K E Y W O R D S S T U D I O S P L C A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 Transformational growth Annual Report and Accounts 2014 Keywords is the leading international technical services provider to the global games industry. Established in Dublin in 1998, it now has operations in Montreal, Rio de Janeiro, Los Angeles, Seattle, Tokyo, Singapore, New Delhi, Pune, Rome, Milan, Barcelona and London. It provides art creation, audio recording, localisation, testing, and customer support services across 50 languages and 12 games platforms to a blue chip client base in more than 15 countries. Its customers comprise many well-known multinational games publishers and developers including 20 out of the 25 largest games companies by revenue*. “Following a successful year in which we delivered strong organic and acquisitive growth, taking the business into complementary services and new geographies, we are now the only international provider of the full range of integrated services in a highly fragmented video games services market. As a result, we look forward with confidence to making further progress as we move through the current year and beyond.” Ross Graham Chairman Strategic Report 1-19 At a Glance Highlights 2014-2015 Chairman’s Statement Market Outlook Our Strategy Business Model Chief Executive’s Review Financial and Operating Review Governance Report 20-30 Board of Directors Directors’ Report Directors’ Remuneration Report Directors’ Remuneration Policy Report Independent Auditor’s Report Financial Statements 31-62 Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows IFC 1 2 4 6 8 10 17 20 22 25 27 29 31 32 33 34 Company Statement of Financial Position 35 Company Statement of Changes in Equity 36 Company Statement of Cash Flows Notes Forming Part of the Consolidated Financial Statements Company Information Contacts 37 38 62 IBC Visit the website for further information www.keywordsintl.com * Source: Newzoo, July 2014. At a Glance Transformational growth through international expansion The Group now has 14 studios strategically located to provide full, integrated services to local and global clients in key gaming clusters across three continents. Since early 2014, we have expanded organically and by acquisition into new locations including Barcelona, London, Los Angeles, Milan, New Delhi, Pune, Rio de Janeiro and Singapore. Montreal Seattle Los Angeles Rio de Janeiro ART CREATION SERVICES The creation of graphical art assets for inclusion in the video game including concept art creation, 2D and 3D art asset production and animation AUDIO/VOICEOVER SERVICES Multi-language voiceover, original language voice recording and related services LOCALISATION SERVICES Translation of in game text, audio scripts, cultural and local adaptation, accreditation, packaging and marketing materials FUNCTIONAL TESTING Quality assurance including discovery and documentation of game defects and testing to verify the game’s compliance with console manufacturers specifications LOCALISATION TESTING Testing for out of context translations, truncations, overlaps, spelling, grammar, age rating issues and console manufacturer compliance requirements in over 30 languages using native speakers CUSTOMER SUPPORT 24/7, multilingual customer support for games in live operation, forum monitoring and moderation services, and social media engagement on behalf of the game brand SELECTED CLIENTS London Tokyo Barcelona Milan Rome New Delhi Dublin (HQ) Pune Singapore 50 12 20 Providing integrated services across 50 languages and 12 games platforms to a blue chip client base in over 15 countries serving 20 of the top 25 games companies by revenue 14 from 14 studios worldwide Highlights 2014 – 2015 OPERATIONAL HIGHLIGHTS Strong organic growth; revenues up 23% excluding all acquisitions: • Continued to gain market share adding clients like Ankama, Bioware, Carbine, Frontier Developments, Nexon and Tencent; and • Invested in new Singapore operation to support Electronic Arts’ move to outsourced services in South East Asia. Significantly extended service capabilities and geographical reach through four acquisitions: • Liquid Violet, acquired in January 2014, extended our audio services offering; • Babel Media, the only other full service provider in the industry, was acquired in February 2014, giving Keywords good exposure to Functional Testing and a presence in India; FINANCIAL HIGHLIGHTS • Binari Sonori, acquired in May 2014, further strengthened our audio and localisation services, giving the Group a presence in Milan and Los Angeles; and • Lakshya Digital, acquired in October 2014, provided an entry into art outsourcing and giving Keywords visibility further up the game development supply chain. Delivered operational synergies in Montreal and in New Delhi through rationalising top management and co-locating production facilities with those acquired. Group revenue (m) €37.3m h130% 40 30 20 10 0 €37.3 €16.2 2013 2014 Total dividend (p) 1.10p h10% 1.2 0.8 0.4 0 1.00 1.10 2013 2014 Adjusted profit before tax (m)1 Adjusted basic earnings per share (c)1 €5.1m h104% 6 4 2 0 €5.1 €2.5 2013 2014 8.54c h48% 8 6 4 2 0 8.54 5.76 2013 2014 Total Group revenue 2014(13)(m) €37.3m(€16.2m) h130% 13% 2% 8% 2% 14% 33% 32% 57% 39% Outer circle: 2014 Inner circle: 2013 Localisation Services Localisation Testing Audio/Voiceover Services Functional Testing Art Creation Services 1 Before acquisition and integration expenses of €1.5m (2013: nil), IPO expenses of nil (2013: €1.12m), share option charges of €0.2m (2013: €0.1m), amortisation of intangibles of €0.5m (2013: nil) and foreign currency gains of €0.5m (2013: losses of €0.1m). 1 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report Chairman’s Statement Strong financial performance and delivery on strategy The business in 2014 In last year’s statement, my first for Keywords as a listed company, I set the scene describing my initial view of the Company, its business ethos and culture and the opportunities for organic and acquisitive growth in a fragmented market. I am pleased to be able to report that, in its first full year as a listed company, Keywords has clearly delivered its strategy with a strong financial performance during the year and four well- conceived and executed acquisitions. During 2014 the business has more than met the Board’s ambitious expectations. Organic revenue growth of 23% has been augmented by four acquisitions (with two further small purchases after the financial year end) such that annualised revenues have grown three-fold since our IPO in 2013. These new businesses are integrating well within Keywords – maintaining their own brands while absorbing the Keywords’ culture, its efficient way of working and its strong financial controls. The acquisitions have resulted in a change in the business mix, making the Group much broader and better balanced and they have opened up opportunities that it simply could not have delivered without all of its current constituents. An important criteria for an acquisitive company is to improve continuously its quality of earnings – sheer growth on its own can prove an illusory achievement. Here, I believe, we have measured up well. In particular, we are very encouraged by the fact that customers, old and new, are increasingly using Keywords, and the Board believes that the introduction of Keyword’s approach to operational efficiency in the new companies will continue to drive margin improvement over time. People & culture Last year I commented on the Keywords’ culture engendering a “can do” attitude founded on the value placed in our people – this attribute is well reflected in how much they actually “have done”. The Group is ahead of plan in terms of both acquiring new service lines (such as the acquisition of Lakshya Digital in October 2014 which took Keywords into the large Art Outsourcing market for the first time) and the establishment of offices in locations closer to key clients (such as the recent acquisition of an office in Brazil and the establishment of the studio in Singapore). Recently the leadership team from round the world came together for two days of strategy and operational exchanges. At this event, it was clear that Keywords now benefits from even greater strength in the depth of its leadership team and that this team is excited to work together with collective ambition, boding well for the future. However, the Group is not just reliant on its leaders and I would like to thank each and every person within the organisation for their individual contributions (going the extra mile) to Keywords’ achievements and transformation during the year. Shareholders & dividend During the year, the Group raised a further £6.0m through a well-supported institutional placing and we would like to thank shareholders for their ongoing support as we continue to focus on delivering shareholder value through our organic and acquisitive growth strategy. However, we are looking at augmenting our investor relations efforts to ensure the Group’s strong overall performance and enhanced positioning is better reflected in the share price. The Board is proposing a final dividend of 0.74p, which gives a total dividend for the year of 1.10p and represents an increase of 10% compared to the total dividend of 1.00p in 2013. This increase is consistent with our progressive dividend policy which takes into account the financial performance of the Group and the alternative uses of funds that will deliver shareholder value. Current trading and prospects The Group has made a good start to the year. Having already delivered strong organic and acquisitive growth, in line with our strategy, and taken the business into complementary services such as art outsourcing and customer support, we are now well positioned as the “go to” organisation for outsourcing and integrated services in the video games market. As importantly, Keywords is now known as the leading consolidator in the market and attracts automatic interest from vendors and management teams wishing to join a larger, more diverse group. 2 KEYWORDS STUDIOS PLC “ Having delivered strong organic and acquisitive growth and taken the business into complementary services such as art outsourcing and customer support, we are now well positioned as the “go to” organisation for outsourced and integrated services in the video games market.” Keywords Services 20 of the Top 25 Games Companies by Revenue*... As a market leader with a strong financial position we are well placed to deliver on the potential for high margin growth we see in our growing markets, both traditional and emerging. We expect to benefit in 2015 from a more settled console games market, the full year effects of acquisitions made during 2014 and continued growth both organically and through additional selective acquisitions, as we further consolidate our market leadership. We, therefore, look forward with confidence to making further progress as we move through the current year and beyond. Ross K Graham Chairman April 14, 2015 Download 200,000+ brand logos in vector format for free http://www.logoeps.com/ … and 7 of the Top 10 Mobile Games Developers by Revenue** * Source: Newzoo, Top 25 Games Companies by Revenues, July 2014. ** Source: PocketGamer.Biz, Top 50 Developers of 2015, March 2015. 3 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report Market Outlook The leading provider in a fast growing market The global video games market is predicted to grow significantly, with Newzoo forecasting a CAGR of 8.1% from $70.4bn in 2012 to $102.9bn in 2017.* Key market drivers The following trends in the games industry are taking video gaming into new markets both geographically and demographically; they are making content more dynamic and continuous, as games developers seek to keep users engaged for longer; they are enabling increases in the size and definition of the graphical and audio content for which our services are used; and as a result of the increased complexity they are underpinning a trend towards outsourcing of art, audio, localisation, testing and customer care services: #1: The proliferation of games platforms: beyond retail packaged console and PC games, to online, social, mobile and cloud-based gaming. Console and PC packaged games currently represent almost half of all games software revenues, but mobile, social and online gaming are growing at a faster rate (Newzoo predicts that the mobile games market will double in size from $17.6bn in 2012 to $35.4bn in 2017). This proliferation of gaming platforms is increasing accessibility to gamers, opening up new: • geographical markets, given the absence of the requirement for relatively expensive console systems or landline based internet connectivity, development of mobile gaming in particular has opened up new geographical markets. Whilst the U.S.A. historically represented the largest video games market in the world, high rates of growth are now being seen in Asia and South America and many other emerging gaming markets which have little history of console or PC gaming. • demographic markets, a recent survey of the US entertainment software market by the Entertainment Software Association reveals that of 48% of all game players are women and that the average age of a gamer is 312 demonstrating that the market has moved well beyond the average gamer being a young male. #2: The introduction of new monetisation models: beyond traditional retail sales to free to play with in-game purchases and advertising and bolt-on content models. The industry is shifting away from traditional retail sales of static boxed games towards a model in which games are provided as a service with new monetisation models which include generating revenues from subscriptions, in-game purchases of digitally distributed dynamic content, advertising and ongoing upgrades which are downloadable and extend the lifetime value of the game. With new content continually produced by developers to support these models, games content now evolves considerably after its initial launch and has become richer and more complex overall. Games content is, therefore, predicted to grow at a faster rate than the overall market, whilst the need for art, localisation and testing support has extended well beyond the games’ initial sale towards a continual requirement which is also driving an increased need for player support services as the game evolves. 2 2014 Essential Facts About the Computer and Video Game Industry. 4 #3: The increased performance of games platforms: new generation consoles from Sony and Microsoft and the introduction of virtual reality hardware including by Facebook and Sony. The evolution in games platforms, which have become ever more sophisticated, with more powerful processors and larger storage capabilities, is supporting significantly more complex, rich and interactive content. As this illustration of lead character, Lara Croft, from Tomb Raider shows, the definition of video games graphics has dramatically improved over time and with this the size of data and the effort to create such detailed art work has risen exponentially. The image on the left is from the 1996 release of the game while that on the right is from 2014’s Tomb Raider, The Definitive Edition. The PlayStation 4 and Xbox One consoles were launched in November 2013 and, given the step change in their capabilities, are selling at a faster rate than the previous generations, creating a quicker transition in the industry from developing content for old consoles to focusing to a greater extent on new, more complex content for new consoles than in previous cycles. KEYWORDS STUDIOS PLC As a result of the increasing complexity of the creation of content, global marketing and ongoing support requirements for games due to this proliferation of devices, audiences, distribution channels, and monetisation models and the enhanced capabilities of new platforms, it has become less cost effective for publishers to have sufficient resources for in-house art, localisation and testing services. They are, therefore, increasingly outsourcing these services to focus their resources on devising successful new business models whilst optimising their return on investment by ensuring content is delivered efficiently and successfully across the growing number of platforms and markets. Many game development studios now have art outsourcing managers in recognition of the fact that such suppliers of art services are now planned for and managed as an essential part of the game production process rather than being a last minute addition when other options failed, as was the case as recently as 2 to 3 years ago. Despite an international and blue chip client base, technical services for the games industry remains a highly fragmented market. The Directors believe the Group is now one of very few international providers of the full range of integrated outsourced services to the video games market with a global reach. Global games market 2013 per market segment3 Global games market 2013 per region3 10% 31% Total: $75.5bn 1.6bn gamers 6% 6% 17% 20% 10% Casual Webgames, $7.4bn, 1,200m gamers MMO, $15.4bn, 800m gamers (Mid)-Core PC, $7.2bn, 960m gamers Mobile Phone, $12.8bn, 1,110m gamers Tablet, $4.8bn, 450m gamers Handheld Console, $4.4bn, 300m gamers TV Console, $23.6bn, 690m gamers Source: Newzoo Global Games Market Report, May 2014. * 3 Excluding tax, hardware, consumer-to-consumer trade but including retail margin. 4% 29% Total: $75.5bn 1.6bn gamers 42% 25% Latin America, $2.9bn, 170m gamers Asia – Pacific, $31.9bn, 740m gamers Europe – Middle East – Africa, $18.7bn, 520m gamers North America, $21.9bn, 190m gamers Global games market total and mobile game revenues, 2012 – 2017 ($bn)* Total Mobile $ 1 0 2 9 . $ 9 5 2 . $ 8 8 4 . $ 8 1 4 . $ 7 5 5 . $ 7 0 4 . 2017 8.1% $ 1 0 2 9 . $ 7 5 5 . R G A C 18% $ 1 2 7 . 23% $ 1 7 6 . 30% $ 2 6 3 . 27% $ 2 1 8 . 32% $ 3 0 7 . 34% $ 3 5 4 . 2017 $ 3 5 4 . 19.1% $ 1 7 6 . 2012 2013 2014 2015 2016 2017 2013 2013 100 90 80 70 60 50 40 30 20 10 0 * Source: Newzoo Global Games Market Report, May 2014. 5 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report Our Strategy Growing both organically and by acquisition Keywords Studios’ strategy is to grow both organically and by acquisition to extend the Group’s client base, market penetration and service lines, where the Group can use its existing expertise, multi-service platform, scale and global reach to generate synergies in a highly fragmented games services industry. The Board believes that there is a clear opportunity for Keywords to extend its existing relationships with many of the major games companies through: CROSS SELLING Extending the relationship the Group has with game publishers and developers to provide additional services from within the Group’s portfolio of services. ACQUISITIONS Selective acquisitions which generate synergies, extend its client base or geographical penetration or add complementary services or critical mass to existing service lines. GEOGRAPHICAL GROWTH Expanding its global presence and client base, including both through acquisition and organic investment, where we see large or high growth addressable markets. For instance, Asia Pacific accounts for three out of the top four video games markets in the world and is projected to grow from $30bn in 2014 to $40bn in 2018 and Latin America, whilst a smaller market, is forecast to grow at the fastest rate of all regions – at a CAGR of over 10% between 2013-20184. OUTSOURCING Capturing new blue chip customers who are looking to outsource all their art, localisation, testing and customer care requirements, because of the increasing complexity and costs for publishers and developers to deliver tailored games content around the world, on multiple platforms using internal resources. ADJACENT ACTIVITIES AND MARKETS Expanding its portfolio of services provided to the video games industry across the life cycle of games from conception to live operations as well as into related interactive entertainment markets. 4 PWC Global media and entertainment outlook 2014 – 2018. 6 KEYWORDS STUDIOS PLC July 2013 Listed on AIM £10m £10m raised to enable the group to extend its service offering and geographical footprint, organically and by acquisition. January 2014 Liquid Violet acquisition Added scale and blue chip clients to the Group’s audio service offering. February 2014 Babel Media acquisition Brought together two of the leading full service providers, giving Keywords critical mass in functional testing. April 2014 Established operation in Singapore Established a full service centre for South East Asian languages with EA outsourcing its services to the new centre. £6m May 2014 Binari Sonori acquisition Added a presence in Milan and Los Angeles and considerably enhanced our position in audio services and text localisation. Keywords established as the “go to” provider for leading publishers of interactive entertainment. KEY EVENTS SINCE IPO Since its IPO, the Group has made considerable progress in executing its growth strategy by significantly extending its range of services, adding new geographies both organically and through acquisitions, and consolidating the market through selective acquisitions. October 2014 Lakshya acquisition Added one of the most recognised brands in the large art services market, providing earlier involvement in the games development cycle. January 2015 Alchemic Dream acquisition Added a well known multilingual customer support services firm, providing entry into this fast growing market. January 2015 Reverb acquisition Bringing Keywords its first presence in the fast growing Latin America market, in Rio de Janeiro. January 2015 Established operation in Barcelona Opened a localisation and project management office in Barcelona to access talent there. 7 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report Business Model Ongoing content creation to extend the life of games OUR BUSINESS MODEL 1 1. PRE-PRODUCTION – Concept art – Level design Services Keywords Studios currently provide. Services Keywords Studios do not currently provide. 2 2. EARLY STAGE GAME DEVELOPMENT – Programming – Story writing – Motion capture – Development quality assurance – Game trailers – Art production – Audio production • Original language voice production • Music scoring • Sound design Video games are increasingly challenging to develop and support due to ever more sophisticated content and software and increased complexity derived not only from the multi-layered scale of the games but also due to the multiple platforms and monetisation models via which they are delivered. The combination of the graphical, audio and text based content together with the flexibility required to deliver a positive user experience means that video games are at the most advanced end of entertainment media. Keywords is an outsourced services company providing technical services to this industry globally, assisting developers and publishers to develop, sell and operationally support their games regardless of the deployment platform or the genre of the game. Currently, the business provides art creation, audio recording, localisation, linguistic and functional testing and customer support services to the video games market across all games platforms including consoles, PCs, the internet, mobile phones and tablets. These services are delivered through a number of strategically located production facilities (“studios”) and through the provision of managed services on clients’ premises. The Company focuses on delivering a competitive service differentiated by high quality and flexibility across the breadth of the life cycle of games from concept to live operations support. Services provided by the various Keywords studios are typically differentiated by language mix, scalability, flexibility, price and proximity to clients. Localisation is not limited to translation into multiple languages; developers and publishers need to take into account the varied cultural, technical and legal differences of their global consumers and the quality of localisation is viewed as a critical factor in the success of a new launch and in the returns made on the initial production investment. The geographical differences require localisation service providers to diligently consider the target gamers’ age range, gender and linguistic variables as well as the cultural, religious and political context of the game. As such, Keywords employs games- specialised translators and native speaking testers who perform in-game quality assurance on the content in more than 50 languages. This talent base provides the Group with market leading scale, which its clients would require substantial investment to replicate in-house. The Directors believe that, through this capability, Keywords has established an industry reputation for quality, reliability and flexibility The Company’s unique selling points, including the use of games-specialised native staff for all languages, the ability to offer their services flexibly on-site at clients’ premises or in its specialised and secure global studios, its track record of delivery for many of the most prominent games companies, together with its integrated art creation, audio, localisation, testing and customer service capabilities, differentiates Keywords from its competitors. Keywords provides its essential professional services on a variable cost, time and materials basis to its largely blue chip customer base typically charging per art asset, per hour or per word, invoicing for work done on a monthly basis. 8 KEYWORDS STUDIOS PLC 6 6. NEW CONTENT FOR GAMES including game extensions, level expansions and issue patches 3 3. LATER STAGE GAME DEVELOPMENT – Functional testing – Text localisation – Audio localisation – Localisation testing – Cinematics/visual effects – Player research 4 4. LAUNCH – Certification testing – Marketing 5 5. ONGOING LIVE OPERATIONS SUPPORT – Customer support – Community management – Data analytics – Payments processing As such, work in progress is typically limited to the preceding month’s activity and underlying cash generation should be expected to largely mirror profitability. The Group’s productivity is facilitated by the scale of its operations and its ability to resource projects in important geographies in Europe, Asia and the Americas. Demand in some areas of the business is seasonal and as such permanent staffing levels are maintained at conservative levels with highly flexible staffing arrangements in place, drawing staff from a bank of regular contractors in most locations to match the peaks of the activity cycles. The Directors believe that one of the strengths of the Group is that it is not directly exposed to the successes and failures of individual game titles. The quantity and quality of game content is the key driver of demand for the Company’s services and, thanks to the loyalty of its clients, who have typically increased the percentage of work awarded to Keywords year on year, the Company has grown rapidly over the past five years with minimal investment in business development. The annual business cycle in the industry varies depending on the market sector and on the game production cycle. Console and PC games largely follow a seasonal pattern with titles typically being published for the holiday period including Thanksgiving and Christmas. Mobile, social and online games do not follow this pattern and are not driven by particular release schedules. As Keywords strengthens its original language game production activities including art creation, functional testing and original voice recording (which take place earlier in the game production cycle than localisation services), its penetration of customer care services with their continuous activity profiles and as the Group continues to drive its exposure to the mobile and social games market, the marked seasonal revenue curve previously experienced will continue to be offset by greater activity around the year. Time and materials billing arrangements and delivering client requirements through flexible resource bases will remain a feature of Keywords business. As the Company undertakes acquisitions, it is likely that some of these businesses will operate less flexibly than Keywords or will have greater exposure to fixed price contracting, in which case the Directors will explore opportunities to move their operating models closer to those of Keywords over time, where appropriate. Keywords is not a capital intensive business. While willingly investing in tools, game testing consoles, PCs and mobile devices to support its testing activities, the Company invested a total of €1.25m in 2014 (3% of revenue) which included fit out costs in some locations as businesses were co-located with each other or, in the case of Singapore, a new studio was commissioned. Good cash flow is an important feature of the business, generally matching net income when the accumulation of production related, multimedia tax credits in Quebec are taken into account. In 2014, operating profit amounted to €3.1m which generated operational cash flow of €1.9m and the Group also accumulated multimedia tax credits in Quebec of €1.4m which will be claimed during 2015. 9 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report Chief Executive’s Review Considerable progress in executing our growth strategy h130% Increase in Group revenues. h104% Increase in adjusted profit before tax. 2014 was a significant year in the development of Keywords: a year in which we became a group of companies with a number of well-known brands providing integrated services to the video game development and publishing markets around the world. During the year, in addition to delivering organic growth of 23% and investing organically in new studios in Singapore and Barcelona (which opened in January 2015) we undertook four acquisitions and made a further two acquisitions in January 2015. The effect of these acquisitions has been to strengthen our market position in our core activities of localisation and testing services as well as extending our range of services upstream to art creation and downstream to customer support. While executing and integrating acquisitions, we continued our focus on timely, secure delivery, quality and flexibility and we achieved revenues and profits in line with market expectations. Service line extensions In addition to bringing further scale to all of our existing service lines during the year, we have extended the business into two new areas of business. Through the acquisition in October 2014 of Lakshya Digital, a well-established supplier of outsourced video game art creation services, Keywords has extended its reach into the earlier stage video game production process. Servicing some leading Japanese video game development studios as well as those in the US and Europe, Lakshya creates characters, environments, and in game items for AAA console titles as well as for social, mobile and massively multiplayer online (“MMO”) games. We estimate the market for outsourced art creation and production for video games to be in the order of twice the size of that for localisation and testing services at around $1.2bn. We are already gaining visibility of production pipelines earlier in the development cycle than we do through our other service lines and we are already identifying opportunities to cross sell services at this earlier stage. The objective for our art creation services line of business is to grow capacity to fulfil demand in a manner that maintains quality, reliability of deliveries and extends our capabilities to areas such as special effects. Shortly after the end of the year we acquired a customer care services business, Alchemic Dream. In addition to continuing to grow is core activities which benefit from a network of multilingual agents working remotely but connected through technology platforms, we intend to accelerate the development of an alternative customer care service delivery model that leverages our more than 1,000 games and language specialised staff who work in our secure facilities in strategically important locations in Asia, Europe and the Americas. By doing this, Keywords teams of native language employees can follow the game into the market as the games transition through the production and launch phases to ongoing live operational support, thereby exploiting their deep knowledge of all aspects of the game to support players as they engage with the content. We intend to continue to extend our service lines in line with client and market demand both through acquisitions and by leveraging the Group’s existing internal skill sets to develop additional services to take to market. 10 KEYWORDS STUDIOS PLC II III 14% Babel increased profitability from 2% return on sales to a healthy 14% return. 11 CASE STUDY: BABEL ACQUISITION The acquisition of Babel Media represented one of the first in a number of successful buyouts for the Group following Keyword’s debut on AIM in the summer of 2013. The driving force for Keywords going public was its strategy to consolidate a fragmented services market, despite the clients being global organisations, and to become the leading outsourced multilingual services provider to the video games industry. Founded in 1999, Babel had become one of the most recognised technical services brands in the video games industry with particular strengths in functional testing, localisation and localisation testing. By acquiring Babel, for £5.4m, Keywords significantly enhanced its functional testing capability, whilst providing substantial operational synergies with Keywords’ existing localisation and localisation testing activities as well as extending its client base and geographical reach including its first presence to India. By bringing to Babel the benefits of Keywords’ flatter, leaner structure, its strong focus on project management, and sharing back office and marketing functions we have been able to deliver significant cost savings, with annualised savings in excess of CAD$1.0m, whilst preserving the enlarged group’s ability to deliver best in class service across the combined operations. As a result, during the first 10 months under Keywords ownership, Babel increased profitability from 2% return on sales to a healthy 14% return. ANNUAL REPORT AND ACCOUNTS 2014Strategic Report Chief Executive’s Review (continued) MAJOR CLIENT CASE STUDY: A TRACK RECORD IN EXPANDING OUR RELATIONSHIPS WITH MAJOR CLIENTS Keywords has a strong track record of taking advantage of the trend towards the provision of multiple services to clients and towards clients’ rationalisation of service suppliers, as game publishers and developers seek to simplify an otherwise complex production supply chain. In the case of one of Keywords’ major clients, Keywords began supplying a service to control the quality of translations being supplied by other vendors in 2000. Four years later, in partnership with the client, Keywords developed a new, more effective way of testing localised games using native speaking games testers rather than games testers supported by linguists. These two services continued to be delivered from Dublin for six years while more European languages were added to support the wider distribution of the games. In 2010, as the client started to rationalise the supplier base, Keywords started to translate games for the client. In 2011, Keywords expanded the relationship by starting to provide translations of game related marketing content and, encouraged by the client, Keywords established a facility in Tokyo as the client moved from an insourced model of localisation and testing of East Asian languages to outsourcing with Keywords, to the benefit of its Tokyo studio. Further supplier rationalisation and internal cost savings led the client to restructure its operations, moving all its management to the US. Keywords supported the client in this shift of activities and worked with the client to design and supply a managed services operation from the client’s own facility on the West Coast. In 2014, with the acquisitions of Binari Sonori and Lakshya, the range of services being supplied has been further strengthened and extended with art production being added to localisation, audio, and localisation testing. 12 KEYWORDS STUDIOS PLC Geographic expansion The Group has expanded geographically and now has 14 (2013: 9) studios in 3 continents providing full, integrated video games services to both local and global clients. This broad reach has enabled Keywords to extend its localisation services into more than 50 languages across 12 platforms to clients in over 15 countries. Keywords’ 14 studios are strategically located to provide services to key gaming clusters in locations such as Tokyo, Singapore, Montreal, Seattle, Los Angeles and London. We have expanded into new locations including Singapore and Rio de Janeiro during the year and, in January 2015, we opened a localisation and project management office in Barcelona in order to access local talent pools. We have also consolidated office locations where acquisitions have brought studios in the same location, combining two studios in Montreal into one unit and doing the same in New Delhi, providing both cost synergies and the opportunity to foster greater cross-selling opportunities. China presents an opportunity for the Group as the second largest market for games outside of the US and one that is slowly liberalising. Changes in government policy in China now means that it is possible to sell games consoles there. Microsoft launched the Xbox One in China in November 2014 and Sony is expected to follow suite. We therefore continue to review opportunities to invest organically or by acquisition in the region. The Group has invested in two business development resources in China in 2014 and is in the process of establishing a wholly foreign owned enterprise (“WFOE”) in Shanghai in anticipation of investing further in the country. Acquisitions In line with the Group’s strategy, Keywords has taken advantage of the fragmented markets in which it operates to grow through a combination of acquisitions and continued organic growth. Liquid Violet (audio services), Babel Media (localisation, localisation testing and functional testing), Binari Sonori (localisation and audio) and Lakshya Digital (art creation services) were all acquired during 2014 – in January, February, May, and October respectively. In January 2015, Alchemic Dream (customer support and community management) and Reverb (localisation and audio for Brazilian Portuguese) were added to the stable. “ Keywords is clearly differentiated from its competitors by its use of games-specialised native staff for all languages, its ability to offer services flexibly on-site at clients’ premises or in its specialised, secure global studios, its track record of delivery for many of the most prominent games companies and by the breadth of its service capabilities.” Results overview The Group’s revenues increased by 130% to €37.29m (2013: €16.18m) during the period. This increase was spread across all lines of business: Localisation activities grew by 125%; Audio grew by 311%; and Functional Testing, expanded many fold, as outlined in more detail in the operational review. Gross profit margins reduced modestly to 34.1% (2013: 34.7%) as a result of the change in the mix of business of the Group in 2014 compared to 2013, particularly the higher percentage of lower margin functional testing revenue following the acquisition of Babel Media in February. Underlying operating expenses excluding one-time costs increased by a total of €4.37m for the period to €7.56m (2013: €3.19m) reflecting our investment in expansion but were maintained at approximately 20% of revenues. The one-time costs included IPO costs of nil (2013: €1.12m), non-cash costs related to share option expenses of €0.16m (2013: €0.07m), amortisation of intangible assets of €0.47m (2013: nil) and costs of acquisition and integration of €1.46m (2013: €0.07m). The Group reported adjusted profit before tax (before IPO expenses, share option charges, amortisation of intangible assets, costs of acquisition and integration and foreign currency movements) for 2014 of €5.05m (2013: €2.45m). Statutory profit before tax for the period was €3.44m (2013: €1.16m). We have been pleased with the progress we have made with integrating the businesses acquired. The businesses have performed well as part of the Group and we have been very encouraged by the positive responses from customers to the acquisitions. In January 2015, we amended the terms of our acquisition of Binari Sonori to conclude the earn out arrangements earlier than originally planned with a view to integrating the business more closely with that of the core Keywords operations. More detail is provided in the Financial and Operating Review on pages 17 to 19. We have been delighted with the integration of Babel Media in particular which, as the most directly competitive business to that of Keywords, presented the greatest risk and greatest potential return. In the 10 months under our ownership, we have been able to make annualised cost savings of over CAD$1.0m from introducing a flatter, leaner structure and combining our two Montreal locations, back office and sales and marketing functions. This, combined with a strong trading performance from Babel, has resulted in the business of Babel moving from a 2% return on sales in 2013 to a healthy 14% return on sales in 2014. We expect acquisition activity to be a feature of the business for the foreseeable future as the company takes advantage of its leadership position in the market and continues to consolidate carefully selected, earnings accretive businesses. As such, we continue to review a number of acquisition opportunities which will provide the Group with complementary services, increased scale in its existing activities or further geographic expansion. 13 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report 6 Acquisitions across the global market since early 2014. 978 Average number of people on the payroll in 2014. Chief Executive’s Review (continued) Results overview continued The Group’s effective tax rate has increased in line with the increased proportion of profits earned in higher tax rate jurisdictions including Canada, US, Japan and Italy. The Group’s effective tax rate based on the KWS measured profit before taxation in the period (as set out on page 18) was 24.0% (2013: 16.0%). Basic earnings per share for the year, before one-time costs of acquisitions and integration, share option charges, amortisation of intangibles, and foreign exchange movements, was 8.54c compared with 5.76c for 2013. After these items, the basic earnings per share from continuing operations was 4.94c (2013: 2.14c). Operational review 2013 and 2014 have been years in which the transition to the latest generation of games consoles have led to some unusual trading patterns. In 2014, as expected, activity in the final quarter of the year was atypically busy following a less active summer period as publishers of console games for the PS4 and Xbox One chose not to release a number of titles in the traditional Thanksgiving and Christmas holiday gifting period in favour of releasing in Q1 2015 to take advantage of the increased installed base of those consoles given the strong sale of those devices in the holiday period. Overall, the Company continued its strong performance achieving organic growth of 23% while more than doubling total revenues to €37.29m (2013: €16.18m) including the effect of acquisitions. The six acquisitions made to date have also broadened our range of services and further extended our geographical reach. Localisation testing operations, which accounted for 39% of Group revenue, grew by 58% to €14.66m (2013: €9.28m). This includes contribution from the acquisition of Babel Media in February 2014. Despite having experienced a significant reduction in volume from a major client which was not as active during this period, this service line continued its strong growth thanks to its market leading reputation and overall healthy demand from console and mobile games sectors. Our Functional testing service, which accounted for 13% of Group revenue in 2014 (2013: 2%), was transformed into a service line with critical mass through the acquisition of Babel Media where functional testing was a larger share of its overall activity. We achieved revenues of €4.99m 14 (2013: €0.35m) undertaking significant projects for clients including Warner Bros., Carbine and Bioware. Localisation (translation) activities, including contributions from Binari Sonori which was acquired in May 2014, increased revenues by 125%, to €11.97m (2013: €5.32m) and accounted for 32% of Group revenue. Binari Sonori’s translation and audio business is focussed on the console game market particularly for large, high production value, AAA game titles. In contrast the core translation business at Keywords and at Babel derives the majority of its revenue from mobile, social and online games. The combination of these three businesses has resulted in the creation of the market leading video games localisation services supplier, well represented in all types of games. Growth in our Audio activities of 311% to €5.08m (2013: €1.23m) was driven both by organic growth and the acquisitions of Liquid Violet and Binari Sonori in January and May 2014 respectively, which both performed well following their acquisition. Voice recordings in video games add considerable depth to a game and are expected to continue to grow as the new generation of consoles provide more powerful processors and larger storage capabilities to enable richer gaming content than ever before. Similarly, smartphones are becoming increasing capable gaming platforms and the addition of voice content to games is a trend we also expect to see accelerate in mobile games. Art creation services was added to our range of services through the acquisition of Lakshya Digital in October 2014 adding revenues of €0.61m in the last quarter. In the face of strong market demand for art creation services, we intend to invest in organic expansion and further acquisitions to build this service line to match those of our translation and testing businesses in the coming years. As we grow, we have continued to invest in the infrastructure to support the larger Group. We have benefitted from some strong additions to our senior leadership team following the acquisitions made during the year. We expanded our sales support, growing from one dedicated business development executive in 2013 to eight in 2014. Investment in project management, workflow management and financial reporting continues as these tools are rolled out to support all operations in a centralised and consistent manner, facilitating strong management reporting and control. KEYWORDS STUDIOS PLC GROWTH IN SERVICE LINE REVENUES Localisation testing (m) €14.8m h58% 15 12 9 6 3 0 €14.8 €9.3 2013 2014 Functional testing (m) €5.0m h€4.7m 5 4 3 2 1 0 €5.0 €0.3 2013 2014 Audio/Voiceover services (m) Art creation services (m) €0.6m 0.8 0.6 0.4 0.2 0 €0.6 €Nil 2013 2014 €5.1m h311% 6 5 4 3 2 1 0 €5.1 €1.2 2013 2014 Localisation services (m) €12m h125% 12 10 8 6 4 2 0 €12.0 €5.3 2013 2014 We also continue to invest in talent and our growth helps us to attract and retain talent, as candidates can see exciting opportunities for career progression throughout the Group. The Group employed an average of 978 people in 2014 (2013: 371). Outlook With the installed base for the new generation of consoles having reached what many believe to be the tipping point following the 2014 holiday season, 2015 is expected to be the first solid, post transition year in the console game sector and we are looking forward to returning to more normal trading patterns as a result. Strong demand at our recently acquired Lakshya Digital art outsourcing business will be met by investment in expanding its resource base in India as well as a small studio in Seattle to help manage and scale the business, while maintaining quality. In January 2015, to better serve the multiplayer games segments, we opened a localisation and project management office in Barcelona in order to access local talent pools. This modest investment is already bearing fruit with some new client wins. Entering 2015 with six lines of business, we feel confident that the synergies already experienced between the business units will continue to build through 2015 and beyond, as we continue to identify and convert cross selling opportunities. We expect to focus on opportunities to grow our newer service lines to achieve a good balance with our other business lines. In particular, the art outsourcing market is expected to yield some interesting acquisition candidates as we seek opportunities to extend our services in that area as well as broaden our geographic spread to better enable us to leverage the synergies with our other services. We will continue to manage our businesses in a lean and agile manner to optimise resourcing levels across the business and to leverage the benefits of centralised functions across a larger group while operating locally to our clients, enabling us to best interpret their needs. 2015 will be another busy year for the Group as we make further progress with integrating acquisitions and realise the full year benefits of acquisitions made through 2014, whilst also driving growth both organically and through further selective acquisitions. 15 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report Chief Executive’s Review (continued) Principal risks and uncertainties Keywords is a fast growing but relatively small Group operating in a wide spread geography. The markets we operate in are fragmented in terms of the suppliers of services but our client base is relatively concentrated with a number of very large, global suppliers at the head and a large tail of small, independent developers. The market is highly dynamic, with technology, business models and consumer tastes evolving constantly. In this environment Keywords has the objective of becoming the leading global supplier of localisation, testing, audio and other related services to the industry and sees the following risks as it pursues this objective. The Principal risks associated with the Group’s strategy can be divided into: 1. General business risks for any international company; Industry related risks; and 2. 3. Those specific to the Keywords Group and its strategy. Beyond the general business risks associated with any international company, the principal risks related to the industry or more specifically to Keywords and its strategy, as identified by the management and the Board, are set out below: A) External risks Exposure to large customers: The Company’s client base principally comprises global game companies whose revenues are in the billions and hundreds of millions of Dollars. Our top five clients account for 49% (2013: 61%) of the company’s revenues. These companies have exacting standards and demand a high quality of service. Any failure in this regard or breakdown in the relationships at the top level could cause considerable damage to the business. The potential impact is partially mitigated through the company’s highly flexible resource base and its expansion continues to reduce its exposure to any single large client. Confidence of the City and investors: Keywords floated on AIM in July 2013 with an expressed set of objectives of growing the business organically and by acquisition. Should the Company lose the confidence of investors, the Company’s rating will suffer and this in turn will affect its ability to raise money for or place shares to pay for acquisitions. However, the Company makes every effort to communicate regularly with investors via announcements and face to face contact and this effective communication of how it continues to execute on its stated growth strategy and successfully integrate the businesses it acquires should continue to maintain the confidence of its investors. Sudden business interruption: Keywords is a global business and needs to minimise business interruptions and be able to continue servicing customers. This threat could be internal such as a major failure in its IT systems but also external such as the Group experienced and managed during the 2011 Japan earthquake and tsunami. The Group’s multiple, full service, delivery hubs provide for a good level of contingency and, supported by a solid business continuity plan and comprehensive insurance, the effects of such disasters can be managed. B) Internal risks Security: The industry requires the highest standards of security within a company offering services such as Keywords. Security breaches may lead to piracy, disruption of clients’ marketing plans, loss of competitive edge and could result in compensation claims. Keywords maintains physical and data security policies and procedures which are regularly audited by its larger clients. Success of acquisitions: Keywords has embarked on an acquisition strategy to reinforce its global growth. Managing such acquisitions successfully and embedding the Keywords culture will be a crucial ingredient of success. Failure to do so will have adverse consequences such as management distraction, disposal and reduced profit. Whilst middle management is relatively inexperienced in this regard, this is mitigated by the considerable experience within the senior management team and across the Board. The group is actively involving middle management in the acquisition process to broaden the experience and our capabilities in executing and integrating acquisitions. C) Financial risks Adequate overseas financial controls: As a business like Keywords grows rapidly, global financial controls, and regular audits need to be in place to ensure smooth, timely and accurate reporting to satisfy the relevant accounting bodies to local branches as well as the Board. The Group has invested and continues to invest in its financial reporting functions to facilitate strong reporting and management control as it grows. Andrew Day Chief Executive April 14, 2015 16 KEYWORDS STUDIOS PLC Financial and Operating Review Strong balance sheet for further growth Group performance 2014 was a year of profitable growth and expansion for the Group. This has been achieved against the backdrop of a games market which was unexpectedly quiet in the first half of the year due to a lull following the intense activity that accompanied the launch of the Xbox One and PlayStation 4 consoles in November 2013, and the consequent launches of a significant number of larger console titles being moved from the pre-Christmas trading period to the first quarter of 2015. This created a busier fourth quarter of the year, as foreseen at the time of the Company’s interim results. The original core service lines continued to grow strongly and were strengthened significantly by the acquisition of Babel Media Group, Binari Sonori and Liquid Violet. In addition the Group began its diversification in to the video game art outsourcing market, in line with its stated strategy, with the acquisition of Lakshya Digital in October 2014. Keywords geographic reach continued to grow through the opening of the Keywords’ Singapore studio, and through acquisitions in New Delhi, Pune, Los Angeles, London and Milan. Revenue Revenue for 2014 was up 130% at €37.3m (2013: €16.2m) due to both organic growth and acquisitions. The organic growth rate, excluding all acquisitions, was up 23% which was very encouraging considering the market conditions encountered in the first half of 2014. Revenue mix Revenues increased across all lines of business in 2014, both organically and through acquisitions, compared with 2013. The acquisitions and the opening of the Singapore studio during the period have greatly increased the Group’s presence in North America and in Asia. The sales mix by region based on the Group’s operational jurisdictions are as follows: The new acquisitions have improved the balance of the sales mix considerably. The Group’s dependence on localisation testing has been reduced to 39.3% of sales in 2014 from 57.4% in 2013. Localisation testing services grew strongly by 58% with sales of €14.7m in 2014 (2013: €9.3m), in part due to additional services from Babel Media and the increased number of console titles launched in 2014 and early 2015 compared to 2013. The acquisition of Babel Media has markedly strengthened functional testing with sales of €5.0m (2013: €0.3m) which represented 13.4% of Group sales (2013: 2.2%). Audio services revenue quadrupled to €5.1m in 2014 (2013: €1.2m), reflecting the acquisitions of Binari Sonori and Liquid Violet. As a result audio services have grown to represent 13.6% of Group sales, up from 7.7% in 2013. Lakshya, which was acquired in October 2014, delivered €0.6m in sales for our new Art Creation services line, which accounted for 1.6% of Group sales but will become a larger part of the sales mix next year. Localisation services revenue grew by 125% to €12.0m (2013: €5.3m), and continued to make up a stable proportion of Group revenues at 32% (2013: 32.8%). This was due to the 40% organic growth delivered by the existing Keywords business, in addition to the contributions from Binari Sonori, and to a lesser extent, Babel Media. Europe Asia North America Year ended 31 December 2014 % Year ended 31 December 2013 % 46 9 45 100 69 7 24 100 Gross margin Gross profit for the year was €12.7m (2013 of €5.6m). The gross margin percentage reduced very slightly to 34.1% (2013: 34.7%). The most significant impact on the gross margin in 2014 was as a result of the increase in functional testing as a proportion of Group sales, as it commands a lower gross margin than the Group’s other services. This was partially offset by a small positive effect from the larger weighting of Audio services following the acquisitions of Binari Sonori and Liquid Violet. Operating profit (“EBITDA”) EBITDA is a measure of operating profit used by the Board, which excludes depreciation, amortisation, share option expenses and one-time costs related to merger and acquisitions and to the IPO. For 2014, EBITDA increased 123% to €6.02m, compared with €2.69m for 2013. 17 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report Financial and Operating Review (continued) Operating profit (“EBITDA”) continued Operating Profit and Adjusted Profit Before Tax for Year Ended 31 December 2014 Year ended 2014 €’000s Year ended 2013 €’000s 3,436 Statutory profit before tax Add back costs excluded from Group’s measure of PBT 1,618 KWS measured profit before tax Add back depreciation and interest 5,054 964 1,158 1,296 2,454 238 Earnings before interest, tax, depreciation and amortisation Details of costs excluded from Group’s measure of PBT Costs of acquisition and integration Costs of Initial Public Offering Share option expense Foreign exchange loss/(gain) Amortisation of intangibles 6,018 2,692 1,461 – – 156 (467) 468 1,124 71 101 – 1,618 1,296 During the year there was some restructuring of some of the newly acquired entities in order to cut costs and to realise synergies over time. Operating expenses excluding depreciation, increased by €3.78m to €6.70m (2013: €2.92m) mainly due to the new acquisitions and the opening of the Singapore studio but these costs decreased slightly as a percentage of sales from 18.1% to 18.0% of sales. Net finance costs During 2014 there was net finance income of €0.36m compared to an expense of €0.07m in 2013 primarily due to the impact of foreign exchange gains. Foreign exchange gains of €0.5m (2013: loss of €0.1m) on translation were created mainly due to the weakening of the Euro against Sterling, Canadian Dollar and US Dollar. The interest expense of €0.06m (2013: nil) is largely due to the interest on certain finance leases which exist within Babel Media. Adjusted Profit before Tax Adjusted Profit before Tax is a measure of profitability of the business used by the Board to measure the more meaningful underlying profit generation of the Group. This measure excludes one-time expenses, such as the expenses of the 18 IPO, and also share option expenses and foreign currency gains or losses. Adjusted profit before tax for 2014 was €5.05m compared with €2.45m in 2013. Taxation The Group’s effective tax rate has increased in line with the increased proportion of profits earned in higher tax rate jurisdictions including Canada, US, Japan and Italy. The Group’s effective tax rate based on the KWS measured profit before taxation in the period (as set out in the previous table) was 24.0% (2013: 16.0%). Foreign exchange Keywords does not hedge foreign currency profit and loss translation exposures. The Group’s results are, therefore, effected by movements in exchange rates and the foreign gains and losses incurred during the year are set out in the net finance costs section above. Dividend The Company has a progressive dividend policy, subject to the retention of funds needed to fund future growth of the Group’s business and its strategic aims. Basic earnings per share Basic earnings per share for the year, before one-time costs of acquisitions and integration, share option charges, amortisation of intangibles, and foreign exchange movements, was 8.54c compared with 5.76c for 2013 which excluded the one time IPO costs as well. Basic earnings per share based on the statutory profit after tax was 4.94c (2013: 2.14c). Cash flow and debt The Group continues to operate without any financing debt. The Group generated operating cash of €1.90m for the year, compared with €2.29m for 2013. However, during the year, the Group also accumulated multimedia tax credits in Quebec of €1.4m (2013: €0.15m) which will be claimed during 2015. The total multimedia tax credit accrual amounted to €3.0m as at December 31, 2014. The Group made four acquisitions to strengthen the business during the year with a net cash outflow on consideration payments of €8.9m, €3.0m repayments of borrowings in Babel and an additional €1.5m in acquisition expenses and integration expenses. Investment in fixed assets amounted to €1.3m (2013: €0.39m) reflecting the cost of bringing the Babel Media and KWS Montreal operations together into one facility, relocating Babel Media India to the Lakshya studio in Gurgaon and fitting out the Singapore office. Additionally, there was ongoing purchases of games testing equipment. The issue of new shares via a Placing in May generated net proceeds of €7.3m. In 2013 the issue of new shares in the IPO generated gross proceeds of €11.6m. Expenses related to the IPO in 2013 amounted to €1.40m, of which €0.3m was capitalised against share premium. Cash and cash equivalents decreased from €15.3m to €11.01m excluding accrued multimedia tax credits of €3.0m (2013: €0.2m). Following the interim dividend payment of 0.36p per share on October 22, 2014, the Board recommends a final dividend of 0.74p per share, which will make the total dividend for the year ending December 31, 2014 1.10p per share, a 10% increase over 2013. Subject to shareholder approval at the Annual General meeting, the final dividend will be paid on June 26, 2015 to all shareholders on the register at June 5, 2015. The final proposed dividend will cost an estimated €443,200. Events after the reporting period On March 26, 2015 the government of Quebec announced in their budget the reversal of the earlier reduction of their multimedia tax credits from 37.5% of the cost of qualifying labour to 30%, with immediate effect. On January 20, 2015 the Company agreed with the selling shareholders of Binari Sonori S.R.L. to vary the terms of the acquisition agreement bringing to a close the earn out conditions 12 months earlier than originally agreed and thereby integrate the businesses more closely with the rest of the Group. Under the terms of the acquisition, deferred consideration of no more than €4.0m could have been payable calculated by reference to the profit before interest and tax of Binari Sonori in the years to December 31, 2014 and December 31, 2015. Under the terms of the agreement, the Company agreed to pay to the selling shareholders total deferred consideration of €300,000 which has been satisfied by the issue of 158,250 new ordinary shares of Keywords at a price of 145.47 pence per share. On January 18, 2015 the Company acquired the entire issued share capital of Reverb Localização – Preparação de Documentos Ltda (“Reverb”), a company registered in Brazil. Reverb provides localisation and audio management services for Brazilian Portuguese for some of the leading games publishers. KEYWORDS STUDIOS PLC Adjusted EBITDA Margin The Board uses an adjusted measure of EBITDA to monitor the performance of the Group. This measure excludes foreign exchange gains or losses, any one-time expenses and the cost of employee share option awards. Adjusted Operating Profit Margin The Board also uses an adjusted measure of operating profit to monitor the performance of the Group. This measure similarly excludes foreign exchange gains or losses, any one time expenses, and the cost of employee share option awards. Non-financial performance is measured by: Resource deployment The Board reviews the efficiency at which the Group is deploying its staff resources to ensure optimum staffing strategies and utilisation rates are being deployed. Business won/lost The Board reviews the levels of new business won and lost, and monitors the reasons for both, to ensure that the services being offered to the market are appropriately priced and relevant. Andrew Lawton Chief Financial Officer April 14, 2015 Under the terms of the agreement, a total consideration of up to €300,000 is to be paid in cash to the sellers. On January 9, 2015, the Directors incorporated Keywords International Barcelona SL, a company registered in Spain, as part of the Group’s continuing geographic expansion. On January 6, 2015 the Company acquired the entire issued share capital of Alchemic Dream Inc., a company registered in Canada. Alchemic Dream specialises in providing cost effective and flexible customer care services to the video game publishers. Under the terms of the agreement, which is expected to be earnings enhancing, a maximum total consideration of CAD$1.25m in cash will be paid to the sellers dependent on certain closing balance sheet related adjustments which are still to be calculated. On December 17, 2014 an employee benefit trust (“EBT”) was set up, in which to “warehouse” Keywords Studios shares in preparation for the exercise of options and the vesting of awards in the future. The EBT was created to allow the flexibility to issue grants of options and awards which exceed the 5% issued share capital of the Company. In the current year to date 200,000 ordinary shares of Keywords at a price of 145.00 pence have been bought by the EBT at a gross cost of €372,320. Key performance indicators We monitor our financial performance against a number of different benchmarks. These are set in agreement with the Board and used to evaluate progress against our strategy. Financial performance is measured by: Revenue Growth Revenue Growth is measured by line of business and overall against the Board’s strategic goal to grow organically and by acquisition. Gross Profit Gross Profit is a key measure of the Group’s pricing strategies, use of resources and its ability to optimise resource utilisation. Overhead costs by location The Board monitors the overheads to ensure the costs in each location are in line with the level of business being generated. 19 ANNUAL REPORT AND ACCOUNTS 2014IIIIIStrategic Report Board of Directors Ross Graham (67) Independent Non-Executive Director and Chairman Ross Graham has extensive executive and non-executive experience in the technology sector. He worked from 1987 to 2003 at Misys plc, a global financial software product and solutions provider. He joined Misys as Finance Director upon its flotation, latterly becoming corporate development director, where he played a key role in developing and implementing its acquisition strategy. Ross also held a non-executive directorship at Psion plc from 2005 until 2012 when that company was successfully sold to Motorola Solutions Inc. During his time at Psion, he held various roles including the senior independent directorship and chairman of the audit and remuneration committees. He was also a non-executive director at Wolfson Microelectronics Plc and was previously senior independent director and the audit committee chairman prior to its sale to Cirrus Logic Inc. last year. Ross qualified as a chartered accountant with Arthur Young in 1969 and was made a partner of that firm in 1981. He is a Fellow of the Institute of Chartered Accountants of England & Wales. Ross was appointed Director and Chairman of Keywords prior to the flotation in July 2013. 20 Andrew Day (51) Group Chief Executive Officer Andrew Lawton (52) Group Finance Director Andrew has a background in technology, manufacturing and business services through corporate development and general management roles within both publicly quoted and private companies. Andrew started his career in 1983 at Rothmans International PLC in production management. From 1986 to 1993 he had responsibility for corporate development activities at Britannia Security Group PLC, TIP Europe PLC and Brent International PLC before holding the position of Divisional Managing Director at Brent International PLC for six years. Andrew was Chief Executive Officer of interactive retail software developer, Unipower Solutions and Head of Retail and CPG for EMEA at NYSE listed advanced analytics business, FICO, before joining Keywords as its Chief Executive Officer in April 2009. Andrew Lawton has extensive experience within the video games industry, FMCG and multi-site retail. He was previously CFO of the fast growing international business, Sony Computer Entertainment Europe where he joined as a founding member of the PlayStation business in 1994 and supported its growth to over €3bn and 1000 employees. In addition to providing strong financial management, his previous responsibilities have been broad- ranging, including Finance, IT, Digital Operations and Business Transformation. Andrew was appointed to the role of Group Finance Director in July 2014. He is a Member of the Institute of Chartered Accountants. KEYWORDS STUDIOS PLC David Reeves (67) Independent Non-Executive Director Giorgio Guastalla (45) Non-Executive Director Giorgio Guastalla is co-founder of Keywords. Prior to establishing Keywords in Ireland in 1998, Giorgio held various positions in marketing and IT at Brent International PLC based in the US, Spain, UK and France. In 2002 Giorgio founded Italicatessen Ltd., a company operating in the food sector. Giorgio was CEO of Keywords until 2009 before concentrating on his other business interests and moving to a non-executive Director role at Keywords Studios. David has spent over 30 years in management roles within multinational companies. He began his career as an operational research consultant before moving overseas with RJ Reynolds Nabisco where he worked from 1979 to 1991, becoming the Marketing Director in 1986 and Worldwide Marketing Director in 1989. In 1991, David served as the General Manager and Vice President of Marketing in Tokyo for Mitsubishi Shoji JV Technology Company. David has considerable experience in the computer entertainment industry. David was the Managing Director for Sony Computer Entertainment (PlayStation) from 1995 until his appointment as its Executive Vice President in 1999 and President in 2003. Throughout his career, David has developed knowledge of the various working styles of European, American and Asian corporations. He was appointed to the Board of Keywords Studios Limited on May 29, 2013. 21 ANNUAL REPORT AND ACCOUNTS 2014IIIIGovernance Report Directors’ Report The Directors present the annual report together with the audited consolidated financial statements for the year ended December 31, 2014. Disclaimer The purpose of this Annual Report and Financial Statements is to provide information to the members of the Company. The Annual Report and Financial Statements have been prepared for, and only for, the members of the Company, as a body, and no other persons. The Company, it’s Directors and employees, agents or advisers do not accept or assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. The Annual Report and Financial Statements contain certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this Annual Report and Financial Statements and the Company undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report and Financial Statements should be construed as a profit forecast. Results and dividends The results for the year are set out on page 13. Dividends paid and proposed are set out on page 44. The Board is proposing a final dividend of 0.74p per share following the payment of an interim dividend of 0.36p per share on October 21, 2014. The proposed total dividend for the year is therefore 1.1p per share. Directors and changes to the Board The Company was formed on May 29, 2013, when Andrew Day, David O’Connor, David Reeves and Giorgio Guastalla were appointed to the Board. Ross Graham was appointed to the Board on July 8, 2013. During the year David O’Connor resigned from the Board on July 31, 2014 and Andrew Lawton was appointed as Group Finance Director after joining the Board on July 1, 2014. Details of members of the Board at December 31, 2014 are set out on page 21. Going concern In view of the Group’s resources, cash at December 31, 2014 of €11.01m, free cash flow in 2014 of €1.90m, results of operations, excluding acquisition and integration costs, and the overall financial condition of the Group, the Directors have reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. Political donations No political donations were made in the year. Directors and their interests A list of Directors, their interests in the ordinary share capital of the Company, their interests in its long-term performance share plan and details of their options over the ordinary share capital of the Company are given in the Directors’ remuneration report on page 25. No director had a material interest in any significant contract, other than a service contract or contract for services, with the Company or any of its operating companies at any time during the year. The names of all persons who, at the year end, were Directors of the Company can be found on page 21 under The Board of Directors. Corporate Governance Compliance with UK Corporate Governance Code Keywords is committed to high standards of corporate governance throughout the Group. As a company whose shares are traded on AIM, it is not required to comply with all the requirements of the UK Corporate Governance Code 2012 (“the Code”). However, the Board recognises the importance of, and is committed to, ensuring that effective corporate governance procedures are in place as appropriate for a public company of its size and complexity and in the light of the risks and challenges it faces. The Group’s corporate governance arrangements are set out below: The Board The Board is comprised of two Executive and three Non-Executive Directors. The Board considers that Ross Graham and David Reeves are independent in character and judgement and that there are no relationships or circumstances which are likely to affect their independent judgement. The Board is responsible for the overall management of Keywords, our strategy and long-term objectives. It provides leadership to Keywords having regard to the interests of shareholders and other stakeholders. Audit Committee The Audit Committee is chaired by David Reeves. Ross Graham is the other Committee member. The Audit Committee is responsible for assisting the Board in fulfilling its financial and risk responsibilities. The Audit Committee oversees our financial reporting, risk management and internal control procedures, and reviews the work of external auditors. 22 KEYWORDS STUDIOS PLC Remuneration Committee The Remuneration Committee is responsible for determining the remuneration of the Chairman, executive Directors, the Company Secretary and senior executives of Keywords. For further information please see pages 25 and 26. Internal controls and risk management The Board has overall responsibility for the Group’s system of internal controls. The system is designed to manage, rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable assurance against material misstatement or loss. The Directors believe that the Group has internal control systems in place appropriate to the size and nature of the business. The key elements are: • Group Board meetings, at a minimum of eight times per year, with reports from and discussions with senior executives on performance and key risk areas in the business; • monthly financial reporting, for the Group and for each subsidiary, of actual performance compared to budget and the prior year; • annual budget setting; and • a defined organisational structure with appropriate delegation of authority. The Board also receives a report from the external auditor on matters identified in the course of the statutory audit. Substantial shareholdings At December 31, 2014, the Company had been notified, in accordance with the Disclosure and Transparency Rules, of the following interests in its ordinary share capital: Name P.E.Q. Holdings Limited Andrew Day Schroders Investment Management Liontrust Asset Management Artemis Investment Management Legal & General Investment Management Invesco Perpetual Hargreave Hale Kabouter Management Shares 11,978,736 5,296,573 3,874,843 3,805,839 3,250,000 2,830,000 2,621,035 2,200,000 1,900,000 % 25.4 11.2 8.2 8.1 6.9 6.0 5.6 4.7 4.0 Future developments Important events since the financial year end are described on page 15 of the Chief Executive’s Review and future developments are described in the strategy section of the Strategic Report on page 6. People and organisation Keywords is, and always has been, dependent on the quality and commitment of its entire staff to provide and maintain the high levels of services expected by the Group’s clients. The average headcount reached 978 for 2014 with peak employment of 1,245 in November 2014. Keywords permanent staff complement averaged 345 during 2014. This permanent headcount is supplemented with employees on short-term contracts as activity changes throughout the year. The Group continues to give full and fair consideration to applications for employment made by disabled persons, having regard to their respective aptitudes and abilities. The policy includes, where practicable, the continued employment of those who may become disabled during their employment and the provision of training and career development and promotion, where appropriate. The Group has continued its policy of employee involvement by making information available to employees on matters of concern to them. Many employees are stakeholders in the Company through participation in share option schemes and a long-term performance share plan. The Group has not disclosed further details on employment of disabled persons or employee involvement as it has less than 250 employees within the UK. Corporate responsibility Keywords seeks to be a socially responsible Group which has a positive impact on the communities it operates in. By the nature of the business, we employ a diverse workforce, with many nationalities. No discrimination is tolerated, and we endeavour to give all employees the opportunity to develop their capabilities. We provide an excellent working environment, the latest technology and appropriate training. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and Financial Statements. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. 23 ANNUAL REPORT AND ACCOUNTS 2014IIIIGovernance Report Directors’ Report (continued) Statement of Directors’ responsibilities continued In preparing these financial statements the Directors are required to: • • make judgements and estimates that are reasonable and prudent; • select suitable accounting policies and then apply them consistently; state whether IFRS as adopted by the EU have been followed, subject to any material departures disclosed and explained in the Group and Company financial statements respectively; and • prepare the financial statements on a going concern basis, unless it is inappropriate to presume that 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 the Group and to enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors as at the date of this report, whose names and functions are listed in the Board of Directors on page 21, confirm that: • do far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and • the Director has taken all the steps that he or she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Website publication The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Group’s websites in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group’s websites is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. By order of the Board Andrew Lawton Company Secretary April 14, 2015 24 KEYWORDS STUDIOS PLC Directors’ Remuneration Report Dear fellow shareholder, It is my pleasure to present the Directors’ remuneration report for the period ended December 31, 2014. It is my hope that you find this a clear and comprehensive report and I look forward to hearing the views of our investors on the information presented here over the coming months. We will carefully monitor emerging practice in this area as well as guidance from investor representative groups. We operate a simple remuneration structure made up of base salary and benefits, a bonus plan and share option scheme, and a long-term incentive plan, which provide a clear link between pay and our key strategic priorities. The Board of Directors The Board of Directors have a duty to act in the best interests of their shareholders when determining remuneration. It is their responsibility to promote the long-term success of the company while also considering the employees, suppliers, customers and other external factors which may be impacted by remuneration decisions. Executive Directors will be responsible for developing and implementing remuneration strategy for the Group. Non-Executive Directors will be responsible for constructively reviewing and contributing to this strategy. The Remuneration Committee The members of the Remuneration Committee are Giorgio Guastalla (committee Chairman), David Reeves and Ross Graham. The members are all Non-Executive Directors. The remit of the Committee is primarily to determine and agree with the Board the framework or broad policy for the remuneration of the Company’s Executive Directors, and if required by the Board, the Senior Management of the Group. Non-Executive Directors, who are the members of the remuneration committee, should oversee Executive remuneration. The remuneration of the Chairman of the Board is determined by the Remuneration Committee. The remuneration of the Non-Executives is a matter for the Executive member of the Board in conjunction with the committee Chairman. No Director or Senior Manager is involved in any discussion or decision about his own remuneration. The Remuneration Committee consists of Non-Executive Directors all of whom are independent with no personal financial interest, other than as shareholders, in the decisions of the Committee. The remuneration committee secretary will be the company human resource manager. By invitation, other members of the Board may attend the Committee’s meetings. Meetings The Remuneration Committee is planned to meet at least three times a year. In the year ended December 31, 2014, the remuneration committee met on four occasions. Directors’ emoluments and pension contributions The aggregate remuneration for the Directors of the Company, for service in all capacities for the period year ended December 31, 2014 was €510,128 (2013: €197,965). The period was from incorporation in July, 2013 to the end of the year. The remunerations of individual Directors were as follows. 2014 2013 Bonus € Pension € Andrew Day David O’Connor David Reeves Giorgio Guastalla Ross Graham Andrew Lawton Salary or fees € 125,056 56,817 55,965 43,383 57,948 54,910 62,500 – – – – 16,537 394,079 79,037 – – – – – – – Share options € 28,043 – – – – 8,969 Total € 215,599 56,817 55,965 43,383 57,948 80,416 Salary or fees € 62,500 47,500 26,407 24,070 23,223 – 37,012 510,128 183,700 Bonus € Pension € – – – – – – – – – – – – – – Share options € 9,005 5,260 – – – – Total € 71,505 52,760 26,407 24,070 23,223 – 14,265 197,965 25 ANNUAL REPORT AND ACCOUNTS 2014IIIIGovernance Report Directors’ Remuneration Report (continued) Directors’ interest in shares The interests of each person who was a director of the Company as at December 31, 2014 (together with interests held by his or her connected persons) were: Giorgio Guastalla5 Andrew Day David Reeves David O’Connor6 Ross Graham 5 Giorgio Guastalla’s indirect shareholding arises out of his 90% holding in P.E.Q. Holdings Limited. 6 David O’Connor resigned as a director on July 31, 2014. The outstanding awards granted to each director of the Company are as follows. Long-Term Investment Plan 2014 Number 2013 Number 10,780,862 5,296,573 16,260 – 30,490 10,780,862 5,296,573 16,260 12,195 – 16,124,185 16,105,890 Andrew Day David O’Connor Andrew Lawton Share Option Plan Andrew Day David O’Connor Start of year Number 86,593 65,811 – 152,404 Awarded Number – – 50,000 50,000 Vested Number – – – – Lapsed Number – 65,811 – End of year Number 86,593 – 50,000 Vesting date July 12, 2016 – July 3, 2017 65,811 136,593 – Start of year Number Awarded Number Vested Number Lapsed Number 21,167 21,167 21,168 63,502 4,490 4,490 4,490 13,470 76,972 – – – – – – – – – – – – – – – – – – – – – – 4,490 4,490 4,490 13,470 13,470 End of year Number 21,167 21,167 21,168 63,502 – – – – 63,502 Vesting date July 12, 2015 July 12, 2016 July 12, 2017 – – – – – – Awards of shares will vest on the dates shown. In the event that a director ceases to be an employee of the Group for reasons other than death, retirement, redundancy, injury, ill-health or disability before the vesting date, then the rights to the award will lapse, unless the Remuneration Committee recommend otherwise. Awards are subject to further performance conditions once granted. Transactions with Directors During the year, there were no material transactions between the Company and the Directors, other than their emoluments. All transactions between the Group and the Directors are set out in the notes to the financial statements, including Note 24 on related party transactions. Giorgio Guastalla Chairman of the Remuneration Committee 26 KEYWORDS STUDIOS PLC Directors’ Remuneration Policy Report The Committee reserves the right to make any remuneration payments and payments for loss of office, notwithstanding that they are not in line with the policy set out below, where the terms of the payment were agreed (i) before the policy came into effect or (ii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes “payments” includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are “agreed” at the time the award is granted. The Remuneration Committee determines the Company’s policy on executive directors’ and if required, senior management remuneration. The objectives of this policy are: • to reward executive directors and senior management in a manner that ensures that they are properly incentivised and motivated to perform in the best interests of shareholders; to provide a level of remuneration required to attract and retain high calibre executive directors and senior management; to encourage value creation through consistent and transparent alignment with the agreed company strategy; the Remuneration Committee takes into account the performance of the individual, comparisons with peer company companies and reports from external independent consultants. The experience of the individual and his/ her level of responsibility are also taken into account; • • • • ensuring the total remuneration packages awarded to executive directors comprise of both performance-related and non-performance-related remuneration, designed to motivate the individual, align interests with shareholders and comply with corporate governance best practice; and to ensure that any remuneration awarded is deserved and is aligned to the shareholders’ interests. • Remuneration components Various remuneration components are combined to ensure an appropriate and balanced remuneration package that reflects the business unit, the employee’s position in the company and professional activity as well as market practice. The remuneration components are comprised of the following elements: • Fixed remuneration (basic salary); • Performance-based remuneration (variable salary); • Pension schemes; • Other benefits; and • LTIP (long-term incentive plan). For Non-Executive Directors there is only one component, a base fee. Basic salaries and benefits Basic salaries should initially be determined to reflect first the role and the responsibility of the individual within that role while also upholding the principle of paying no more than is necessary. The basic salaries of executive directors and senior management are reviewed annually having regard to personal performance, company performance, significant changes in their responsibilities and competitive market practice. Any increases in basic salary should be disclosed and justified. Performance bonus Under current arrangements, which will be reviewed annually by the Remuneration Committee, executive directors and senior management are eligible to participate in a bonus scheme. The bonus amount is a percentage of salary ranging from 20% to 50%, which is subject to the attainment of specific targets set for each individual. The portion of bonus earned in any one year depends on the Remuneration Committee’s assessment of each individual’s performance and the overall performance of the Company against predetermined turnover and profitability targets for the year. Performance targets are weighted 80 per cent towards the Company’s financial performance and 20 per cent towards personal performance. The Remuneration Committee will review targets and the weighting of performance measures each year. The bonus may not exceed the agreed percentage of the fixed salary, which level can only be achieved at a weighted target achievement of 100 per cent. Furthermore, the bonus will be cancelled at a weighted target achievement of less than 80 per cent. Pension entitlements The Company does not operate any pension scheme or make pension provision for non-executive directors. At the discretion of the remuneration committee the executive directors and senior management may participate in a pension scheme facilitated by the Company. Benefits During the period since incorporation, the Company did not contribute to any Employment related benefits. Share options Share option programmes are in place for permanent members of staff, including the Senior Management. The focus of the share option programmes is to retain and create long-term shareholder value. The intention of such grants is to ensure value creation and fulfilment of the company’s long-term goals. 27 ANNUAL REPORT AND ACCOUNTS 2014IIIIGovernance Report Directors’ Remuneration Policy Report (continued) Long-Term Incentive Plan (LTIP) The purpose of the LTIP is to incentivise delivery against total shareholder return. Share awards further the alignment of executives’ and shareholders’ interests. LTIP grants can be made annually to a range of senior employees across the Company. Awards are made in the form of share options which vest subject to performance conditions. Performance conditions are measured over three financial years and are not retested. Conditions are reviewed annually. Leaver treatment Fair treatment will be extended to departing executives. Executives who resign or are dismissed for cause are, by default, not eligible for an annual bonus if they have left or are under notice at date of payment, and forfeit all LTIP shares. At the Committee’s discretion good leavers (normally including such circumstances as retirement, death, disability, and redundancy) may be eligible for an annual bonus for the proportion of the bonus year served. However performance will be tested in line with the normal performance schedule. 28 KEYWORDS STUDIOS PLC Independent Auditor’s Report to the Members of Keywords Studios plc We have audited the financial statements of Keywords Studios plc for the year ended December 31, 2014 which comprise the Group and Parent Company Statements of Financial Position, the Group and Parent Company Statements of Comprehensive Income, the Group and Parent Company Statements of Cash Flow, the Group and Parent Company Statements of Changes in Equity, the related notes and the Directors Remuneration Report. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3, 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 auditor’s 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 audit work, for this report or for opinions we have formed. Respective responsibilities of Directors and Auditor The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group and company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and company and of the profit or loss of the Group and company for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. select suitable accounting policies and then apply them consistently; In preparing these financial statements, the Directors are required to: • • make judgements and accounting estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that 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 the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Website publication The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Our responsibility is to audit and express an opinion on 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 FRC’s website at www.frc.org.uk/auditscopeukprivate. 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 parent company’s affairs as at December 31, 2014 and of the Group’s and the parent company’s profit for the period then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. • • • Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 29 ANNUAL REPORT AND ACCOUNTS 2014IIIIGovernance Report Independent Auditor’s Report (continued) to the Members of Keywords Studios plc Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches • not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of Directors’ remuneration specified by law are not made; or • • we have not received all the information and explanations we require for our audit. Teresa Morahan (Senior statutory auditor) for and on behalf of BDO, Statutory Auditor Mercer Street Lower Dublin 2 Ireland April 14, 2015 30 KEYWORDS STUDIOS PLC Consolidated Statement of Comprehensive Income Revenues Other operating costs Multimedia tax credits Gross Profit Other administration expenses Costs of Initial Public Offering Share option expense Costs of acquisitions and integration Amortisation of intangible assets Administrative expenses Operating profit Financing income Financing cost Profit before taxation Tax expense Profit for the year Other comprehensive income: Exchange (losses)/gains on translation of foreign operations Total comprehensive income for the year attributable to the owners of the parent Earnings per share Basic earnings per ordinary share (Euro cent) Diluted earnings per ordinary share (Euro cent) The notes on pages 38 to 62 form an integral part of these consolidated financial statements. On behalf of the Board Andrew Day Director April 14, 2015 Andrew Lawton Director Note 4 5 6 6 7 Years ended 31 December 2014 € 2013 Restated € 37,293,179 (25,980,943) 1,413,038 16,184,611 (10,721,956) 152,260 12,725,274 5,614,915 (7,566,240) – (156,000) (1,461,054) (467,786) (3,196,156) (1,123,566) (70,755) – – (9,651,080) (4,390,477) 3,074,194 516,028 (154,662) 3,435,560 (1,215,373) 1,224,438 59,335 (125,710) 1,158,063 (393,720) 2,220,187 764,343 (287,970) 84,591 1,932,217 848,934 Note Euro cent Euro cent 9 9 4.94 4.93 2.14 2.12 31 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Consolidated Statement of Financial Position Restated Non-current assets Property, plant and equipment Goodwill Intangible assets Deferred tax assets Current assets Trade receivables Other receivables Cash and cash equivalents Short-term investments Deferred tax assets Total assets Equity Share capital Share premium Merger reserve – restructuring Merger reserve – acquisitions Foreign exchange reserve Share option reserve Retained earnings Total equity Current liabilities Trade payables Other payables Corporation tax liabilities Non-current liabilities Other payables Deferred tax liabilities Total equity and liabilities As of 31 December Note 2014 € 2013 € 14 12 13 28 15 16 17 18 28 19 20 21 22 22 28 2,760,906 14,710,709 2,966,537 435,652 20,873,804 6,203,352 5,644,086 11,013,977 258,866 377,237 600,415 – – – 600,415 1,303,462 1,125,451 15,270,569 518,506 – 23,497,518 18,217,988 44,371,322 18,818,403 551,146 18,542,387 (370,069) 5,667,168 (265,116) 226,755 7,666,617 464,782 11,249,637 (370,069) – 22,854 70,755 6,055,588 32,018,888 17,493,547 2,322,061 6,880,839 542,983 503,634 516,399 4,627 9,745,883 1,024,660 1,218,550 1,388,001 2,606,551 300,196 – 300,196 44,371,322 18,818,403 The notes on pages 38 to 62 form an integral part of these consolidated financial statements. The financial statements were approved and authorised for issue by the Board on April 14, 2015. Andrew Lawton Director On behalf of the Board Andrew Day Director April 14, 2015 32 KEYWORDS STUDIOS PLC Consolidated Statement of Changes in Equity Balance at 1 January 2013 Total comprehensive income for the year Share option expense (Note 20) Dividends paid (Note 10) Shares issued (Note 19) Share issuance cost capitalised Merger reserve arising on Group reconstruction (Note 19) Balance at 31 December 2013 Profit for the year Other comprehensive income Share option expense (Note 20) Dividends paid (Note 10) Shares issued for cash (Note 19) Shares issued upon acquisitions (Note 19) Merger reserve arising on Group acquisitions (Note 19) Share capital € 188 Share premium € – – – – – – – 464,594 11,530,689 (281,052) – – – (370,069) 464,782 11,249,637 – – – – 7,292,750 – – – – 48,944 (370,069) – – – – – 37,420 – – – – – Merger reserve restructuring € Merger reserve acquisitions € Foreign exchange reserve € (61,737) 84,591 – – – – Share option reserve € Retained earnings € Total equity € – 6,072,372 6,010,823 – 70,755 – – – 764,343 – (781,127) 848,934 70,755 (781,127) – 11,995,283 (281,052) – – – – (370,069) 22,854 – (287,970) – – – 70,755 – – 156,000 – – 6,055,588 17,493,547 2,220,187 2,220,187 (287,970) – 156,000 – (609,158) (609,158) 7,341,694 – – – – – – – 37,420 5,667,168 – – – – – – – – – – – – – – – – – – – – 5,667,168 Balance at 31 December 2014 551,146 18,542,387 (370,069) 5,667,168 (265,116) 226,755 7,666,617 32,018,888 33 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Consolidated Statement of Cash Flows Cash flows from operating activities Profit after tax Adjustments to reconcile net income to net cash provided by operating activities (see below) Income taxes (paid) Net cash provided by operating activities Cash flows from investing activities Acquisition of subsidiaries net of cash acquired Acquisition of property, plant and equipment Disposal/(acquisition) of short-term investments Interest received Net cash used in investing activities Cash flows from financing activities Repayment of borrowings in acquired company Dividends paid Shares issued Share issuance expenses Interest paid Net cash used in financing activities (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of period Adjustments to reconcile net income to net cash provided by operating activities Income and expenses not affecting operating cash flows Depreciation Intangibles amortisation Income tax expense Share option expense Foreign currency revaluation of fixed assets Loss on disposal of fixed assets Interest received Share issuance costs Interest paid Changes in operating assets and liabilities (Increase)/decrease in trade receivables (Increase)/decrease in other receivables Increase in trade and other payables Increase in foreign exchange reserve 34 Years ended 31 December Note 2014 € 2013 Restated € 2,220,187 764,343 202,302 (522,295) 1,881,048 (359,104) 1,900,194 2,286,287 (8,889,170) (1,252,412) 259,640 49,405 – (393,690) (12,921) 59,335 (9,832,537) (347,276) (2,996,110) (609,158) 7,341,700 – (60,681) – (781,127) 11,625,214 (1,404,618) – 3,675,751 9,439,469 (4,256,592) 15,270,569 11,378,480 3,892,089 30 14 18 6 10 19 6 17 11,013,977 15,270,569 Years ended 31 December Note 2014 € 2013 € 5 5 7 20 14 14 6 6 868,308 467,786 1,215,373 156,000 (161,001) 65,965 (49,405) – 60,681 (2,929,983) (2,089,814) 2,598,392 – 272,470 – 393,720 70,755 11,209 – (59,335) 1,123,566 – 93,786 (248,138) 138,424 84,591 202,302 1,881,048 KEYWORDS STUDIOS PLC Company Statement of Financial Position Non-current assets: Investment in subsidiaries Other receivables Current assets: Other receivables Cash and cash equivalents Total assets Equity: Share capital Share premium Merger reserve – restructuring Merger reserve – acquisitions Share option reserve Retained earnings Total equity Current liabilities Corporation tax liabilities Trade payables Other payables Non-current liabilities Other payables Total equity and liabilities As of 31 December Note 2014 € 2013 Restated € 23 16 16 17 19 20 21 22 12,765,330 3,000,000 5,735,481 – 15,765,330 5,735,481 15,798,350 701,146 1,898,008 10,722,542 16,499,496 12,620,550 32,264,826 18,356,031 551,146 18,542,387 5,312,892 5,667,168 226,755 (317,467) 464,782 11,249,637 5,312,892 – 70,755 897,418 29,982,881 17,995,484 4,226 73,883 1,132,388 1,210,497 22,650 – 37,701 60,351 22 1,071,448 300,196 32,264,826 18,356,031 The notes on pages 38 to 62 form an integral part of these financial statements. The financial statements were approved and authorised for issue by the Board on April 14, 2015. On behalf of the Board Andrew Day Director April 14, 2015 Andrew Lawton Director 35 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Company Statement of Changes in Equity Balance at 1 January 2013 Total comprehensive income for the year Share option expense (Note 20) Dividends paid (Note 10) Shares issued (Note 19) Share issue costs capitalised Merger reserve arising on Group reconstruction (Note 19) Balance at 31 December 2013 Total comprehensive income for the year Share option expense (Note 20) Dividends paid (Note 10) Shares issued for cash (Note 19) Shares issued upon acquisitions (Note 19) Merger reserve arising on Group reconstruction (Note 19) Share capital € – Share premium € – – – – 464,782 – – – – 11,530,689 (281,052) – – 5,312,892 464,782 11,249,637 5,312,892 – – – 48,944 37,420 – – – – 7,292,750 – – – – – – – – Merger reserve restructuring € Merger reserve acquisitions € Share option reserve € – – 70,755 – – – Retained earnings € – Total equity € – 1,054,027 – (156,609) – – 1,054,027 70,755 (156,609) 11,995,471 (281,052) – – 5,312,892 70,755 897,418 17,995,484 – 156,000 – – (605,727) – (609,158) – – – – – (605,727) 156,000 (609,158) 7,341,694 37,420 5,667,168 – – – – – – – – – – – – – – – – – – – 5,667,168 Balance at 31 December 2014 551,146 18,542,387 5,312,892 5,667,168 226,755 (317,467) 29,982,881 36 KEYWORDS STUDIOS PLC Company Statement of Cash Flows Cash flows from operating activities (Loss)/profit after tax Adjustments to reconcile net income to net cash provided by operating activities (see below) Income taxes (paid) Net cash provided by operating activities Cash flows from investing activities Acquisition of subsidiaries Acquisition of property, plant and equipment Acquisition of short-term investments Interest received Net cash used in investing activities Cash flows from financing activities Repayment of borrowings in acquired company Dividends paid Shares issued Share issuance expenses Interest paid Net cash used in financing activities (Decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of period Adjustments to reconcile net income to net cash provided by operating activities Income and expenses not affecting operating cash flows Income tax expense Share option expense Interest received Share issuance costs Interest paid Changes in operating assets and liabilities (Increase) in other receivables Increase in trade and other payables Years ended 31 December Note 2014 € 2013 Restated € (605,727) (16,405,082) (27,902) 1,054,027 (409,647) – (17,038,711) 644,380 (2,735,139) – – 20,392 (2,714,747) – – – 14,175 14,175 10 – (609,158) 10,341,700 – (480) – (156,609) 11,625,214 (1,404,618) – 9,732,062 10,063,987 (10,021,396) 10,722,542 10,722,542 – 17 701,146 10,722,542 Years ended 31 December 2014 € 2013 € 9,478 156,000 (20,392) – 480 22,650 18,423 (14,175) 1,123,566 – (16,900,342) 349,694 (1,898,008) 337,897 (16,405,082) (409,647) 37 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements 1 Basis of preparation Keywords Studios plc (the “Company” is a company incorporated in the UK. These consolidated financial statements include the financial statements of the Company and its subsidiaries (the “Group”) made up to December 31, 2014. The Group was formed on July 8, 2013 when Keywords Studios plc (formerly Keywords Studios Limited) acquired the entire share capital of Keywords International Limited through the issue of 31,901,332 ordinary shares. The parent company financial statements present information about the Company as a separate entity and not about its Group. The consolidated and Company financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the European Union (“adopted IFRSs”). In the current year the Group has adopted all of the new and revised standards and interpretations issued by the IASB and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, as they have been adopted by the European Union, that are relevant to its operations and effective for accounting periods beginning on January 1, 2013. The adoption of these standards has had no material impact on the financial statements. New standards, interpretations and amendments not yet effective None of the new standards, interpretations and amendments, which are effective for periods beginning after January 1, 2014, have been adopted. No detailed review of the impact of IFRS 15 has taken place and therefore we are unable to conclude what impact it may have on the Group’s future financial statements at this point. 2 Significant accounting policies Basis of consolidation Where the company has control over an investee, it is classified as a subsidiary. The company controls an investee if all three of the following elements are present; power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control. De-facto control exists in situations where the company has the practical ability to direct the relevant activities of the investee without holding the majority of the voting rights. In determining whether de-facto control exists the company considers all relevant facts and circumstances, including: • the size of the company’s voting rights relative to both the size and dispersion of other parties who hold voting rights; substantive potential voting rights held by the company and by other parties; • • other contractual arrangements; and • historic patterns in voting attendance. The consolidated financial statements present the results of the company and its subsidiaries (“the Group”) as if they formed a single entity. Intercompany transactions and balances between Group companies are eliminated in full. The acquisition of Keywords International Limited was deemed to be a “combination under common control” as ultimate control before and after the acquisition was the same. As a result, these transactions were outside the scope of IFRS 3 “Business combinations” and have been accounted for under the principles of merger accounting as set out under UK GAAP. Keywords Studios Limited was incorporated on May 29, 2013. Accordingly, although the units which comprise the Group did not form a legal group for the entire year, the prior year comprises the results and balances of the subsidiary companies and the Company as if the Group had been in existence throughout the entire period. As part of the Group reconstruction in 2013, the Company issued 31,901,332 shares at a value of £1.23 each, being the flotation price, as part of a share for share exchange with the shareholders of Keywords International Limited. The £0.01 nominal value of the shares issues was accounted for in Issued Share Capital. On the 2013 consolidated balance sheet, the difference between the nominal value of shares issued by the company as consideration for the shares in Keywords International Limited, and the nominal value of the shares in Keywords International Limited was treated as a merger reserve arising on group reconstruction. On the Company balance sheet, the excess of net book value of the assets held by Keywords International Limited, at the date of the share for share exchange, over the nominal value of the shares issued was treated as a merger reserve. Business combinations The consolidated financial statements incorporate the results of business combinations using the purchase method. In the Consolidated Statement of Financial Position, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated income statement from the date on which control is obtained. They are deconsolidated from the date of which control ceases. Any contingent consideration payable is recognised at fair value at the acquisition date and is split between current liabilities and long-term liabilities depending on when it is due. When the consideration becomes more certain the fair value of the contingent consideration will be revalued and any change will be recognised in the statements of comprehensive income. Foreign currency Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their “functional currency”) are recorded at the rates ruling when the transactions occur. The Functional currency for the Company is Euro. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in profit or loss. 38 KEYWORDS STUDIOS PLC On consolidation, the results of overseas operations are translated into Euro at rates approximating to this ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve. Exchange differences recognised in profit or loss in Group entities’ separate financial statements on the translation of long-term items forming part of the Group’s net investment in the overseas operation concerned are classified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation. On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal. Revenue recognition Revenue is recognised, net of sales taxes, when the service is rendered. When projects are in progress at the period end, revenue is recognised to the extent that services have been provided. The multimedia tax credits received in Montreal on testing services are treated as a deduction against direct costs. The tax credits of €1,413,038 (2013 €152,260) were treated as revenue in the previous accounting periods. The comparatives have been restated. Share-based payments The Company issues equity settled share-based payments to certain employees and Directors under a share options plan and a long-term incentive plan (“LTIP”). The fair value determined at the grant date is expensed on a straight line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions. At each reporting date, the Company revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves. The Company has no legal or constructive obligation to repurchase or settle the options in cash. Where share-based payments are issued to employees of subsidiary companies, the annual cost of the option is expensed in the subsidiary company, with a corresponding increase in capital contribution from the Company. This annual cost is recorded as an increase in the Company’s cost of investment in that subsidiary. Share option plan These are measured at fair value, taking into account market vesting conditions but not non-market vesting conditions on the grant date using a Black-Scholes option pricing model which calculates the fair value of an option by using the vesting period, the expected volatility of the share price, the current share price, the exercise price and the risk free interest rate. The fair value of the option is amortised over the vesting period, with one third of the options vesting after two years, one third after three years, and the balance vest after four years. The only vesting condition is continuous service. There is no requirement to revalue the option at any subsequent date. The charge that is recognised is adjusted to reflect failure to vest due to non- achievement of a non-market vesting condition but not failure to vest due to the non-achievement of a market vesting condition. LTIP An alternative share plan was introduced to give awards to Directors and staff, subject to outperforming the Numis Small Cap (excluding Investment Trusts) index in terms of shareholder return over a three year period. There are three different award levels; one third of the share options vest if the company shall exceed the Total Shareholder Return of the Numis Small Cap Index by not less than 10%, two thirds if the shareholder return exceeds by over 20% and 100% of the share options if the shareholder return exceeds by over 30%. These are measured at fair value, taking into account market vesting conditions but not non-market vesting conditions, at the date of grant, measured by using the Monte Carlo binomial model. The charge that is recognised is adjusted to reflect failure to vest due to non-achievement of a non-market vesting condition but not failure to vest due to the non-achievement of a market vesting condition. Dividend distribution Final dividends are recorded in the Group’s financial statements in the period in which they are approved by the Group’s shareholders. Interim dividends are recognised when paid. Income taxes and deferred taxation Provision for income taxes is calculated in accordance with the tax legislations and applicable tax rates in force at the reporting date in the countries in which the Group companies have been incorporated. Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on: • the initial recognition of goodwill; the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. • • The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). 39 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 2 Significant accounting policies continued Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either: • • different Group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities the same taxable Group company; or simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered. Property, plant and equipment Property, plant and equipment comprise computers, leasehold improvements, and office furniture and equipment, and are stated at cost less accumulated depreciation. Carrying amounts are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Depreciation is calculated to write off the cost of fixed assets on a straight line basis over the expected useful lives of the assets concerned. The principal annual rates used for this purpose are: Computers and software Office furniture and equipment Building and leasehold improvements % 33.33 10.00 over the length of the lease Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the consolidated statement of comprehensive income. Goodwill Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date. Impairment Impairment tests on goodwill and other tangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to annual impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. – the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to establish the recoverable amount of an individual asset, the impairment test is carried out on the asset’s cash generating unit (i.e. – the lowest Group of assets in which the asset belongs for which there are separately identifiable cash flows). Impairment charges are included in the administrative expenses line item in the consolidated statement of comprehensive income. Intangible assets Intangible assets, separately identified from goodwill acquired as part of a business combination, are initially stated at fair value. The fair value attributed is determined by discounting the expected future cashflow to be generated from the asset at the risk adjusted average weighted cost of capital appropriate to the intangible asset. The assets are estimated over their useful life which presently is 5 years starting from date the asset was capitalised. Financial assets Loans and receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. The Group’s receivables comprise trade and other receivables and cash and cash equivalents in the statement of financial position. Trade receivables, which principally represent amounts due from customers, are initially recognised, thereafter, are recognised at amortised cost. An estimate for doubtful debts is made when there is objective evidence that the Group will not be able to collect amounts due according to the original terms of receivables. Bad debts are written off when identified. Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months. Where cash is on deposit with maturity dates greater than three months, it is disclosed as short-term investments. Share capital Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group’s ordinary shares are classified as equity instruments. Financial liabilities Trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. 40 KEYWORDS STUDIOS PLC Leased assets Where substantially all of the risks and rewards of ownership are not transferred to the Group (“operating lease”), the total rental payables are charged to the consolidated statement of comprehensive income on a straight-line basis over the term of the lease. Finance leases Where substantially all of the risks and rewards incidental to ownership of a leased asset have been transferred to the Group (a “finance lease”), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the consolidated statement of comprehensive income over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor. 3 Critical accounting estimates and judgements The preparation of consolidated financial statements under IFRS requires the Directors to make estimates and judgements that effect the application of policies and reported amounts. The areas requiring the use of estimates and critical judgements that may significantly impact the Group’s earnings and financial position are revenue recognition in respect of accrued income and computation of income taxes. Estimates and judgements are continually evaluated and are based on historic experience and other factors including expectations of future events that are believed to be reasonable. Actual results may differ from these estimates and assumptions. Accrued income Judgement is required in respect of the amount of accrued income recognised at the reporting date. The amount of accrued income is determined based on an assessment of the expected amount of unbilled time costs in respect of work commenced prior to the close of a particular year end that will be invoiced to customers after that year end date. Income taxes The Group is subject to income tax in several jurisdictions and judgement may be required in determining the provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination may be uncertain. As a result, the company recognises tax liabilities based on an understanding of taxation legislation in particular jurisdictions and any related estimates of whether taxes and/or interest will be due. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made. Goodwill and intangible assets arising on acquisition The value of goodwill and intangible assets recognised on the Group’s acquisitions during the year, were derived from the projected cashflows for those businesses at the time of acquisition, based on management forecasts. The accuracy of the valuation would therefore be compromised by any differences between the forecasts and the levels of business activity that the entity might actually have been able to generate in the absence of acquisition. The valuation will also be affected by the accuracy of the discount factor used. The carrying value of goodwill and intangibles assets is dependent on the accuracy of the inputs into the impairment test detailed in Note 12. 4 Segmental analysis Management considers that the Group’s activity as a single source supplier of Localisation and Localisation Testing Services constitutes one operating and reporting segment, as defined under IFRS 8. Management review the performance of the Group by reference to Group-wide profit measures and the revenues derived from four main service groupings: • Localisation Services – Localisation services relate to translation and cultural adaptation of in-game text and audio scripts across multiple game platforms and genres; • Localisation Testing – Localisation Testing involves testing the linguistic correctness and cultural acceptability of computer games; • Audio/Voiceover Services – Audio Services relate to the audio production process for computer games and includes script translation, actor selection and talent management through pre-production, audio direction, recording, and post-production, including native language Quality Assurance of the recordings; • Functional Testing – Functional Testing relates to quality assurance services provided to game producers to ensure games function as required; and • Art Creation Services – Art creation services relate to the production of graphical art assets for inclusion in the video game including concept art creation along with 2D and 3D art asset production and animation. There is no allocation of operating expenses, profit measures, assets and liabilities to individual product groupings. Accordingly the disclosures below are provided on an entity-wide basis. Activities are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker has been identified as the executive management team made up of the Chief Executive Officer and the Finance Director. 41 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 4 Segmental analysis continued Revenue by line of business Localisation Localisation testing Audio Functional testing Art creation Years ended 31 December 2014 € 2013 € 11,956,656 14,657,743 5,080,460 4,985,834 612,486 5,320,891 9,279,536 1,234,846 349,338 – 37,293,179 16,184,611 The 2013 revenue has been restated to exclude the multimedia tax credits which were previously included in Localisation Testing of €152,260 and also a financing discount received from a customer of €50,121. Two (2013: Two) customers accounted for more than 10% of the Group’s revenue during the year. Revenues generated from those customers were €7.1m and €3.9m (2013: €3.4m and €2.9m). Geographical analysis of revenues by jurisdiction Analysis by geographical regions is made according to the Group’s operational jurisdictions. This does not reflect the region of the Group’s customers, whose locations are worldwide. Ireland Japan Italy Canada United States India Singapore United Kingdom Total revenues Geographical analysis of non-current assets from continuing businesses Ireland Canada Japan Italy United States India Singapore UK 5 Operating profit Operating profit is stated after charging: Depreciation Amortisation of intangible assets Costs of Initial Public Offering Costs of acquisitions Costs of integration Operating lease repayments 42 Years ended 31 December 2014 € 2013 € 9,939,377 2,643,895 6,754,245 11,066,703 5,838,019 612,485 64,939 373,516 10,904,474 1,208,392 345,884 926,340 2,799,521 – – – 37,293,179 16,184,611 As of 31 December 2014 € 2013 € 391,166 1,056,685 26,138 316,312 249,190 602,975 97,288 21,152 452,958 106,360 11,602 28,939 556 – – – 2,760,906 600,415 Years ended 31 December 2014 € 2013 € 868,308 467,786 – 482,858 978,196 272,470 – 1,123,566 – – 1,017,810 587,085 KEYWORDS STUDIOS PLC One-time costs of €482,858 and €978,196 respectively were incurred in acquiring and integrating the new entities into the group. Last year costs of €1,404,618 were incurred in the Company’s IPO. €281,052 of these costs were capitalised against the share premium account. Auditors’ remuneration Audit services Parent company and Group audit Subsidiary companies audit Non-audit services Accounting services Taxation compliance Corporate finance fees related to IPO Due diligence services 6 Financing income and costs Finance income Interest received Foreign exchange gain Finance cost Bank charges Interest expense Foreign exchange losses Net financing income/(expense) 7 Taxation Current income tax Income tax on profits Income tax on profits of subsidiary operations Deferred tax (Note 28) The tax charge for the year can be reconciled to accounting profit as follows: Profit before tax Expected tax charge based on the standard rate of taxation in the UK at 23% (2013: 23%) Higher rates of current income tax in overseas jurisdictions Lower rates of current income tax in overseas jurisdictions Losses incurred in overseas jurisdictions Permanent differences on non-deductible IPO expenses Effects of other timing differences Total tax charge Years ended 31 December 2014 € 2013 € 33,241 66,759 3,419 18,142 – 25,060 38,000 20,000 – 14,962 205,101 – 146,621 278,063 Years ended 31 December 2014 € 2013 € 49,405 466,623 516,028 59,335 – 59,335 (93,981) (60,681) – (24,703) – (101,007) (154,662) (125,710) 361,366 (66,375) Years ended 31 December 2014 € 2013 € 9,478 954,973 250,922 22,650 371,070 – 1,215,373 393,720 Years ended 31 December 2014 € 2013 € 3,435,560 1,158,063 790,179 236,328 (160,919) 31,905 – 317,880 266,354 20,702 (234,220) 148,755 258,420 (66,291) 1,215,373 393,720 The Group’s subsidiaries are located in different jurisdictions and are taxed on their residual profit in those jurisdictions. The majority of profits arise in Ireland. 43 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 8 Profit attributable to shareholders of the parent company In accordance with Companies Act 2006, the Company is availing of the exemption from presenting its individual Statement of Comprehensive Income to the annual general meeting and from filing it with Companies House. The amount of profit/(loss) after tax dealt with in the parent undertaking is (€605,727) (2013: profit €1,054,027). 9 Earnings per share Basic Diluted Profit for the period from continuing operations Denominator (weighted average number of equity shares) Basic Diluted Years ended 31 December 2014 Euro cent 2013 Euro cent 4.94 4.93 2014 € 2.14 2.12 2013 € 2,220,187 764,343 Number Number 44,955,503 45,064,294 35,778,042 36,062,393 The dilutive impact of share options has been considered in calculating diluted earnings per share. Details of the number of share options outstanding at the year-end are set out in Note 20. 10 Dividends Interim Final Interim Dividends paid to shareholders 2014 Per share Euro cent – 0.84 0.46 1.30 Total € – 393,767 215,391 2013 Per share Euro cent 842.00 3,379.00 0.39 Total € 124,518 500,000 156,609 609,158 4,221.39 781,127 In May 2013, Keywords International Limited distributed €8.42 per share, based on the shares in issue at that time, or €124,518 in total, as a special dividend for 2011. In June 2013, Keywords International Limited distributed €33.79 per share, based on the shares in issue at that time, or €500,000 in total, as a final dividend for 2012. In October 2013 Keywords Studios plc distributed its maiden dividend of Stg 0.33/€0.39 per share, based on the shares in issue at that time, or €156,609, as an interim dividend for 2013. In June 2014, Keywords International Limited approved a dividend of Stg 0.67/€0.84 per share, based on the shares in issue at that time, or €393,767 in total, as a final dividend for 2013. The dividend was paid in July 2014. In September 2014, Keywords International Limited approved a dividend of Stg 0.36/€0.46 per share, based on the shares in issue at that time, or €215,391 in total, as an interim dividend for 2014. The dividend was paid in October 2014. The Directors’ recommend a final dividend in respect of the financial year ended December 31, 2014 of Stg 0.74p per Ordinary share, to be paid on June 26, 2015 to shareholders who are on the register at June 5, 2015. This dividend is not reflected in these financial statements as it does not represent a liability at December 31, 2014. The final proposed dividend will reduce shareholders’ funds by an estimated €443,200. 11 Staff costs Total staff costs (including Directors) comprise the following: Salaries and related costs Share-based payment costs 44 Years ended 31 December 2014 € 2013 € 19,906,840 156,000 8,704,709 70,775 20,062,840 8,775,464 KEYWORDS STUDIOS PLC Key management compensation: Salaries and related costs Social welfare costs Pension costs Share-based payment costs Years ended 31 December 2014 € 594,616 59,645 4,800 66,073 2013 € 394,800 17,724 54,800 24,582 725,134 491,906 The key management compensation includes the five Directors of Keywords Studios plc (2013: five Directors of Keywords International Limited/ Keywords Studios). The breakdown of Directors’ remuneration for the Company is included in the Directors’ Remuneration Report on page 25. Average number of employees Operations General and administration 12 Goodwill Group Years ended 31 December 2014 918 60 978 Lakshya Digital Private Limited € 2013 350 21 371 Total € Liquid Violet Limited € Babel Media Limited € Binari Sonori S.R.L. € Cost and net book value At 31 December 2013 Recognised on acquisition of a subsidiary – 1,042,854 – 4,374,676 – 7,630,429 – 1,662,750 – 14,710,709 As at 31 December 2014 1,042,854 4,374,676 7,630,429 1,662,750 14,710,709 During the period goodwill arose on the acquisition of Liquid Violet Limited, Babel Media Group Limited, Binari Sonori S.R.L. and Lakshya Digital Private Limited. The goodwill has been tested for impairment in this period. The recoverable amount for each cash-generating unit (“CGU”) has been determined from value in use calculations. The key assumptions for the value in use calculations are those regarding discount rates, terminal value growth rates and expected changes to selling prices and costs during the period. All of the assumptions have been reviewed by management. Management estimates a discount rate using pre-tax rates that reflect current market assessments of the time value of money and the risk of the CGUs. The rate used within the calculations was 12.5% for each CGU. The growth rates are based on a review of recently achieved growth rates and a prudent estimate of likely growth rates for each CGU. Key assumptions for the value in use calculations are as follows: Liquid Violet Limited Babel Media Limited Binari Sonori S.R.L Lakshya Digital Private Limited Long-term growth rate 10% 10% 10% 10% Discount rate 12.5% 12.5% 12.5% 12.5% As part of the value in use calculation, management prepared an initial cash flow forecast, approved by the Board of Directors, covering the period to December 31, and the following five years. The long-term growth rate has been used to determine a terminal value for each CGU. The Group has conducted a sensitivity analysis on the carrying value on each of the CGUs. If the sales projections reduce by the following percentages, the value of goodwill would be impaired. Liquid Violet Limited Babel Media Limited Binari Sonori S.R.L Lakshya Digital Private Limited 10.6% 17.6% 9.1% 12.6% The result of the value in use calculations was that no impairment is required in this period. 45 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 13 Intangible assets – customer relationships Group Cost At 31 December 2013 Additions As at 31 December 2014 Amortisation and impairment At 31 December 2013 Amortisation charge As at 31 December 2014 Net book value As at 31 December 2013 As at 31 December 2014 Liquid Violet Limited € Babel Media Limited € Binari Sonori S.R.L. € Lakshya Digital Private Limited € Total € – 203,770 – 964,287 – 1,791,281 – 474,985 – 3,434,323 203,770 964,287 1,791,281 474,985 3,434,323 Liquid Violet Limited € – 39,056 39,056 Babel Media Limited € Binari Sonori S.R.L. € – 168,756 – 238,837 168,756 238,837 Lakshya Digital Private Limited € – 21,137 21,137 Total € – 467,786 467,786 – – – – – 164,714 795,531 1,552,444 453,848 2,966,537 Customer relationships are amortised over 5 years from the point of acquisition on a straight line basis. 14 Property, plant and equipment Group Cost At 1 January 2013 Currency revaluation Additions Transfer At 31 December 2013 Currency revaluation Additions Acquisitions through business combinations Disposals At 31 December 2014 Accumulated depreciation Cost At 1 January 2013 Currency revaluation Charge Transfer At 31 December 2013 Currency revaluation Acquisitions through business combinations Depreciation charge Disposals At 31 December 2014 Net book value As at 31 December 2013 As at 31 December 2014 46 Computers and software € 927,547 (10,523) 314,481 (39,455) 1,192,050 178,962 410,632 3,508,114 (342,374) Office, furniture and equipment € 109,865 (5,196) 69,495 39,455 213,619 92,700 456,279 1,964,189 (999,384) Leasehold improvements € Total € 27,378 (4,760) 9,714 – 32,332 36,257 385,501 380,510 (47,539) 1,064,790 (20,479) 393,690 – 1,438,001 307,919 1,252,412 5,852,813 (1,389,297) 4,947,384 1,727,403 787,061 7,461,848 Computers and software € 510,873 (4,988) 245,522 (11,738) 739,669 82,958 2,686,133 545,668 (289,442) Office, furniture and equipment € 56,516 (2,470) 21,605 11,738 87,389 60,186 1,411,066 296,093 (986,352) Leasehold improvements € Total € 6,997 (1,812) 5,343 – 10,528 3,774 74,262 26,547 (47,537) 574,386 (9,270) 272,470 – 837,586 146,918 4,171,461 868,308 (1,323,331) 3,764,986 868,382 67,574 4,700,942 452,381 126,230 21,804 600,415 1,182,398 859,021 719,487 2,760,906 KEYWORDS STUDIOS PLC 15 Trade receivables Group Customers Provision for bad debts (Note 25) 16 Other receivables Group Accrued income Prepayments Other receivables Other tax and social security Restricted cash (Note 24) Company Intercompany receivables (Note 24) Restricted cash (Note 24) Prepayments Other receivables Other tax and social security Non-current Intercompany receivables (Note 24) 17 Cash and cash equivalents Group Cash at bank Short-term bank deposits Company Cash at bank Short-term bank deposits As of 31 December 2014 € 2013 € 6,463,891 (260,539) 1,384,750 (81,288) 6,203,352 1,303,462 As of 31 December 2014 € 954,329 483,920 3,650,336 234,536 320,965 2013 € 209,743 215,364 295,427 104,721 300,196 5,644,086 1,125,451 As of 31 December 2014 € 2013 € 15,389,791 320,965 71,279 – 16,315 1,483,464 300,196 31,139 8,340 74,869 15,798,350 1,898,008 3,000,000 3,000,000 – – As of 31 December 2014 € 2013 € 9,634,925 1,379,052 2,121,135 13,149,434 11,013,977 15,270,569 378,084 323,062 522,760 10,199,782 701,146 10,722,542 Short-term bank deposits relate to cash on deposit with maturity dates less than three months, or which can be accessed before on demand. 47 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 18 Short-term investments Group Medium-term bank deposits As of 31 December 2014 € 2013 € 258,866 518,506 258,866 518,506 Medium-term bank deposits relate to cash on deposit with maturity dates greater than three months, which cannot be accessed before maturity. 19 Shareholder’s equity Share capital At 1 January 2013 Ordinary shares of £0.01 each issued on incorporation Ordinary shares of £0.01 each issued on reconstruction Ordinary shares of €0.012697 each eliminated on reconstruction As at 8 July 2013 Ordinary shares of £ £0.01 each issued on flotation As at 31 December 2013 Ordinary shares of £0.01 issued on acquisition of Babel Media Limited Ordinary shares of £0.01 issued on acquisition of Binari Sonori S.R.L. Placing of ordinary shares of £0.01 on the market As at 31 December 2014 Shares € 14,797 1,000 31,901,332 (14,797) 31,902,332 8,130,081 40,032,413 1,516,944 1,555,650 4,000,000 47,105,007 188 12 370,257 (188) 370,269 94,513 464,782 18,525 18,895 48,944 551,146 On February 17, 2014 the Group issued 1,516,944 of 1p shares which formed part of the consideration for the acquisition of Babel Media Limited. On May 9, 2014 the Group issued 1,555,650 of 1p shares which formed part of the consideration for the acquisition of Binari Sonori S.R.L. On May 9, 2014 the Group placed 4,000,000 of 1p shares into the market at a value of £1.50 (€1.83) per share. Reserves The following describes the nature and purpose of each reserve within owner’s equity: Reserve Retained earnings Foreign exchange reserve Share premium Share option reserve Merger reserve – restructuring Merger reserve – acquisitions Description and purpose. Cumulative net gains and losses recognised in the consolidated statement of comprehensive income. Gains or losses arising on retranslation of the net assets of the overseas operations into Euro. The Share Premium account is the amount received for shares issued in excess of their nominal value, net of share issuance costs. The Share option reserve is the credit arising on share-based payment charges in relation to the Company’s share option schemes. The merger reserve was initially created following the Group reconstruction, when Keywords Studios plc acquired the Keywords International Limited Group of companies. In 2014 the shares in Keywords Studios plc have been issues for the acquisition of Babel Media Limited and Binari Sonori S.R.L. The value in excess of the nominal value, net of share issuance costs are within this reserve. 20 Share options In July 2013, at the time of the IPO, the Company put in place a Share Option Scheme and a Long-Term Incentive Plan (“LTIP”). The charge in relation to these arrangements is shown below, with further details of the schemes following: Share Option Scheme Expense Share Option Scheme – LTIP Expense 2014 € 65,945 90,055 156,000 2013 € 43,079 27,676 70,755 Of the total share option charge, €66,078 relates to Directors of the Company as at December 31, 2014. (2013: €24,582). Share option scheme Share options are granted to Directors and to permanent employees. The exercise price of the granted options is equal to management’s the market price of the shares at the time of the award of the options. The Company has no legal or constructive obligation to repurchase or settle the options in cash. 48 KEYWORDS STUDIOS PLC Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Outstanding at the beginning of the year Granted Lapsed Exercised Outstanding at the end of the year Exercisable at the end of the year 2014 2013 Average exercise price in £ per share 1.20 – 1.20 – 1.20 – Number of options 762,775 – (120,489) – 642,286 – Average exercise price in £ per share – 1.20 – – 1.20 – Number of options – 762,775 – – 762,775 – There were no options granted during the year and 120,489 lapsed due to staff leaving. All 642,286 options were granted on July 12, 2013 at an average exercise price of £1.20. All options were granted to either employees or Directors of the Group. Of the total options granted, 214,162 are exercisable from July 12, 2015 to July 11, 2020, 214,162 are exercisable from July 12, 2016 to July 11, 2020 and 214,162 are exercisable from July 12, 2017 to July 11, 2020. The inputs into the Black-Scholes model, used to value the options are as follows: Weighted average share price (£) Weighted average exercise price (£) Average expected life Expected volatility Risk free rates Average expected dividends yield 2014 1.23 1.20 3 years 36.12% 0.5% 1.00% 2013 1.23 1.20 3 years 36.12% 0.5% 1.00% Expected volatility was determined by calculating the historical volatility of two similar listed companies over the previous 3 years. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The weighted average remaining contractual life of the options outstanding at December 31, 2014 was 1 year 6 months (2013: 2 years 6 months). All of the outstanding options can be exercised at an average of £1.20 over a 2 to 4 year period. Long-Term Incentive Plan Scheme An alternative share plan was introduced to give awards to Directors and staff subject to outperforming the Numis Small Cap (excluding Investment Trusts) index in terms of shareholder return over a three year period. A total of 376,226 (2013: 392,037) nil price (1p) options are available to vest to Directors and to selected employees on the basis of the number of options they are entitled to. Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Outstanding at the beginning of the year Granted Lapsed Exercised Outstanding at the end of the year Exercisable at the end of the year 2014 2013 Average exercise price in £ per share 0.01 0.01 0.01 – 0.01 – Number of options 392,037 50,000 (65,811) – 376,226 – Average exercise price in £ per share – 0.01 – – 0.01 – Number of options – 392,037 – – 392,037 – On July 3, 50,000 options were granted at an exercise price of £0.01 to a director of the Group. The options are exercisable from July 3, 2017 to July 3, 2021 if the market performance conditions are met as at July 3, 2017. Additionally 65,811 options lapsed due to a director leaving the Group. Also 326,226 options were granted previously on July 12, 2013 at an exercise price of £0.01. All options were granted to either employees or Directors of the Group. The 326,226 options granted are exercisable from July 12, 2016 to July 11, 2020 if the market performance conditions are met as at July 12, 2016. 49 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 20 Share options continued The options were valued using a Monte Carlo binomial model using the following inputs: LTIPS granted in 2013 Weighted average share price (£) Weighted average exercise price (£) Average expected life Expected volatility Risk free rates LTIPS granted in 2014 Weighted average share price (£) Weighted average exercise price (£) Average expected life Expected volatility Risk free rates 2014 1.60 0.01 3 years 35.52% 0.5% 2014 1.60 1.20 3 years 35.52% 0.5% 2013 1.23 0.01 3 years 36.12% 0.5% 2013 – – – – – Expected volatility was determined by calculating the historical volatility of two similar listed companies over the previous 3 years. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. As any dividends earned are to be re-invested into the business the impact of dividends has been ignored in the calculation of the LTIP share option charge. The weighted average remaining contractual life of the options outstanding at December 31, 2014 was 1 years 8 months (2013: 2 years 6 months). All of the outstanding options can be exercised at £0.01 over a 4 year period. As of 31 December 2014 € 2013 € 2,322,061 503,634 2,322,061 503,634 73,883 73,883 – – 21 Trade payables Group Suppliers Company Suppliers 50 KEYWORDS STUDIOS PLC 22 Other payables Group Current Accrued expenses Payroll taxes Other payables Contingent consideration Related party payable (Note 24) Non-current Other payables Contingent consideration Company Current Accrued expenses Payroll taxes Other payables Contingent consideration Non-current Other payables Contingent consideration 23 Investments in subsidiaries Company Investment in subsidiaries Share option expense related to subsidiary companies As of 31 December 2014 € 2013 € 3,014,482 874,780 1,898,230 1,087,867 5,480 277,179 137,461 92,517 – 9,242 6,880,839 516,399 468,068 750,482 300,196 – 1,218,550 300,196 255,915 40,539 48,067 787,867 1,132,388 21,503 16,133 65 – 37,701 320,966 750,482 300,196 – 1,071,448 300,196 As of 31 December 2014 € 2013 € 12,765,330 – 5,683,149 52,332 12,765,330 5,735,481 The 2013 investment in subsidiaries reflected the net book value of the assets held by Keywords International Limited at the date of the share for share exchange. In 2014, the company invested in four new subsidiaries as detailed in Note 30. In 2014, the Company recorded the share option expense through the financial statements of the subsidiary companies, whereas in the comparative this was recorded through the Company investment account. 51 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 23 Investments in subsidiaries continued Details of the Company and Group’s subsidiaries as at December 31, 2014 are set out below: Name Keywords International Limited Keywords International Co. Limited Keywords International Corporation Inc. Keywords Italia S.R.L. Keywords International Inc. KW Studios Limited Keywords International Pte. Limited Binari Sonori S.R.L. Binari Sonori Inc. Liquid Violet Limited Babel Media Limited Babel Games Services Inc. Babel Media India Private Limited Babel Media USA Inc. Lakshya Digital Private Limited Lakshya Digital Singapore Pte. Ltd. Edugames Solution Private Limited Country of incorporation Ireland Japan Canada Italy United States United Kingdom Singapore Italy United States United Kingdom United Kingdom Canada India United States India Singapore India Date of incorporation/ acquisition 13-05-1998 30-11-2010 22-12-2010 18-05-2011 26-09-2012 29-05-2013 24-04-2014 08-05-2014 08-05-2014 15-01-2014 17-02-2014 17-02-2014 17-02-2014 17-02-2014 10-10-2014 10-10-2014 10-10-2014 Proportion of voting rights and ordinary share capital held 100% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 91% 91% 91% Nature of business Trading Company Trading Company Trading Company Trading Company Trading Company Dormant Company Trading Company Trading Company Trading Company Trading Company Trading Company Trading Company Trading Company Trading Company Trading Company Trading Company Trading Company 24 Related parties and shareholders Italicatessen Limited, a company registered in Ireland is related by virtue of a common significant shareholder. P.E.Q. Holdings Limited is 100% owner of Italicatessen Limited. At December 31, 2014, P.E.Q. Holdings Limited owned 25.4% of the Company. In addition, Mr. Giorgio Guastalla is a Director of Italicatessen Limited, P.E.Q. Holdings Limited and the Company, and owns, or controls, 90% of the share capital of P.E.Q. Holdings Limited. The following transactions arose with Italicatessen Limited, which provides canteen services to Keywords International Limited: Operating expenses Canteen charges The following are year-end balances: Italicatessen Limited Total related party creditors As of 31 December 2014 € 2013 € 41,811 67,028 As of 31 December 2014 5,480 5,480 2013 9,242 9,242 The company paid the following amounts to Mr. Giorgio Guastalla, Director of the Company, and shareholder of P.E.Q. Holdings Limited, in respect of rent on premises occupied by the employees of the Group in Dublin. Operating expenses Rental payment 2014 € 2013 € 21,600 18,000 The Company entered into a deed of undertaking and indemnity on July 8, 2013 with Mr. Andrew Day, CEO and Director of the Company related to possible liabilities which might arise due to the restructuring of the Group prior to its IPO on July 12, 2013. As part of this deed of undertaking and indemnity, Mr. Day deposited £250,000 as security for the Company. This is included as Restricted Cash in Other Receivables of the Company. This amount is repayable to Mr. Day on January 8, 2016 if no liability arises in that period. There is a corresponding liability included in Other Payables. The details of key management compensation (being the remuneration of the Directors) are set out in Note 31. As at December 31, 2014 and 2013, the Company had amounts receivable from its subsidiaries, amounting to €18,389,791 (2013: €1,483,464) relating to intergroup trading activities. 52 KEYWORDS STUDIOS PLC 25 Financial instruments and risk management Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Group’s income and operating cash flows are substantially independent of changes in market interest changes. The management monitors interest rate fluctuations on a continuous basis and acts accordingly. Where the Group has a significant amount of surplus cash, it will invest in higher earning interest deposit accounts. Due to interest rate conditions, the interest rates for short-term deposits are at similar levels to those achieved for longer terms. The Group is not unduly exposed to market interest rate fluctuations, and no interest rate sensitivity analysis has been presented as a result. Credit risk Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. The Group closely monitors the activities of its counterparties and maintains regular contact which enables it to ensure the prompt collection of customers’ balances. The Group’s main financial assets are cash and cash equivalents as well as trade and other receivables and represent the Group’s maximum exposure to credit risk in connection with its financial assets. Trade and other receivables are carried on the statement of financial position net of bad debt provisions estimated by the Directors based on prior year experience and an evaluation of prevailing economic circumstances. Whenever possible and commercially practical the Group invests cash with major financial institutions in each jurisdiction where it operates. The Group periodically monitors the credit rating and stability of these institutions. The ageing of trade and receivables that are past due but not impaired can be analysed as follows: Group As at 31 December 2013 As at 31 December 2014 Total € Not past due € 1-2 months overdue € 1,303,462 923,224 295,408 More than 2 months past due € 84,830 6,203,352 3,790,380 1,310,559 1,102,413 The above balances relate to customers with no default history. A provision for doubtful debtors is included within trade receivables that can be reconciled as follows: Provision at the beginning of the year Charged to income statement Utilised Provision at end of the year 2014 € 81,288 198,803 (19,552) 2013 € 65,808 15,480 – 260,539 81,288 Related party receivables of €nil were not past due at December 31, 2014 (2013: nil). Company Intercompany receivables of €18,389,791 were not past due at December 31, 2014 (2013: €1,483,464). Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The foreign exchange risk arises for the Group where assets and liabilities arise and are held in overseas subsidiaries in a currency other than the Euro and to a lesser extent where individual Group entities enter into transactions denominated in currency other that their functional currency. The Group’s policy, where possible, is for Group entities to manage foreign exchange risk at a local level by matching the currency in which revenue is generated and the expenses incurred and by settling liabilities denominated in their functional currency with cash generated from their own operations in that currency. Where Group entities have liabilities denominated in a currency other than their functional currency (and have insufficient reserves of that currency to settle them), cash already denominated in that currency will, where possible, be transferred from elsewhere within the Group. 53 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 25 Financial instruments and risk management continued Over the course of the year the Group’s currency has increased and diversified due to the addition of the newly acquired subsidiaries. The Group is predominantly exposed to currency risk on the balances held within working capital within the Group and the exposure is concentrated in the movement of the Canadian Dollar, US Dollar and Sterling against the Euro. The effect of a strengthening and weakening of 10% of these currencies against the Euro at the reporting date on the working capital balances held at this date would, all other variable held constant, have resulted in the following pre-tax profit / (loss) impact for the year as follows: Canadian Dollar to Euro United States Dollar to Euro Sterling to Euro 10% strengthening € 10% weakening € 596,127 236,958 (89,727) (487,741) (193,875) 144,216 Total financial assets and liabilities The carrying amount of the financial assets and liabilities shown in the Group and Company statements of financial position are stated at fair value. Liquidity risk Liquidity risk arises from the Group’s management of working capital and the financial charges on its debt instruments. The Group’s policy is to ensure that it will have sufficient cash to allow it to meet its liabilities when they become due. The following are the contractual maturities (representing undiscounted contractual cash flows) of the Group’s and Company’s financial liabilities: Group Year ended 31 December 2014 Trade payables Other accounts payable Year ended 31 December 2013 Trade payables Other accounts payable Company Year ended 31 December 2014 Trade payables Other accounts payable Year ended 31 December 2013 Trade payables Other accounts payable Total € Within 1 year € 1-2 years € 2-5 years € 2,322,061 8,099,389 2,322,061 6,880,839 – 1,218,550 – – Total € Within 1 year € 503,634 816,595 503,634 516,399 1-2 years € – 300,196 2-5 years € – – Total € Within 1 year € 1-2 years € 2-5 years € 73,883 2,203,836 73,883 1,132,388 – 1,071,448 – – Total € Within 1 year € – 337,897 – 37,701 1-2 years € – 300,196 2-5 years € – – 26 Operating lease commitments The Group maintains a portfolio of leased properties. The terms of property leases vary from country to country, although they all tend to be tenant repairing with rent reviews every 2 to 5 years and some have break clauses. The total future value of the minimum lease payments is due as follows: Group Not later than one year Later than one year and not later than five years Later than five years 54 2014 € 2013 € 1,230,504 4,120,883 1,878,757 553,465 1,629,476 498,477 7,230,144 2,681,418 KEYWORDS STUDIOS PLC 27 Finance lease commitments The Group has leased computer equipment (net carrying value €379,222) and office telephone systems (net carrying value €21,333). Such assets are generally classified as finance leases as the rental period amounts to the estimated useful economic life of the assets concerned and often the Group has the right to purchase the assets outright at the end of the minimum lease term by paying a nominal amount. The total future value of the minimum lease payments is due as follows: Group 2014 Not later than one year Later than one year and not later than five years Later than five years Minimum lease payments € 127,681 153,000 – Interest € 9,455 9,386 – Present value € 118,226 143,614 – 280,681 18,841 261,840 28 Deferred tax Details of the deferred tax assets and liabilities, and amounts recognised in the profit or loss are as follows: Accelerated capital allowances Personal severance indemnity Available losses Rent – free inducement Fixed asset excess of tax over accounting Deferred tax related to multimedia tax credits Other temporary and deductible differences Business combinations Net tax assets/(liabilities) Asset 2014 € 16,430 17,786 309,675 29,281 65,097 – 74,184 300,436 Liability 2014 € – – – – – (719,397) (6,009) (662,595) (Charged)/credited to profit or loss 2014 € Net 2014 € 16,430 17,786 309,675 29,281 65,097 (719,397) 68,175 (362,159) (1,624) (17,786) (17,862) (5,831) (58,831) 420,418 (67,562) – 812,889 (1,388,001) (575,112) 250,922 The unused tax losses of €309,675 are anticipated to be utilised by 31 December 2015 and are accounted for under current assets. No deferred tax asset has been provided for on the losses attributable to Keywords Montreal, Keywords Rome, Lakshya Digital Private Limited and Keywords Studios plc in the financial statements. 29 Prior year restatements The comparative figures have been regrouped, where necessary, on a basis consistent with the current year. 55 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 30 Acquisitions Acquisition of Liquid Violet Limited On January 15, 2014 the Company acquired the entire issued share capital of Liquid Violet Limited, a video games voice production services company, registered in the UK. Liquid Violet specialises in the management, on behalf of major video game publishers and the acquisition is in line with the Group’s strategy of growing both organically and by acquisition to extend the Group’s client base, market penetration or service lines, where the Group can use its existing expertise, multi-service platform, scale and global reach to generate synergies. The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below. Financial assets Property, plant and equipment Identifiable intangible assets – customer relationship Trade and other receivables Cash and cash equivalents Trade and other payables Deferred tax liabilities Total identifiable assets Goodwill Total consideration Satisfied by: Cash Deferred consideration Total consideration transferred Net cash outflow arising on acquisition Cash consideration Less: cash and cash equivalent balances transferred Book value € 14,797 – 65,215 95,154 (132,891) – 42,275 Fair value adjustment € – 203,770 – – – (40,754) 163,016 Fair value € 14,797 203,770 65,215 95,154 (132,891) (40,754) 205,291 1,042,854 1,248,145 361,359 886,786 1,248,145 361,359 (95,154) 266,205 The intangibles assets are to be amortised over their estimated useful lives of 5 years. The main factors leading to recognition of goodwill on the acquisition of Liquid Violet are the presence of certain intangible assets in the acquired entity which do not value for separate recognition such as the expertise in sound recording, reputation within the industry, and, an unidentified proportion representing the balance contributing to profit generation. The sale purchase agreement includes a provision for an earn out which is based on Profit after tax over the next 2 years. The earn out amount is shown as deferred consideration and is calculated from management’s best estimates based on the available information. The maximum value of the deferred consideration is €1,565,890. Liquid Violet contributed €376,343 revenue (including €2,827 of intercompany sales subsequently billed onwards) and €15,021 loss before tax to the Group between the date of acquisition and the reporting date. If the acquisition had been completed on the first day of the financial year, revenue of €385,590 would have been contributed to the Group (including intercompany sales) and € 50,687 loss before tax. Acquisition costs of €39,324 have been charged through the Comprehensive Income statement. 56 KEYWORDS STUDIOS PLC Acquisition of Babel Media Group On February 17, 2014, the Company acquired the entire issued share capital of Babel Media Limited, a company registered in the UK, together with its subsidiary companies. Babel Media is a leading provider of outsourced video games services with operations in the UK, Canada and India. The acquisition will extend the Group’s client base, market penetration or service lines, where the Group can use its existing expertise, multi-service platform, scale and global reach to generate synergies. The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below. Financial assets Property, plant and equipment Identifiable intangible assets – customer relationship Trade and other receivable Cash and cash equivalents Trade and other payables Short-term loan Long-term loan Deferred tax liabilities Total identifiable assets Goodwill Total consideration Satisfied by: Equity instruments (1,516,944 shares of parent company) Total consideration transferred Net cash outflow arising on acquisition Cash consideration Less: cash and cash equivalent balances transferred Book value € 666,369 – 2,721,336 (857,804) (1,506,388) (291,527) (2,704,583) – Fair value adjustment € (225,507) 964,287 (65,064) – (259,895) – – (111,318) Fair value € 440,862 964,287 2,656,272 (857,804) (1,766,283) (291,527) (2,704,583) (111,318) (1,972,597) 302,503 (1,670,094) 4,374,676 2,704,582 2,704,582 2,704,582 – 857,804 857,804 The intangibles assets are to be amortised over their estimated useful lives of 5 years. The main factors leading to recognition of goodwill on the acquisition of Babel Media are the presence of certain intangible assets in the acquired entity which do not value for separate recognition such as the expertise in provision of technical services, reputation within the industry, cost synergies with the Keywords Group, and, an unidentified proportion representing the balance contributing to profit generation. Babel Media contributed €9,846,217 revenue (including €253,127 of intercompany sales subsequently billed onwards) and €1,439,927 profit before tax to the Group before integration costs of €823,790, between the date of acquisition and the reporting date. If the acquisition had been completed on the first day of the financial year, revenue of €10,882,199 (including intercompany sales) and €1,389,857 profit before tax would have been contributed to the group before fair value adjustments of €302,503. Acquisition costs of €123,906 and integration costs of €823,790 have been charged through the Comprehensive Income Statement. 57 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 30 Acquisitions continued Acquisition of Binari Sonori S. R. L. On May 8, 2014 the Group acquired 100% of the issued share capital of Binari Sonori S. R. L. ( “Binari Sonori” )for a cash consideration of €8,922,409 and consideration of €3,000,000 in KWS Group shares, obtaining control of Binari Sonori. The principal activity of Binari Sonori is the provision of outsourced voice-over and translation services to the international video games market. Binari Sonori was acquired to strengthen the Group’s audio services and translation services business and to extend the Group’s client base. The amounts recognised in respect of the identifiable assets acquired, liabilities assumed, purchase consideration and goodwill are set out in the table below. Financial assets Property, plant and equipment Identifiable intangible assets – customer relationship Trade and other receivable Cash and cash equivalents Trade and other payables Deferred tax liabilities Total identifiable assets Goodwill Total consideration Satisfied by: Cash Equity instruments (1,555,650 shares of parent company) Deferred consideration (Settled post year end – Note 31) Total consideration transferred Net cash outflow arising on acquisition Cash consideration Less: cash and cash equivalent balances transferred Book value € 658,498 – 1,086,441 3,143,350 (1,711,657) – Fair value adjustment € – 1,791,281 – – (165,410) (510,523) Fair value € 658,498 1,791,281 1,086,441 3,143,350 (1,877,067) (510,523) 3,176,632 1,115,348 4,291,980 7,630,429 11,922,409 8,622,409 3,000,000 300,000 11,922,409 8,622,409 (3,143,350) 5,479,059 The intangibles assets are to be amortised over their estimated useful lives of 5 years. The main factors leading to recognition of goodwill on the acquisition of Binari Sonori are the presence of certain intangible assets in the acquired entity which do not value for separate recognition such as the expertise in sound recording, reputation within the industry, and, an unidentified proportion representing the balance contributing to profit generation. The sale purchase agreement had an earn out arrangement which has subsequently been satisfied on January 19 by consideration of €300,000 provided in the form of 158,250 shares in KWS Group Plc (Note 31). Binari Sonori S.R.L. contributed €7,059,626 revenue (including €187,586 of intercompany sales subsequently billed onwards) and €1,068,991 profit before tax to the Group between the date of acquisition and the reporting date. If the acquisition had been completed on the first day of the financial year, revenue of €9,049,493 (including intercompany sales) and €684,438 profit before tax would have been added to the group before fair value adjustments of €1,115,348. Acquisition costs of €156,917 have been charged through the Comprehensive Income Statement. 58 KEYWORDS STUDIOS PLC Acquisition of Lakshya Digital Private Limited On October 10, 2014 the Group acquired 91% of the issued share capital of Lakshya Digital Private Limited for a cash consideration of €2,373,780. A further agreement to buy the remaining 9% of the company on October 10, 2015 has been signed for a consideration of €703,342 and the Group is committed to go through with this purchase, hence the company has been 100% consolidated into the Group results. The principal activity of Lakshya Digital Private Limited is the provision of outsourced art creation services to the international video games market. Lakshya Digital Private Limited was acquired to widen the scope of the Group’s services business and to extend the Group’s client base. The amounts recognised in respect of the identifiable assets acquired, liabilities assumed, purchase consideration and goodwill are set out in the table below. Financial assets Property, plant and equipment Identifiable intangible assets – customer relationship Trade and other receivable Cash and cash equivalents Trade and other payables Deferred tax asset Total identifiable assets Goodwill Total consideration Satisfied by: Cash Deferred consideration Total consideration transferred Net cash outflow arising on acquisition Cash consideration Less: cash and cash equivalent balances transferred Book value € 567,194 – 1,914,777 87,672 (587,347) – Fair value adjustment € – 474,985 (1,275,814) – (59,531) 292,436 Fair value € 567,194 474,985 638,963 87,672 (646,878) 292,436 1,982,296 (567,924) 1,414,372 1,662,750 3,077,122 2,373,780 703,342 3,077,122 2,373,780 (87,672) 2,286,108 The intangibles assets are to be amortised over their estimated useful lives of 5 years. The main factors leading to recognition of goodwill on the acquisition of Lakshya Digital Private Limited are the presence of certain intangible assets in the acquired entity which do not value for separate recognition such as the expertise in sound recording, reputation within the industry, and, an unidentified proportion representing the balance contributing to profit generation. Lakshya Digital Private Limited contributed €612,485 revenue and €209,839 loss before tax to the Group between the date of acquisition and the reporting date. If the acquisition had been completed on the first day of the financial year, revenue of €3,061,966 and €361,658 loss before tax would have been added to the group before fair value adjustments excluding customer relationships of €567,924. Acquisition costs of €93,022 have been charged through the Comprehensive Income Statement. 59 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes Forming Part of the Consolidated Financial Statements (continued) 31 Events after the reporting date Acquisition of Alchemic Dream Inc. On January 6, 2015 the Group acquired the entire issued share capital of Alchemic Dream Inc., a company registered in Canada, which specialises in providing cost effective and flexible customer care services to video game publishers. The acquisition is in line with the Group’s strategy to diversify into the provision of complementary services to the video game market and strengthens the Group’s service of games already in production. Additionally the acquisition leverages the Group’s existing expertise, locations, scale and global reach to extend the services provided by Alchemic Dream as well as generating synergies. Under the terms of the acquisition, which will be immediately earnings enhancing, a maximum total consideration of CAD$1.25m in cash will be paid to the sellers. The sale purchase agreement includes a provision for an adjustment to the sales price based on working capital at the acquisition date. Management does not believe any further adjustments to the acquisition price are necessary. The book value acquired of net assets is as follows: Financial assets Property, plant and equipment Trade and other receivable Cash and cash equivalents Trade and other payables Short-term loan Long-term loan Total identifiable assets Goodwill Total consideration Satisfied by: Cash Total consideration transferred Net cash outflow arising on acquisition Cash consideration Less: cash and cash equivalent balances transferred Book value € 37,828 801,988 37,708 (469,754) (9,593) (17,715) 380,462 514,607 895,069 895,069 895,069 895,069 (37,708) 857,361 At the date of authorisation of these financial statements a detailed assessment of the fair value of the identifiable net assets has not been completed. Information on the revenue and impact on profit due to this acquisition has not been disclosed as it is impracticable to do so at this point in time. 60 KEYWORDS STUDIOS PLC Acquisition of Reverb Localização – Preparação de Documentos Ltda On January 18, 2015 the Group acquired 100% of the issued share capital of Reverb Localização – Preparação de Documentos Ltda (“Reverb”), a company registered in Brazil. Reverb provides localisation and audio management services for Brazilian Portuguese for some of the leading games publishers. Reverb Studios was acquired to widen the scope of the Group’s services business and to extend the Group’s client base. Under the terms of the agreement, which will be earnings enhancing, total consideration of €200,000 was paid in cash with further consideration of €100,000 being payable out of profits generated and in any event by December 31, 2016. The book value acquired of net assets is as follows: Financial assets Cash and cash equivalents Total identifiable assets Goodwill Total consideration Satisfied by: Cash Deferred consideration Total consideration transferred Net cash outflow arising on acquisition Cash consideration Less: cash and cash equivalent balances transferred Book value € 12,312 12,312 287,688 300,000 200,000 100,000 300,000 200,000 (12,312) 187,688 At the date of authorisation of these financial statements a detailed assessment of the fair value of the identifiable net assets has not been completed. Information on the revenue and impact on profit due to this acquisition has not been disclosed as it is impracticable to do so at this point in time. Buyout of Binari Sonori Earn-out On January 20, 2015 the Group agreed with the selling shareholders of Binari Sonori S.R.L. to vary the terms of the acquisition agreement bringing to a close the earn out conditions 12 months earlier than originally agreed. Under the terms of the acquisition, deferred consideration of no more than €4.0m could have been payable calculated by reference to the profit before interest and tax of Binari Sonori in the years to December 31, 2014 and December 31, 2015. Under the terms of the agreement, the Group agreed to pay to the Selling Shareholders total deferred consideration of €300,000 which has been satisfied by the issue of 158,250 new ordinary shares of Keywords at a price of 145.47 pence per share. Incorporation of Keywords International Barcelona SL On January 9, 2015, the Directors incorporated Keywords International Barcelona SL, a company registered in Spain, as part of the Group’s continuing geographic expansion. Creation of Employee Benefit Trust (EBT) On December 17, 2014 an employee benefit trust (“EBT”) was set up, in which to “warehouse” Keywords Studios shares in preparation for the exercise of options and the vesting of awards in the future. The EBT was created to allow the flexibility to issue grants of options and awards which exceed the 5% issued share capital of the Company. To date 200,000 ordinary shares of Keywords at a price of 145.00 pence have been bought by the EBT at a gross cost of €372,320. 61 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Company Information Directors Secretary Andrew Day Giorgio Guastalla Ross King Graham Andrew Lawton David Reeves David O’Connor David O’Connor Andrew Lawton Registered Number 8548351 Registered Office Auditors Principal Bankers Nominated Adviser and Broker Financial PR Adviser Solicitors 8 Clifford Street London BDO Registered Auditors Beaux Lane House Mercer Street Lower Dublin 2 Barclays Bank 27 Soho Square London W1D 3QR Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT MHP Communications 60 Great Portland Street London W1W 7RT Squire Sanders (UK) LLP 7 Devonshire Square London EC2M 4YH Brown Rudnick LLP 8 Clifford Street London W1S 2LQ 62 KEYWORDS STUDIOS PLC Notes 63 ANNUAL REPORT AND ACCOUNTS 2014IIIFinancial Statements Notes 64 KEYWORDS STUDIOS PLC Contacts DUBLIN Keywords International Ltd. Whelan House South Country Business Park Dublin 18 LONDON Liquid Violet 75 Dean Street London W1D 3PU BARCELONA Keywords International Passeig de Gràcia 12, 1er pis 08007 Barcelona T: +353 190 22 730 T: +44 02 7432 3981 T: +34 93 492 03 98 MILAN Binari Sonori Europe Viale Fulvio Testi, 11 Cinisello Balsamo (MI) 20092 ROME Keywords Italia S.R.L. Via Tiberio Imperatore, 15 00145 Rome PUNE Lakshya Digital Kapil Upavan Business Center Lake Town Society Road Bibvewadi, Pune – 411037 T: +39 02 61866310 T: +39 06 44202521 T: +91 20 3939 5200 NEW DELHI Lakshya Digital/Babel Media D-32, Infocity 2 Sector – 33 Gurgaon 122001 SINGAPORE Keywords International 1557 Keppel Road #03-28 Singapore 089066 TOKYO Keywords International Co., Ltd. 2F Toshin Building 4-33-10 Yoyogi, Shibuya-ku, Tokyo 151-0053 T: +91 12 4410 2086 T: +65 6709 8680 T: +81 3 4588 6760 LOS ANGELES Binari Sonori America 350 North Glenoaks Boulevard, Burbank, California 91502 SEATTLE Keywords International Inc. Plaza Center 10900 NE 8th Street, Suite 1000 Bellevue, Seattle, WA 98004 MONTREAL Babel Media Inc. 410 St-Nicolas, Suite 600 Montréal, Québec, Canada H2Y 2P5 T: +1 818 729 8508 T: +1 425 633 3226 T: +1 514 789 0404 MONTREAL Alchemic Dream 442, Avenue Willow Shawinigan Québec, G9N 1X2 RIO DE JANEIRO Keywords do Brasil Av. Churchill, 109/GR 204 – Centro Rio de Janeiro/R 20020-050 T: +1 819 840 9607 T: +55 (21) 2524 79 18 K E Y W O R D S S T U D I O S P L C A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 4 KEYWORDS STUDIOS PLC KEYWORDS INTERNATIONAL LTD. WHELAN HOUSE SOUTH COUNTY BUSINESS PARK DUBLIN 18 IRELAND T: +353 190 22 730 www.keywordsintl.com