairment loss has been recognised as management expect to dispose of the properties at a profit. 2012 £’000 1,598 Group 2011 £’000 2012 £’000 Company 2011 £’000 - 1,598 - Property, plant and Equipment 22 Share capital On issue at 1 March Issued for cash Exercise of share options Issued in business combination Issued as payment of deferred consideration On issue at 29 February – fully paid 2012 15,923,953 - 258,168 - 450,915 16,633,036 Ordinary shares 2011 14,420,726 1,150,000 270,625 82,602 - 15,923,953 2012 Number 2012 £’000 2011 Number 2011 £’000 Equity shares Issued, allotted and fully paid Ordinary shares of £0.005 each 16,633,036 83 15,923,953 80 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. Shares increased in the year due to the exercise of 258,168 share options (2011: 270,625) for consideration of £360k (2011: £329k) together with an associated transfer from the share option reserve of £83k (2011: £118k), the issue of 450,915 shares (2011: 82,602) at £2,216k (2011: £251k) purchase consideration for outstanding deferred consideration on subsidiaries. 54 • FIRST DERIVATIVES PLC Notes (continued) 23 Share premium account Opening balance Premium on shares issued Closing balance 24 Share option reserve 2012 £’000 7,846 2,656 10,502 2012 £’000 2,384 Opening balance Fair value of share based payments cost (note 41) 725 Options exercised in the period (83) Effect of share option forfeits (44) Deferred tax on share based payments (309) Closing balance 2,673 Group 2011 £’000 3,906 3,940 7,846 Group 2011 £’000 983 538 (118) (49) 1,030 2,384 2012 £’000 7,846 2,656 10,502 2012 £’000 2,384 725 (83) (44) (309) 2,673 Company 2011 £’000 3,906 3,940 7,846 Company 2011 £’000 983 538 (118) (49) 1,030 2,384 The share option reserve comprises the charge for unexercised share options granted to employees and includes share options granted in consideration for the acquisition of business combinations net of deferred tax assets relating to the tax deduction receivable when the options are exercised. 25 Fair Value reserve Group 2012 2011 £’000 £’000 Opening balance Effect of corporation tax rate reduction on deferred tax asset 126 126 5 - Closing balance 131 126 The fair value reserve includes the cumulative net change in the fair value of available-for-sale financial assets until the investment is derecognised or impaired. The amount is retained in the company as the original investment was included at fair value in the carrying value of the associate when significant influence was obtained. NOTES • 55 Notes (continued) 26 Revaluation reserve Group 2012 2011 £’000 £’000 Opening balance 174 174 Transfer to retained earnings on loss of interest in associate (12) - Effect of corporation tax rate reduction on deferred tax asset 5 - Closing balance 167 174 For the purposes of the group, the revaluation of the available for sale asset prior to its reclassification as an associate, has been transferred to the revaluation reserve. 27 Currency translation adjustment reserve Group 2012 2011 £’000 £’000 Opening balance 197 694 Net gain/(loss) on net investment in foreign subsidiaries 119 (641) Net gain/(loss) on net investment in associate 95 (450) Net (loss)/gain on hedge of net investment in foreign subsidiaries (63) 351 Net (loss)/gain on hedge of investment in associate (58) 243 Closing balance 290 197 The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations and intercompany loans that are determined to form part of the net investment, as well as from the translation of liabilities that hedge the group’s net investment in a foreign subsidiary. 28 Loans and borrowings Current liabilities Secured bank loans Finance leases Non-current liabilities Secured bank loans Less: Capital arrangement fee Finance leases 2012 £’000 3,447 156 3,603 17,178 (31) 1,451 18,598 Group 2011 £’000 1,098 26 1,124 21,585 (41) - 21,544 2012 £’000 3,447 - 3,447 17,178 (31) 17,147 Company 2011 £’000 1,098 - 1,098 21,585 (41) - 21,544 56 • FIRST DERIVATIVES PLC Notes (continued) 28 Loans and borrowings (continued) Terms and debt repayment schedule The group had the following loan facilities with Bank of Ireland at the end of the year: £11,000,000 multi currency loan (Facility A) £8,000,000 multi currency loan (Facility B) $3,700,000 US dollar loan (Loan A) £2,500,000 sterling overdraft (Facility D) The terms and conditions of outstanding loans were as follows: 28 February 2012 Currency Nominal interest maturity Year of Face value rate Carrying Face value amount 28 February 2011 Carrying amount £000 £000 £000 £000 Facility A Facility B Facility C Facility D Loan A Finance Lease Finance Lease Total interest-bearing borrowings USD 2.25%+LIBOR* GBP 2.25%+LIBOR* GBP 3.00%+ LIBOR* 2.00%+LIBOR GBP 3%+ LIBOR USD 11% USD 4.375% EUR 2016 2016 2013 2013 2016 2012 2015 9,652 8,542 - 1,553 878 - 1,607 9,621 8,542 - 1,553 878 - 1,607 10,976 7,909 1,500 - 2,298 26 - 10,935 7,909 1,500 - 2,298 26 - 22,232 22,201 22,709 22,668 * In respect of these loans, the nominal interest rate varies as the group meets financial targets and these have been assessed as being closely linked to the underlying contract with a minimum rate available of 1.50%+LIBOR. The bank loans are secured over property, plant and equipment including assets held for sale with a carrying amount of £15,524k (2011: £17,725k). All outstanding loans have interest charged at 2.00%, 2.25% or 3.00% (2011: 2.25% or 3%) above LIBOR. Finance lease liabilities Finance lease liabilities are payable as follows: Group Future minimum lease payments 2012 £’000 Less than one year 224 Between one and five years 1,531 1,755 Interest 2012 £’000 68 80 148 Principal Future 2012 minimum lease payments 2011 £’000 £’000 156 1,451 1,607 28 - 28 Interest 2011 Principal 2011 £’000 £’000 2 - 2 26 - 26 The finance leases are secured over the leased equipment. NOTES • 57 Notes (continued) 29 Deferred taxation Group Deferred tax assets and liabilities are attributable to the following: 2012 £000 - 1,048 302 - - 400 1,750 Assets 2011 £000 4 1,427 228 - - 201 1,860 Liabilities 2011 £000 2012 £000 (1,633) - - (42) (549) - (2,224) (885) - - (47) (387) - (1,319) 2012 £000 (1,633) 1,048 302 (42) (549) 400 (474) Net 2011 £000 (881) 1,427 228 (47) (387) 201 541 Property, plant and equipment Share based payments Trading Losses Net fair value movement on available for sale assets Intangible assets Other Net tax assets/(liabilities) Movement in temporary differences during the year: Balance at Recognised Recognised Recognised in equity in income Share Balance at Recognised Recognised in equity 28 Feb in income 1 March 2010 £000 on acquisition £000 options exercised £000 £000 £000 Share Balance at 29 Feb 2012 £000 options xercised £000 Property, plant and equipment Share based payments Trading losses Net fair value movement on available for sale assets Intangible assets Other (506) 438 - (49) (124) 80 (161) £000 (375) 140 228 - (141) 121 (27) £000 - 1,030 - 2 (3) - 1,029 - - - - (119) - (119) - (181) - - - - (181) 2011 £000 (881) 1,427 228 (47) (387) 201 541 (752) 32 74 - (162) 199 (609) - (309) - 5 - - (304) - (102) - - - - (102) (1,633) 1,048 302 (42) (549) 400 (474) The basis by which taxation is calculated is stated in note 1. There is no unprovided or unrecognised deferred tax balances. 58 • FIRST DERIVATIVES PLC Notes (continued) 29 Deferred taxation (continued) Company Deferred tax assets and liabilities are attributable to the following: 2012 £000 Property, plant and equipment Share based payments Net fair value movement on available for sale assets Other Net tax assets/(liabilities) - 1,048 - 36 1,084 Assets 2011 £000 - 1,427 - 41 1,468 2012 £000 (1,497) - (42) - (1,539) Liabilities 2011 £000 (867) - (47) - (914) 2012 £000 (1,497) 1,048 (42) 36 (455) Net 2011 £000 (867) 1,427 (47) 41 554 Movement in temporary differences during the year: Balance at Recognised Recognised in equity in profit and loss £000 1 March 2010 £000 £000 Share Balance at Recognised Recognised in equity options exercised £000 28 Feb 2011 £000 in profit and loss £000 Property, plant and equipment Share based payments Employee benefits Net fair value movement on available for sale assets Other (461) 438 - (49) 37 (35) (406) 140 - - 4 (262) - 1,030 - 2 - 1,032 - (181) - - - (181) (867) 1,427 - (47) 41 554 (630) 32 - - (5) (603) Share Balance at 28 Feb 2012 £000 options exercised £000 - (102) - - - (102) (1,497) 1,048 - (42) 36 (455) £000 - (309) - 5 - (304) The basis by which taxation is calculated is stated in note 1. There is no unprovided or unrecognised deferred tax balances. NOTES • 59 Notes (continued) 30 Contingent deferred consideration Contingent deferred consideration liabilities are payable as follows: 2012 £’000 7,610 At 1 March (Decrease)/Increase in contingent deferred consideration (1,354) Foreign exchange movement in contingent deferred consideration Settled in year – cash Settled in year – share issue Settled in year – share option charge At 29 February 222 (3,316) (2,216) (56) 890 Group 2011 £’000 7,542 2,302 (241) (1,795) - (198) 7,610 2012 £’000 5,268 133 199 (3,100) (2,216) (25) 259 Company 2011 £’000 5,298 1,981 (263) (1,550) - (198) 5,268 The payment of contingent deferred consideration was paid in cash together with a share option charge in respect of share options issued as part of purchase consideration. The (decrease)/increase in contingent deferred consideration arises from a reassessment of contingent deferred consideration in line with (decreased)/increased performance of the subsidiary as per the terms of the relevant sale and purchase agreement. As at 29 February 2012 the maximum total amount payable under the terms of the sale and purchase agreements is £4,772k (2011: £9,557k) and the minimum total amount payable is £335k (2011: £5,268k). Less than one year Between one and five years 2012 £’000 890 - 890 Group 2011 £’000 5,617 1,993 7,610 2012 £’000 259 - 259 Company 2011 £’000 5,268 - 5,268 The amount of contingent deferred consideration is variable depending on the future performance of the relevant subsidiary. £859k (2011: £5,381k) of the group contingent deferred consideration is payable in cash, £Nil (2011: £2,068k) payable in a variable number of shares and £31k (2011: £161k) unamortised share option charge. 60 • FIRST DERIVATIVES PLC Notes (continued) 31 Trade and other payables Current liabilities Trade payables Other payables Accruals Deferred income including government grants Payables to subsidiaries Non current liabilities Deferred income in respect of government grants 2012 £’000 1,265 1,801 692 3,698 - 7,456 2012 £’000 2,901 Group 2011 £’000 1,195 2,210 662 3,888 - 7,955 Group 2011 £’000 2,034 2012 £’000 707 1,405 535 1,978 965 5,590 2012 £’000 1,820 Company 2011 £’000 667 1,766 598 1,771 235 5,037 Company 2011 £’000 1,570 The group and company’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 39. The group has claimed three government grants to date as follows: • Grant amounting to £5,122k, conditional on recruitment of additional staff. The grant is recognised as deferred income as additional staff are recruited and is being amortised over the period of the grant. • Grant amounting to £468k, conditional on the provision of staff training. It is recognised as other income as training is provided. • Grant amounting to £1,744k, conditional upon research and development expenditure. This is recognised as deferred income as expenditure is incurred and is being amortised over the useful life of the generated intangible. 32 Current tax payable Current tax payable 2012 £’000 702 Group 2011 £’000 1,176 2012 £’000 798 Company 2011 £’000 1,489 Notes (continued) 33 Provisions At 1 March 2011 Payments Release to income statement At 29 February 2012 At 1 March 2010 Payments At 28 February 2011 NOTES • 61 Group £’000 344 (78) (266) - 645 (301) 344 On the acquisition of the trade and assets of Cognotec Holdings Ltd in the 2010 certain contracts were identified that were deemed to be onerous in nature due to the requirement to deliver services for no additional income. This related to a prepayment made by a third party prior to the group’s purchase of the trade and assets of the business. The contracted service to be delivered for this payment had not been delivered at the time of the acquisition. The group had an obligation to refund the prepayment (payments made of £379k) and has renegotiated the remaining balance (£266k). No further amounts are due. 34 Capital and other commitments There was no capital or other commitments at the current or prior year end. 35 Leasing commitments Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years 2012 £’000 572 1,466 1,121 3,159 Group 2011 £’000 412 1,130 980 2,522 2012 £’000 140 560 840 1,540 Company 2011 £’000 140 560 980 1,680 The group leases four premises under operating lease arrangements. Group During the year £513k was recognised as an expense in the income statement in respect of operating leases (2011: £348k). Company During the year £140k was recognised as an expense in the income statement in respect of operating leases (2011: £140k). 36 Pension contributions The group makes contributions to the personal pension schemes of certain employees. The pension charge for the year amounted to £650k (2011: £308k). Contributions amounting to £101k (2011: £84k) were payable to the schemes at the year end and are included in creditors. 62 • FIRST DERIVATIVES PLC Notes (continued) 37 Related party transactions Group Key management personnel compensation The remuneration of the directors and rights to subscribe for shares as set out in note 12 is deemed to be the remuneration of key management personnel. Key management personnel and director transactions The Group is charged rent monthly for the use of apartments located in London owned by Brian Conlon. The charge incurred during the financial year amounted to £53k (2011: £53k). Rent deposits of £26k (2011: £26k) have been paid to the Brian Conlon in respect of these apartments. During the year the group incurred £40k (2011: £50k) expenditure with Glenmount Limited, a consultancy services company in which M O’Neill is a director. The balance owed to Glenmount at 29 February 2012 is £6k (2011: £10k). During the year, until the date of his resignation, the group incurred £nil (2011: £273k) expenditure with Ishtara Consulting Limited, a company in which P Kinney is a director for consulting services. The balance owed to Ishtara at 29 February 2012 is £nil (2011: £40k). A 15 year lease was entered into for the rental of office space for the head office in Newry. The lessor is Oncon Properties, a partnership owned by B Conlon and M O’Neill. £140k (2011: £140k) rental charge was incurred in the year. The balance owed to Oncon at 29 February 2012 is £nil (2011: £99k). Other related party transactions Associate Associate Company Other related party transactions Subsidiaries Associate 106 106 2012 £000 1,783 458 2,241 Commission earned Administrative expenses incurred from 2011 £000 2011 £000 2012 £000 2012 £000 458 458 869 869 121 121 303 303 Receivables outstanding 2011 2012 £000 £000 616 616 Payables outstanding 2011 £000 2012 £000 - - - - Revenue Administrative expenses incurred from 2011 £000 2011 £000 2012 £000 485 869 1,354 4,317 121 4,438 2,892 303 3,195 NOTES • 63 Notes (continued) 37 Party related transactions (continued) Subsidiaries Associates Receivables outstanding 2011 2012 £000 £000 10,030 106 10,136 7,914 616 8,530 Payables outstanding 2012 £000 965 - 965 2011 £000 235 - 235 The above associate receivables balances outstanding for group and company includes a trade receivable balance of £64k (2011: £454k) and a prepayment of £42k (2011: £162k). All outstanding trade receivable balances with the associate are on an arms length basis and are due to be settled in cash within six months of the reporting date. The balances are not secured. The group has a perpetual OEM agreement for the kbd+ software. In addition, the group has a sales partner agreement to regulate circumstances where it may assist the associate on the sale of its products. During the year development costs of £328k (2011: £677k) were recharged from a subsidiary to the company. Interest is charged on inter-company loans at market rates. 38 Ultimate controlling party There is no one party who is the ultimate controlling party of the group and company. 39 Financial instruments Fair values Group The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: 2012 Loans and receivables £’000 Liabilities at amortised cost £’000 Trade and other receivables Cash and cash equivalents Secured bank loans Finance leases Trade, accruals and other payables Employee benefits Contingent deferred consideration 13,045 1,318 - - - - - - - (20,625) (1,607) (3,758) (2,110) (859) Carrying amount Fair value £’000 13,045 1,318 (20,594) (1,607) (3,758) (2,110) (859) £’000 13,045 1,318 (20,594) (1,607) (3,758) (2,110) (859) 64 • FIRST DERIVATIVES PLC Notes (continued) 39 Financial instruments (continued) 2011 Loans and receivables £’000 Liabilities at amortised cost £’000 Trade and other receivables Cash and cash equivalents Secured bank loans Finance leases Trade, accruals and other payables Employee benefits Contingent deferred consideration Provisions 11,845 3,501 - - - - - - - - (22,683) (26) (4,067) (2,401) (7,610) (344) Carrying amount Fair value £’000 11,845 3,501 (22,642) (26) (4,067) (2,401) (7,610) (344) £’000 11,845 3,501 (22,642) (26) (4,067) (2,401) (7,610) (344) Company The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: 2012 Loans and receivables £’000 Liabilities at amortised cost £’000 Trade and other receivables Cash and cash equivalents Secured bank loans Trade, accruals and other payables Employee benefits Contingent deferred consideration 16,232 962 - - - - - - (20,625) (3,612) (1,901) (259) Carrying amount Fair value £’000 16,232 962 (20,594) (3,612) (1,901) (259) £’000 16,232 962 (20,594) (3,612) (1,901) (259) 2011 Loans and receivables £’000 Liabilities at amortised cost £’000 Trade and other receivables Cash and cash equivalents Secured bank loans Trade, accruals and other payables Employee benefits Contingent deferred consideration 15,495 2,956 - - - - - - (22,683) (3,266) (2,121) (5,268) Carrying amount Fair value £’000 15,495 2,956 (22,642) (3,266) (2,121) (5,268) £’000 15,495 2,956 (22,642) (3,266) (2,121) (5,268) NOTES • 65 Notes (continued) 39 Financial instruments (continued) Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Trade and other receivables Cash and cash equivalents Group Carrying amount 2011 £’000 11,845 3,501 15,346 2012 £’000 13,045 1,318 14,363 Company Carrying amount 2011 £’000 15,495 2,956 18,451 2012 £’000 16,232 962 17,194 All financial assets which are subject to credit risk are held at amortised cost. The maximum exposure to credit risk for trade and other receivables at the reporting date by geographical region was: Europe America United Kingdom Australasia 2012 £’000 2,667 4,949 3,666 1,763 13,045 Group 2011 £’000 1,063 4,061 6,211 510 11,845 2012 £’000 6,861 4,899 3,759 713 16,232 Company 2011 £’000 5,688 3,415 6,334 58 15,495 The maximum exposure to credit risk for trade and other receivables at the reporting date by type of counterparty was: End-user customer Other 2012 £’000 9,337 3,708 13,045 Group 2011 £’000 8,566 3,279 11,845 2012 £’000 5,040 11,192 16,232 Company 2011 £’000 5,152 10,343 15,495 The group’s most significant customer is an investment bank which accounts for £1,472k of the trade and other receivables carrying amount at 29 February 2012 (2011: £3,262k). No other customers had receivable balances in excess of 10% of the group’s total balance at the year end. In addition £1,303k (2011: £2,428k) is receivable from Invest Northern Ireland in respect of grants receivable. 66 • FIRST DERIVATIVES PLC Notes (continued) 39 Financial instruments (continued) Impairment losses The ageing of trade receivables at the reporting date was: Group Not past due Past due 0-30 days Past due 31-120 days Past due 120 days + Total Company Not past due Past due 0-30 days Past due 31-120 days Past due 120 days + Total Gross 2012 £’000 4,612 1,464 761 2,841 9,678 Gross 2012 £’000 3,192 757 425 727 5,101 Impairment 2012 £’000 - - - 379 379 Impairment 2012 £’000 - - - 230 230 Gross 2011 £’000 3,402 3,357 215 1,487 8,461 Gross 2011 £’000 2,202 2,409 69 368 5,048 Impairment 2011 £’000 - - - 440 440 Impairment 2011 £’000 - - - 350 350 The movement in the specific allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 March Impairment loss (reversed) /charged Amounts written off Balance at end of period 2012 £’000 440 (60) (1) 379 Group 2011 £’000 176 381 (117) 440 2012 £’000 350 (120) - 230 Company 2011 £’000 150 211 (11) 350 A review of debt outstanding led to the reversal of £60k previously included in the impairment provision. A specific impairment loss was incurred during the prior year with regard to concerns over the recoverability of debt relating to four customers mainly due to the economic circumstances of the customers. The group and company believe that the unimpaired amounts that are past due by more than 30 days are still collectible, based on historic payment behaviours. The above allowance for impairment for the group includes a collective based provision of £112k (2011: £82k). The allowance for impairment for the company is entirely specific. NOTES• 67 Notes (continued) 39 Financial instruments (continued) Liquidity risk Group The following are contractual maturities of financial liabilities, including estimated interest payments. 29 February 2012 Carrying Contractual amount cash flows £’000 £’000 6 mths 6-12 mths 1-2 years 2-5 years More than 5 years or less £’000 £’000 £’000 £’000 £’000 Secured bank loans Finance leases Trade and other payables Deferred consideration (20,594) (1,607) (3,758) (859) (26,818) (25,475) (1,755) (3,758) (859) (31,847) (2,881) (87) (3,758) (438) (7,164) (1,589) (137) - (421) (2,147) (3,045) (498) - - (3,543) (17,960) (1,033) - - (18,993) - - - - - 28 February 2011 Carrying Contractual amount cash flows £’000 £’000 6 mths 6-12 mths 1-2 years 2-5 years More than 5 years or less £’000 £’000 £’000 £’000 £’000 Secured bank loans Finance leases Trade and other payables Deferred consideration Other provision (22,642) (26) (4,067) (5,381) (344) (32,460) (27,012) (28) (4,067) (5,483) (344) (36,934) (1,120) (28) (4,067) (3,104) (50) (8,369) (1,120) - - (284) (50) (1,454) (3,163) - - (2,095) (100) (5,358) (21,609) - - - (144) (21,753) - - - - - The above contracted cash flows include interest on secured bank loans the terms of which are set out in note 28. 68 • FIRST DERIVATIVES PLC Notes (continued) 39 Financial instruments (continued) Company The following are contractual maturities of financial liabilities, including estimated interest payments. 29 February 2012 Carrying Contractual amount cash flows £’000 £’000 6 mths 6-12 mths 1-2 years 2-5 years More than 5 years or less £’000 £’000 £’000 £’000 £’000 Secured bank loans Trade and other payables Deferred consideration (20,594) (3,612) (259) (24,465) (25,475) (3,612) (259) (29,346) (2,881) (3,612) (259) (6,752) (1,589) - - (1,589) (3,045) - - (3,045) (17,960) - - (17,960) - - - - 28 February 2011 Carrying Contractual amount cash flows £’000 £’000 6 mths 6-12 mths 1-2 years 2-5 years More than 5 years or less £’000 £’000 £’000 £’000 £’000 Secured bank loans Trade and other payables Deferred consideration (22,642) (3,266) (3,039) (28,947) (27,012) (3,266) (3,039) (33,317) (1,120) (3,266) (2,929) (7,315) (1,120) - (110) (1,230) (3,163) - - (3,163) (21,609) - - (21,609) - - - - The above contracted cash flows include interest on secured bank loans the terms of which are set out in note 28. It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. Currency risk Group The group’s exposure to currency risk was as follows: CAD £000’s Trade receivables 947 Secured bank loans - Trade payables - Gross balance sheet exposure 947 29 February 2012 USD Euro £’000 £’000 249 - - 249 4,091 (453) - 3,638 CAD £000’s 171 - - 171 28 February 2011 USD £’000 Euro £’000 627 - - 627 2,901 (3,182) (65) (346) The secured bank loan above excludes bank loans designated in a net investment hedge of £10,036k (2011: £10,631k). NOTES • 69 Notes (continued) 39 Financial instruments (continued) Company The company’s exposure to currency risk was as follows: 29 February 2012 CAD £000’s Trade receivables 947 Secured bank loans - Trade payables - Gross balance sheet exposure 947 Euro £’000 215 - - 215 USD £’000 1,679 (453) - 1,226 28 February 2011 CAD £000’s 171 - - 171 Euro £’000 46 - - 46 USD £’000 1,805 (3,182) (41) (1,418) The following significant exchange rates applied during the year: USD 1 EUR 1 CAD 1 2012 1.60 1.16 1.59 Average rate Reporting date spot rate 2011 2011 2012 1.55 1.17 1.58 1.58 1.18 1.58 1.61 1.17 1.57 Sensitivity analysis A 10% strengthening of Sterling against the above currencies at the end of the period would decrease group equity and profit or loss by approximately £762k (2011: £45k). A 10% weakening of Sterling against the above currencies at the end of the period would increase group equity and profit or loss by approximately £762k (2011: £45k). This analysis assumes that all other variables, in particular interest rates, remain constant. Interest rate risks At the reporting date the interest profile of the group’s and company’s interest bearing financial instruments was: Variable rate instruments • Financial assets • Financial liabilities Fixed rate instruments • Financial assets • Financial liabilities 2012 £’000 - (20,625) (20,625) - (1,607) (1,607) Group 2011 £’000 - (22,683) (22,683) - (26) (26) 2012 £’000 - (20,625) (20,625) - - - Company 2011 £’000 - (22,683) (22,683) - - - A 10% reduction in interest rates at the end of the period would increase group equity and profit and loss by approximately £116k (2011: £124k). A 10% increase in interest rates at the end of the period would decrease group equity and profit or loss by approximately £116k (2011: £119k). This analysis assumes that all other variables remain constant. 70 • FIRST DERIVATIVES PLC Notes (continued) 40 Employee benefits Accrued holiday pay Employee taxes 41 Share based payments 2012 £’000 632 1,478 2,110 Group 2011 £’000 654 1,747 2,401 2012 £’000 517 1,384 1,901 Company 2011 £’000 527 1,594 2,121 Options have been granted as set out below under the group’s two share option schemes which are open to all directors and employees of the group. The key terms of all options issued are consistent, with all options subject to the completion of one, two, three and four years of service as set by the group prior to the grant of the option, with the exception of options issued as purchase consideration which include conditions relating to performance. As the options vest at annual intervals over a three year period, they are deemed to consist of three separate options for valuation purposes. Vested options are exercisable following the satisfaction of the service criteria for a period not exceeding 10 years from the date of grant. It is noted that share options which pre-date the scope of IFRS 2: (Share Based Payment), are not accounted for under this standard. The number and weighted average exercise prices of share options have been analysed into three exercise price ranges as follows: Weighted average exercise price 2012 Number Weighted average exercise price 2011 of options 2012 Maximum options outstanding at beginning of period Lapsed during the period Exercised during the period Granted during the period Maximum options outstanding at end of period Exercisable at end of period 1.31 1.14 1.30 - 1.33 1.24 1,790,375 (194,875) (227,833) - 1,367,667 630,000 1.28 1.41 1.03 - 1.31 1.24 Number of options 2011 2,076,000 (45,500) (240,125) - 1,790,375 780,000 The options outstanding at 29 February 2012 above have an exercise price in the range of £0.510 to £1.785 (2011: £0.510 to £1.785) and a weighted average contractual life of 5.6 years (2011: 6.7 years). Weighted average exercise price 2012 Number Weighted average exercise price 2011 of options 2012 Maximum options outstanding at beginning of period Lapsed during the period Exercised during the period Granted during the period Maximum options outstanding at end of period Exercisable at end of period 2.51 2.64 2.50 - 2.49 2.69 1,087,000 (125,000) (30,335) - 931,665 195,120 2.71 2.53 2.67 2.27 2.51 2.67 Number of options 2011 676,000 (69,500) (30,500) 511,000 1,087,000 200,000 The options outstanding at 29 February 2012 above have an exercise price in the range of £2.270 to £2.735 (2011: £2.270 to £2.735) and a weighted average contractual life of 7.1 years (2011: 8.1 years). NOTES • 71 Notes (continued) 41 Share based payments (continued) Weighted average exercise price 2012 Number Weighted average exercise price 2011 of options 2012 Number of options 2011 Maximum options outstanding at beginning of period Lapsed during the period Exercised during the period Granted during the period Maximum options outstanding at end of period Exercisable at end of period 4.15 - - 4.40 4.33 - 350,000 - - 1,011,600 1,361,600 - - - - 4.15 4.15 - - - - 350,000 350,000 - The options outstanding at 29 February 2012 above have an exercise price in the range of £4.150 to £4.800 (2011:£4.150) and a weighted average contractual life of 9.7 years (2011: 9 years). The weighted average share price at the date of exercise for share options exercised for the year ending 29 February 2012 was £4.95 per share (2011: £3.310). The fair value of services received in return for share options granted is based on the fair value of share options granted, measured using an adjusted Black Scholes model, with the following inputs: Grant of options on 20 December 2011 Fair value of share options and assumptions Fair value at grant date Share price at grant date Exercise price Number of options Expected volatility (weighted average volatility) Option life (expected weighted average life) Expected dividends Risk-free interest rate (based on government bonds) Grant of options on 3 March 2011 Fair value of share options and assumptions Fair value at grant date Share price at grant date Exercise price Number of options Expected volatility (weighted average volatility) Option life (expected weighted average life) Expected dividends Risk-free interest rate (based on government bonds) 2012 1.22 4.80 4.80 250,000 30% 3 years 0.1% 4.0% 2012 1.19 4.27 4.27 90,000 30% 3.5 years 0.1% 4.0% 72 • FIRST DERIVATIVES PLC Notes (continued) 41 Share based payments (continued) Grant of options on 3 March 2011 Fair value of share options and assumptions Fair value at grant date Share price at grant date Exercise price Number of options Expected volatility (weighted average volatility) Option life (expected weighted average life) Expected dividends Risk-free interest rate (based on government bonds) Grant of options on 21 November 2010 Fair value of share options and assumptions Fair value at grant date Share price at grant date Exercise price Number of options Expected volatility (weighted average volatility) Option life (expected weighted average life) Expected dividends Risk-free interest rate (based on government bonds) Grant of options on 3 March 2010 Fair value of share options and assumptions Fair value at grant date Share price at grant date Exercise price Number of options Expected volatility (weighted average volatility) Option life (expected weighted average life) Expected dividends Risk-free interest rate (based on government bonds) 2012 0.98 4.27 4.27 671,600 30% 2.5 years 0.1% 4.0% 2011 1.52 4.15 4.15 350,000 40% 4 years 0% 4% 2011 0.83 2.27 2.27 511,000 40% 4 years 0% 4% The adjustments made to the standard Black Scholes model are those required to reflect more clearly the company’s experience relating to key assumptions. NOTES • 73 Notes (continued) 41 Share based payments (continued) Employee expenses 2012 2011 £’000 £’000 Expense relating to: Share options granted in 2007/08 – equity settled - 7 Share options granted in 2009/10 – equity settled 64 145 Share options granted in 2010/11 – equity settled 296 188 Share options granted in 2011/12 – equity settled 126 - Total expense recognised as employee benefit expense 486 340 Capitalised expenses Amounts relating to: Share options granted in 2011/12- equity settled 183 - Total amount recognised as software development cost 183 - Business combinations Amount relating to: Share options granted in 2009/10 – equity settled 56 198 Total amount recognised in share based payment reserve 725 538 42 Contingencies Government grants A portion of grants may become repayable should the conditions of offer cease to be met. The repayment of the employment grant is contingent on the maintenance of employment levels to May 2014, February 2016 and October 2016 in relation to the respective grants. 74 • FIRST DERIVATIVES PLC About Delta Launched in 2008, Delta is a comprehensive suite of high performance real-time trading, CEP, market data and risk management applications. Flagship trading products include Delta Flow, Delta Algo, Delta Margin and Delta Stream which are used in high volume, low latency environments. NOTES • 75 Notes 76 • FIRST DERIVATIVES PLC Notes NOTES • 76 Notes 78 • FIRST DERIVATIVES PLC Notes NOTES • 79 Notes 80 (cid:129) FIRST DERIVATIVES PLC Corporate Directory UK & Ireland Registrars Neville Registrars Ltd. Neville House 18 Laurel Lane Halesowen West Midlands B63 3DA Telephone: +44 121-585 1131 Fax: +44 121 585 1132 PR Stakeholder Communications 2 Donegal Square East, Belfast BT1 5HB Northern Ireland Telephone: +44 (0)28 9033 9949 Email: info@stakeholdergroup.com Website: www.stakeholdergroup.com Walbrook Public Relations 4 Lombard Street, London EC3V 9HD Telephone:+44 (0)20 7933 8780 Email: info@walbrookpr.com Website: www.walbrookpr.com Brokers Charles Stanley Securities 25 Luke Street London EC2A 4AR United Kingdom Telephone: +44 (0) 207 149 6000 Fax: +44 (0) 207 149 6777 Website: www.csysecurities.com IEX Brokers Goodbody Stockbrokers Ballsbridge Park Ballsbridge Dublin Ireland Telephone: +353 1 614 0600 Fax: +353 1 667 2111 Email: support@goodbody.ie Website: www.goodbody.ie Solicitors Mills Selig 21 Arthur Street Belfast BT1 4GA Northern Ireland Telephone: +44 28 9024 3878 Fax: +44 28 9023 1956 Email: info@nilaw.com Website: www.millselig.com Auditors KPMG Stokes House 17-25 College Square East Belfast BT1 6DH Telephone: +44 (0)28 90243377 Fax: +44 (0)28 90893893 Website: www.kpmg.ie Global Directory UK & Ireland Head Office First Derivatives plc 3 Canal Quay Newry Co. Down N. Ireland BT35 6BP Telephone: +44 28 3025 2242 London Fifth Floor 9 Devonshire Square London EC2M 4YF UK USA & Canada New York 45 Broadway Suite 2040 New York NY 10006 USA Telephone: +1 (212) 447-6700 Philadelphia 1880 JFK Boulevard 19th Floor Philadelphia PA19103 USA Asia Pacific Sydney Suite 713 1C Burdett Street Hornsby NSW 2076 Australia Belfast Suite B First Floor 11-13 Gloucester Street Belfast Co. Antrim N. Ireland BT1 4LS Dublin 1st Floor Fleming Court Flemings Place Mespil Road Dublin 4 Ireland New Jersey 14 Vervalen Street Closter NJ 07624 USA Toronto First Canadian Place 100 King Street West Suite 5600 Toronto M5X 1C9 Canada Adelaide Rose Park House 30 Kensington Road Rose Park SA 5067 Australia First Derivatives PLC info@firstderivatives.com www.firstderivatives.com 

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