Dillistone Group Plc Annual Report and Accounts 2014 Empowering recruitment globally through technology D i l l i s t o n e G r o u p 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 Dillistone Group Plc is a global leader in the supply of technology solutions and services to the recruitment industry worldwide We provide software and services to recruitment firms and recruiting teams within major corporations. Across our subsidiaries, we work with over 2,000 firms in over 60 countries. Our two divisions are Dillistone Systems and Voyager Software. Dillistone Systems specialises in the supply of software and services into executive level recruitment teams. Voyager Software’s clientele are primarily involved in contingent recruitment, including permanent placement, contract placement and the provision of temporary staff. Contents Strategic Report 1 Highlights 2 Dillistone Group at a Glance 4 Chairman’s Statement 6 CEO’s Review 12 Financial Review Governance 14 Corporate Governance Report Report to the Shareholders on 16 Directors’ Remuneration 18 Board of Directors 20 Directors’ Report Financial Statements 21 Independent Auditor’s Report to the Members Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated and Company Statements of Financial Position Consolidated Cash Flow Statement Company Cash Flow Statement Notes to the Financial Statements 22 23 24 25 26 27 28 IBC Directors and Advisers 1 Highlights • Revenues up 6% to £8.6m • Record level of recurring revenues of £5.9m up Adjusted basic EPS pence 14 13 8.56 7.99 12% from 2013 • Adjusted operating profits1 up 1% to £1.82m • Adjusted EBITDA2 up 7% to £2.4m • Adjusted pre-tax profits3 up 1% to £1.82m • Profit for the year down 7% to £1.15m • Adjusted earnings per share4 up 7% to 8.56p • Final dividend of 2.7p per share recommended, making total dividend for the year of 4p (a yield of 3.7% on a share price of 107p) (2013: 3.85p) • Cash funds of £1.9m (2013: £1.4m) after acquisition related payments of £1.3m offset by £1.0m placing proceeds. Bank borrowings total of £0.5m (2013: nil) • ISV Software acquisition completed in October 2014 +7% Recurring revenues £’000 14 13 5,929 5,271 +12% “ The Group has enjoyed another successful year in 2014, delivering its best ever performance in terms of revenue, adjusted operating profit and adjusted EPS. The business continued to invest, delivering a major new product launch in the Dillistone Systems division, while successfully completing the integration of FCP Internet into the Voyager Software division, and in September 2014 announcing the acquisition of ISV Software. This represents our 3rd successive year on year increase in the dividend, in line with our progressive dividend policy, which illustrates the Board’s confidence in the future prospects of the Group.” Dr Mike Love Non-Executive Chairman 1 Adjusted operating profit is statutory operating profit before acquisition costs, related intangible amortisation, movements in contingent consideration and other one-off costs relating to acquisitions. 2 Adjusted EBITDA is adjusted operating profit with depreciation and amortisation added back. 3 Adjusted pre-tax profits is statutory pre-tax profits before acquisition costs, related intangible amortisation, movements in contingent consideration and other one-off costs relating to acquisitions. 4 Adjusted earnings per share is computed from statutory profits after tax adjusted to exclude the post-tax effect of acquisition costs, related intangible amortisation, movements in contingent consideration and other one-off costs relating to acquisitions. www.dillistonegroup.com Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 2 Dillistone Group at a Glance Our two divisions are Dillistone Systems and Voyager Software Global reach Dillistone Group has offices in the UK, US, Germany and Australia, serving over 2,000 firms in over 60 countries Main Group offices Dillistone Systems Products FileFinder is designed specifically for the executive search market with FileFinder Anywhere being the latest generation of the product. FileFinder is an executive search database, CRM system, research tool, report writer and project management solution all rolled into one. It is designed to support every element of the search process. The product is unique in its market, in that it is available to purchase or to rent, and can be accessed via a Desktop App, a full Browser App, a Mobile App or through Microsoft Outlook. Dillistone Systems Division Dillistone Systems is a leading global supplier of software to executive search firms and to in-house search teams at major corporations and not-for-profit organisations. The Division’s main product is the FileFinder Anywhere suite which was launched in September 2014. The Division is headquartered in the UK, but has offices in Germany, the United States and Australia and serves clients in more than 60 countries, generating more revenue from outside the UK than from its home market. Dillistone Systems is widely acknowledged to work with more executive search firms than any comparable supplier, and is also considered to be a thought leader in this space. As a result, the Division has also moved beyond the supply of software, and provides additional services including training in executive search techniques, marketing and advertising services, and also runs regular conferences which are open to both client and non-client firms. Browser Desktop Outlook Mobile Voyager Software Division Voyager Software became a part of the Dillistone Group in September 2011. At the time of its acquisition by Dillistone, it provided end-to-end recruitment solutions principally to the third party recruiting sector. Voyager’s products included Voyager Professional, Voyager Commercial, Voyager VDQ! and Voyager Mid-Office, a product range largely used by temp and contingency recruiters. In September 2012, Voyager launched its next generation software platform, Voyager Infinity. Voyager Infinity is designed to improve the performance of recruitment companies specialising in both contract and permanent placements. Infinity meets the demands of flexibility and functionality required by these firms, putting it at the forefront of software available to the recruitment industry. In July 2013, the Group acquired FCP Internet, suppliers of the Evolve SaaS product, and this has subsequently been folded into the Voyager division. In October 2014, a further acquisition saw ISV Software – a supplier of skills testing and training services – folded into the division. Today, the Voyager products are used in over 20 different countries by many thousands of users in different-sized recruitment businesses. The Division has offices in the UK and Australia and employs around 50 people. Dillistone Group Plc Annual Report and Accounts 2014Strategic Report 3 Middle and Back Office Products Voyager Mid-Office Voyager’s flexible Pay & Bill solution, automates the processing of large volumes of invoices and payments to numerous clients and candidates. Voyager Bureau enables bureaus to subcontract back-office operations for multiple client recruitment companies on a single platform. Voyager Software Products Voyager is a leading provider of innovative recruitment software. Its focus is on service and delivering tangible benefits and its recruitment solutions offer rapid deployment and return on investment. The products span the entire recruitment landscape, from the front office to the back office and even to bureaus. By combining recruitment software products, the Division has a strong track record of delivering vertical market solutions. Voyager Infinity manages the timetables of recruiters working to fill permanent and longer-term contract/ temporary vacancies. With Virtual Voyager, all Voyager products can now be hosted and delivered to any customer PC with an internet connection. Voyager Commercial brings further unique tools that optimise a candidate’s entire association with a temporary or short-term contract placement agency. Voyager VDQ! is designed for fast- paced blue and white collar temporary placement agencies that have to quickly assemble transient or ad-hoc teams to serve highly volatile and urgent labour requirements. Through FCP Internet, the division also provides its evolveTM software. evolve™ has been designed to deliver an effective workflow solution for all sizes and types of recruitment businesses. It is delivered only as a SaaS product. Through ISV, the division provides its fastPath software. This software delivers pre-employment skills testing and training tools to recruitment businesses and corporates. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 4 Chairman’s Statement Mike Love Non-Executive Chairman “ Product development is fundamental to the long term success of the business” The Group has enjoyed another successful year in 2014, delivering its best ever performance in terms of revenue, adjusted operating profit and adjusted EPS. Revenue was up 6% to £8.63m and adjusted operating profits up 1% to £1.82m. Profit after tax fell 7% to £1.15m. Adjusted EPS rose 7% to 8.56p. The business continued to invest, delivering a major new product launch in the Dillistone Systems division, while successfully completing the integration of FCP Internet into the Voyager Software division, and in September 2014 announcing the acquisition of ISV Software (ISV). This represents our 3rd successive year on year increase in the dividend, in line with our progressive dividend policy, which illustrates the Board’s confidence in the future prospects of the Group. The business is committed to maintaining its policy of investing in its products and services whilst rewarding its shareholders. ISV (www.isvgroup.com) is a UK based supplier of training and testing services, primarily to the recruitment industry. ISV works with 9 of the 10 largest recruitment agencies in the UK (by office numbers) and 7 of the 10 largest by revenue. It offers over 200 published materials/tests covering many business sectors. ISV contributed £195,000 to revenue and £18,000 to profit before taxation during the three months of its ownership by Dillistone in 2014. It is the view of the Board that product development is fundamental to the long term success of the business and, as a result, 2015 will see us continue to invest in the development of software within both of our Divisions. Dividends The Board was pleased to increase the interim dividend payment in September 2014 to 1.30p (2013: 1.25p). The Board has recommended an increased final dividend of 2.7p per share (2013: 2.6p), subject to shareholder approval, payable on 24 June 2015 to holders on the register on 29 May 2015. Shares will trade ex-dividend from 28 May 2015. This takes the total dividend based on the 2014 results to 4.00p (2013: 3.85p), and gives a yield of 3.7% on a share price of 107p. Staff Our staff are fundamentally important to the success of the business. It is through their efforts, commitment and determination that we continue to be a leading technology provider in the sectors we serve. On behalf of the Board I would like to take this opportunity to thank all of them. Outlook Group revenues in the first quarter are ahead of the same period in 2014. Our Dillistone Systems division has seen incoming orders in Q1 increase on the same period in the previous year reflecting, in part, the launch of the FileFinder Anywhere platform in September of 2014. As noted previously, since the launch of FileFinder Anywhere, the Division has been successful in winning a number of larger than average contracts and is currently in talks with a number of potential clients which, if successfully closed, would fall into this same category. These larger contracts do however take longer to implement and the full impact may not be seen in 2015. Nonetheless, the relative scale and increasing frequency of these opportunities validates the Board’s strategy of investing in new product development and in the prospects for this iteration of FileFinder. Dillistone Group Plc Annual Report and Accounts 2014Strategic Report 5 Revenues for our Voyager Software division are also up on the same period of 2014. The Division has invested significantly in product development over the past 2 years and it expects to announce a number of further notable product updates and launches in the coming months. These are expected to have a positive impact on the business in the medium to longer term. Both Divisions currently see recurring revenue at record levels and the Group was delighted to sign an extension of one of its largest SaaS contracts during the first quarter of 2015. This contract, worth at a minimum, in the region of £250,000 per annum, has been extended until November 2016. In the longer term, the Group’s continuing investment in product development across all parts of the business gives the Board confidence in the future and, as a result, we are delighted to propose an increase in our final dividend of 3.8% to 2.7p (2013: 2.6p). Dr Mike Love Non-Executive Chairman 24 April 2015 Case study How FileFinder Anywhere Supports O’Neill Consulting Dillistone Systems is a global market-leading provider of technology to executive recruitment companies and strategic talent acquisition teams. In September 2014, it launched the latest generation of its flagship product – FileFinder Anywhere, which enables users to access their business-critical data via four platforms – Desktop Software, Mobile, Browser and Outlook – anywhere, anytime. Since the launch, close to 100 companies have purchased or upgraded to FileFinder Anywhere, many of them reporting measurable benefits to their businesses. One of the earliest adopters of FileFinder Anywhere is O’Neill Consulting, a client- centred retained Executive Search firm headquartered in South Kingstown, RI, USA. Alexandra Henry, Client Care Officer at O’Neill Consulting Group, shared her experience about the organisation’s implementation of FileFinder Anywhere. The Background O’Neill Consulting Group is a retained search firm that aims to deliver high impact talent solutions to clients around the world. It specializes in the consumer, industrial, manufacturing, life sciences and private equity sectors with emphasis on finance, operations, human resources, supply chain, logistics and general management roles. How impactful is being able to access your data from machines other than your traditional office desktops? “That is going to be extremely impactful for us,” commented Alexandra. She explained it would be much quicker and easier for the CEO and our Managing Directors, to access business information wherever they are. How well does the product work on your Mac computers? Some of O’Neill Consulting Group’s employees work remotely and prefer to travel with their Macs. Alexandra said the product was “working well” on Mac computers, and speaking about the attachments feature, which enables users, including those on the road, to pull up attachments in relation to a search quickly. How do you find the new Outlook integration? Alexandra explained: “It’s a lot easier to use, especially for people who are on the road – they don’t have to go into the database; they can see a lot of information right there, which is going to be extremely helpful for us pulling information on candidates quickly.” How easy is the product to use? “The product has been extremely easy; for us,” explained Alexandra. “It has been very straightforward; it hasn’t been a tricky process at all to switch over.” How are the stability and the speed of the product? “The stability has been excellent. We haven’t had any issues – I haven’t had anyone tell me they’ve had any crash issues or problems with things not working correctly,” said Alexandra. She described the speed of the product as “great”. She added: “One thing that we really like, especially with a lot of our people on the road, is how quick the speed is between updating something on the desktop to the browser version.” Would you recommend FileFinder Anywhere? “Yes, we would definitely recommend it, I think for firms that are growing and firms that have people outside of one office,” commented Alexandra. “I highly recommend it for anyone who travels a lot or has remote employees and needs information quickly.” Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 6 CEO’s Review Jason Starr Chief Executive “ 2014 saw recurring revenues grow 12% to £5.923m” Dillistone Group Plc is a global leader in the supply of technology solutions and services to the recruitment industry worldwide. Strategy and objectives The Group’s strategy is to grow the business both organically and through acquisition. This strategy is made possible by our commitment to product development, which ensures that the business continues to command a leading role in all of the markets in which it operates. Our acquisition strategy typically entails consideration of businesses offering: • products that would further increase market share in the Group’s core markets; legacy applications where clients could be transferred to our modern suite of products; or • • complementary applications which may be cross-sold to clients of the Group. The Group’s objectives are principally to: • ensure our products meet the needs of the recruitment sector through continual investment and development; • be a leading player in all of the markets we serve; • develop our staff; and • increase our profitability and deliver increased shareholder value year on year in conjunction with following a progressive dividend policy. Our business model The business is split into two divisions, Dillistone Systems and Voyager Software. Dillistone Systems specialises in the supply of software and services into executive-level recruitment teams. Voyager Software’s clientele are primarily involved in contingent recruitment, including permanent placement, contract placement and the provision of temporary staff. Across our subsidiaries, we work with over 2,000 firms in approximately 60 countries. Further details of the products we supply are given in the ‘At a Glance’ section. The majority of our products are delivered through one or more of the following: 1. an upfront licence fee plus a recurring support fee; 2. Software as a Service (SaaS) subscription basis; or 3. a hybrid model incorporating an upfront payment and recurring support and hosting fees. The business has offices in four countries, the UK, Germany, the US and Australia. This enables the Group to support its customers on an approaching 24/5 basis. As well as supplying and supporting our software we also host the software for a proportion of our clients. This is done through data centres in Europe, the US, Singapore and Australia. Dillistone Group Plc Annual Report and Accounts 2014Strategic Report 7 Key Performance Indicators (KPIs) The Board and management use absolute figures to monitor the performance of the business in the following financial KPIs: Total revenues Recurring revenues Non-recurring revenues Adjusted profit before tax Cash less borrowings FY 2014 £000 8,625 5,929 2,285 1,824 1,443 FY 2013 £000 8,101 5,271 2,428 1,801 1,399 Measure year on year growth year on year growth year on year growth year on year growth sufficient cash resources maintained In addition, the Board monitors order levels and employee numbers as well as performance against budget. Group review of the business 2014 saw recurring revenues grow 12% to £5.929m (2013: £5.271m) reflecting the full year impact of the acquisition of FCP Internet and also the acquisition of ISV in October 2014. Non-recurring revenues fell 6% to £2.285m (2013: £2.428m). As a result, overall revenues, which were negatively impacted by exchange rates, increased by 6% to £8.625m (2013: £8.101m). Recurring revenues represent 69% of Group revenues (2013: 65%). Overheads have increased across the business mainly as a result of the acquisitions with EBITDA increasing 7% to £2.402m (2013: £2.242m). Operating profits before acquisition related items increased 1% to £1.820m (2013: £1.793m) and pre-tax profits before acquisition related items also increased 1% to £1.824m (2013: £1.801m). Divisional reviews Dillistone Systems The Dillistone Systems division is primarily focused on providing technology solutions to the executive search market via our range of ‘FileFinder’ applications. This client group is made up of both executive search firms and executive search teams in major organisations. Revenue Recurring income Non-recurring income 2014 £’000 2013 £’000 3,186 1,371 4,557 3,248 1,675 4,923 On the face of it, these are disappointing results. However, they are not unexpected, given our conscious and pre-stated decision to hold back the number of implementations we completed in the second half of the year. This enabled the successful replacement of the FileFinder 10 product with our new FileFinder Anywhere suite, launched to the market in September 2014, with the first ‘live’ implementations in November. FileFinder systems are business critical for our clients, and so we ensured that the product went through a significant beta test process. This meant that we deliberately implemented virtually no new client FileFinder systems between September and mid-November, so as to ensure that our development, implementation and support teams were able to provide our ‘early adopters’ with the level of service that they required. Dillistone Systems’ head office is in London and it has offices in the US, Germany and Australia. The Division accounts for 53% (2013: 61%) of the Group’s revenue and saw recurring revenue fall 2% to £3.186m (2013: £3.248m) mainly due to the impact of currency movements. As a whole, the Division saw segmental operating profit before amortisation and depreciation decrease by 21% to £1.597m (2013: £2.013m). This strategy has proven to be the correct one. Client feedback on the new product has been excellent, with a number of case studies and client testimonials already shown on our website. We reported in our January trading statement that the new product had led to the Division achieving a number of early successes in the market, including: • total order intake in Q4 of 2014 was more than 20% up on both Q4 of 2013 and on the average of Q1–Q3 2014; • we won more new business contracts in December 2014 than in any single month in the last 2 years; and • contract wins included our largest single North American win since 2009 with a number of clients switching from competing products. The Division has seen further positive signs in 2015: • January 2015 saw us win our largest contract in mainland Europe since 2007; • February 2015 saw us win one of our largest ever upgrade contracts for an existing client; • several new clients converted to FileFinder Anywhere from the product of our main competitor; and • total orders in Q1 2015 were more than 12% up on Q1 2014. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 8 CEO’s Review continued As a result, the Division has now seen 3 successive quarters of year on year growth in total orders. Divisional recurring revenues at the end of Q1 are once again climbing and we have a strong prospect pipeline. We are currently ramping up our implementation frequency meaning that Q2 is likely to see realised revenue ahead of Q1 with the expectation that H2 will be stronger again. The new FileFinder Anywhere suite continues to be developed, and we anticipate further positive announcements within the next 12 months. As a result, while the 2014 divisional results were disappointing, the Board is confident that the Division has an exciting future. Voyager Software Voyager Software is a leading provider of innovative recruitment software with products targeted at the entire recruitment landscape, from front office to back office and bureaus. Revenue Recurring income Non-recurring income Third party revenues 2014 £’000 2013 £’000 2,743 914 411 4,068 2,023 777 402 3,202 In 2014, the Voyager Software division accounted for 47% (2013: 39%) of Group revenues. The Division’s revenues were £4.068m and its segmental operating profit before amortisation and depreciation increased by 34% to £0.802m (2013: £0.598m). Recurring revenues increased by 36% to £2.743m (2013: £2.023m). The Division benefited from the full year impact of the FCP acquisition made in July 2013 and the acquisition of ISV in October 2014. The Division successfully won its largest ever contract and has seen its ‘Infinity’ product gain good momentum in the market. Interest rate risk The Group is exposed to interest rate risk through its floating rate borrowings and through its management of retained cash. The Group monitors its exposure to interest rate risk when borrowing and investing its cash resources. The Infinity product was a major development for the business and, since launch, work has continued to optimise it for larger firms and additional delivery models. Further announcements on this are expected in due course. The year in review was our first full year with FCP Internet under our management. This acquisition has proven to be very successful, with the evolve product now supporting more users than at any point in its history. Work is underway to deliver an updated version of the product, with completion expected in the coming months. ISV Software was acquired in October 2014. Unlike our other products, ISV provides pre-employment testing tools. It is the UK market leader. The business made a small contribution in 2014, and work is underway to integrate the product with the Voyager Software Infinity platform. This project should increase cross selling opportunities, and is likely to be completed this summer. Financial risk management The Group’s operations expose it to a number of risks that include the effect of changes in interest rates, credit, foreign currency exchange rates and liquidity. The Group does not trade in financial instruments. Further details in relation to these risks are shown in note 24. Credit risk The Group has a large customer base in excess of 2,000 customers and is not dependent on a small number of customers. Accordingly, the Group does not believe it is exposed to significant credit risk. In addition, it only places money with banks with strong credit ratings. Exchange risk The Group is exposed to translation and transaction foreign exchange risk. The Group’s foreign operations primarily trade in their own currencies, reducing the transaction risk. As a result the main foreign exchange transactional exposure arises when repatriating profits. The Group only seeks to remit cash when required in the UK and it usually has some flexibility on timing of such appropriations to minimise any exchange losses. To a degree, the Group relies on a partial natural hedge of Euro, Australian Dollar and US Dollar to cover the translation exposures. Liquidity risk Although the Group has some borrowings it maintains positive cash resources and has sufficient available funds for its operations and planned expansion of its existing activities. Dillistone Group Plc Annual Report and Accounts 2014Strategic Report 9 Timeline 1983 The original FileFinder software was developed by David Dillistone, himself a retained search consultant. While it was initially created for in-house use, David soon realised that there was a market for it beyond his own firm, and so he created David Dillistone Systems. 1990 By the late 1990s, David had retired and the business – now renamed as Dillistone Systems – was owned by Custom Business Systems (CBS). CBS invested heavily in the firm and, by the end of the decade, offices had been established on three continents. 2003 In 2003, the current management team took part in a management buyout of the business. The dawn of the internet meant that it became far easier to sell the FileFinder system internationally, and, as a result, Dillistone Systems grew rapidly. 2006 In 2006, the Group floated on the AIM market of the London Stock Exchange (DSG.L). 2008 In 2008, a decision was taken to significantly increase R&D expenditure, and the development of the next generation of FileFinder began. 2011 In March 2011, FileFinder 10 was released after over two years of development. In September 2011, the Group made its first acquisition: Voyager Software. 2012 In September 2012, Voyager Infinity was launched after three years of development. 2013 In July 2013, the Group made its second acquisition: FCP Internet. 2014 In October 2014, the Group acquired ISV Software. 2014 saw the release of FileFinder Anywhere, a market leading product suited to mobile working. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 10 CEO’s Review continued Principle risk and uncertainties There are a number of risks and uncertainties which could have an impact on the Group’s long term performance and cause actual results to differ materially from expected and historical results. The Directors seek to identify material risks and put in place policies and procedures to mitigate any exposure. The table of risks that follows gives details of the principal risks and the approach being taken to manage them. Risk Economic risk Potential adverse impact Mitigation The recruitment industry has a reputation for being vulnerable to the cyclical nature of the economy. This can impact significantly on non-recurring revenue and to a lesser extent recurring revenue. The Company operates globally and so is not reliant on one economy. It enjoys a high percentage of recurring revenues. The acquisition of Voyager FCP and ISV has increased the exposure to the UK economy. In a downturn there may be a reduction in new permanent hires which may be replaced by temporary hires. The Group’s suite of products now supports more aspects of the third party recruitment market through its acquisition of Voyager. The temporary recruitment market is potentially anti-cyclical. New product risk The introduction of new products might contain significant bugs that make them unusable. This could damage the Group’s reputation and result in loss of new orders and therefore reduce revenue growth. It could also result in claims against the Company. Products are tested pre launch and launch and implementation strategies developed to minimise risks. Additional unit testing built in and commitment to focus on user experience. Attrition of customer base Failure to attract new customers, or the loss of existing customers, may have a detrimental effect on the Group’s ability to generate revenues. Actively manage existing customer relationships through account management structures and promptly deal with issues. Competitor activity The Group continues to invest in new products and new features being added. The Group has strong customer relationships and uses account management to keep in touch with clients. The Group continues to invest in its product development and 2015 is expected to see the launch of a SaaS version of Infinity and a full browser version of FF. The Group continues to innovate and provide solutions to client needs. There is a focus on fixing bugs and issues as they arise to ensure the user experience is good. Pricing strategies reviewed on a regular basis. The introduction of a SaaS product should result in a more competitive subscription model for Voyager. The Group continue to look at developing new products and additional features to more readily compete. The market for recruitment software is extremely fragmented with a large number of small suppliers operating in all of the Group’s geographical markets. Very few of these suppliers have the necessary financial, technical and marketing resources to be able to develop their competitive position. However, the competition may intensify through consolidation or new entrants to the market. Some competitors offer a broader product range enabling them to compete across the whole of the sector. The businesses can easily lose market share if its products are not well regarded either from being ‘out of date’ or ‘buggy’. Some firms may try to compete on price, particularly if the market deteriorates. Currently, Voyager carries a very high marginal cost on its subscription model. Some competitors target Dillistone clients and make inroads based on their features. Dillistone Group Plc Annual Report and Accounts 2014Strategic Report 11 Risk Potential adverse impact Mitigation Business continuity risks associated with information systems’ operational failure and data security A failure of systems or failure of hosting facilities leading to loss of customer confidence in the Group being able to deliver their requirements. Each division is reliant on data centres. Work ongoing to improve disaster recovery plans, including investing in SANs and use of the cloud. Loss or corruption of data held on behalf of customers which could have a detrimental effect on their confidence in data security processes and could cause financial loss. External attacks on servers could result in lost or corrupted data and loss of reputation. Plans are regularly reviewed on how to improve data centre management as the business grows worldwide. Data backups occur daily and the necessary test carried out on a regular basis to ensure data can be restored. Penetration testing helps minimise the risk of attacks. Employee engagement and retention Capability to meet the demands of the markets in which the Group operates and competes effectively with other IT suppliers is largely dependent on the skills, experience and performance of staff. Failure to attract or retain high calibre employees could seriously impede future growth and present performance. Reliance on a small group of people especially in parts of the business. The Group has made three acquisitions since 2011 and is likely to make further acquisitions in the future. This creates the potential risk that acquisitions may not perform or may contain hidden risks or liabilities. Acquisition risk Ability to finance acquisitions and expansion The Group wants to grow by acquisition and this requires that it will have the ability to fund such expansion either via borrowing or placement, or through the availability of its own cash resources. Management capacity Size of business means that management tends to be stretched and under resourced. As the business grows there may be insufficient support to ensure that the growth is effectively managed and integrated. To retain staff the Group operates competitive remuneration packages. Appraisals are carried out which also consider individual’s personal development. Cross training being carried out where possible. For all acquisitions and in advance of completion, management undertakes due diligence and prepare integration plans including risk identification. These papers are reviewed and approved by the Board prior to any commitment being entered into. Ongoing discussions with investors and potential investors to build a following in Dillistone. Recent bank loan has established the feasibility of raising bank finance. Recent placing oversubscribed so Group has small fund available for future acquisitions. Investment in additional management in 2014. Structure of Divisional Boards under review as a way of developing senior management. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 12 Financial Review Julie Pomeroy Finance Director “ Dillistone finished the year with cash funds of £1.923m and bank borrowings of £0.487m” Total revenues increased by 6% to £8.625m (2013: £8.101m), with pre-tax profits before acquisition related items up 1% to £1.824m (2013: £1.801m). Recurring revenues increased by 12% to £5.929m (2013: £5.271m) while non-recurring revenues saw a 6% decrease to £2.285m from £2.428m in 2013. Third party software product sales amounted to £0.411m in the period (2013: £0.402m). These results include FCP revenues for the full year and ISV revenues from October 2014. Cost of sales increased by 16% to £1.108m (2013: £0.957m), reflecting the full year impact of FCP and also the impact of ISV from October 2014. Administrative costs, excluding acquisition related items, depreciation and amortisation, rose 4% to £5.116m (2013: £4.901m), again reflecting the full year of FCP and ISV costs from October 2014. Depreciation and amortisation increased to £0.582m (2013: £0.449m). Administrative costs totalling £0.418m (2013: £0.210m), related to acquisition costs and amortisation of intangibles arising on the Voyager, FCP, and ISV acquisitions. Finance cost includes £0.101m relating to the unwinding of the discount in respect of the contingent consideration. Recurring revenues covered 104% of administrative expenses before acquisition related costs (2013: 98%). Excluding depreciation and amortisation of our own internal development, the administrative costs are covered 116% (2013: 108%) by recurring revenues. Tax has been provided at an effective rate of 13% (2013: 19%) excluding acquisition related items and at 12% (2013: 19%) post acquisition related costs. These rates reflect the R&D tax credits available to both Dillistone Systems and Voyager Software that have been claimed; the reduction in corporation tax rates from 23.25% to 21.5%; the release of prior year provisions relating in part to agreement of the prior years’ tax position of the branch operation in Germany; and partially offset by the higher rates of corporation tax that are payable overseas. The post acquisition related items tax rate also reflects the reduction in deferred consideration and the write off of acquisition costs together with the reduction in the deferred tax rate used in the accounts from 21% to 20%. Profits for the year before acquisition related items rose 9% to £1.584m (2013: £1.455m) and profits for the year after acquisition related items decreased to £1.145m (2013: £1.231m). Basic earnings per share (EPS) rose 7% to 8.56p (2013: 7.99p) before acquisition related items and decreased by 9% to 6.18p (2013: 6.76p) after such items. Fully diluted EPS rose 7% to 8.23p before acquisition related items (2013: 7.70p) and decreased 9% to 5.95p (2013: 6.51p) after acquisition related items. Dillistone Group Plc Annual Report and Accounts 2014Strategic Report 13 8,625 8,101 7,052 5,448 Revenue analysis 2014 Divisional revenue analysis 2014 69% Recurring 26% Non-recurring 5% 3rd party 53% Dillistone 47% Voyager Cash To part finance the acquisition of ISV, a placing of £0.500m was carried out and a bank loan of £0.500m obtained. Also in view of the demand for shares, two further placings, raising a total of £0.500m for working capital purposes, were carried out. Dillistone finished the year with cash funds of £1.929m (2013: £1.399m) and bank borrowings of £0.487m (2013: nil). This is after capital expenditure of £1.073m, the payment to the vendors of Voyager, FCP and ISV of £1.268m (net of cash received with ISV) (2013: £0.900m) and dividend payments of £0.723m (2013: £0.683m). On behalf of the Board Julie Pomeroy Finance Director 24 April 2015 The Strategic Report is signed on behalf of the Board by Jason Starr Chief Executive 24 April 2015 Capital expenditure The Group invested £1.073m in property, plant and equipment and product development during the year (2013: £0.830m). This expenditure included £0.814m (2013: £0.747m) spent on development costs, of which £0.319m relates to development in Voyager Software division (2013: £0.250m) that has been capitalised under IFRS in the Group accounts. Trade and other payables As with previous years, the trade and other payables include income which has been billed in advance but is not recognised as income at that time. This principally relates to support, SaaS and hosting renewals, which are billed in 2014 but that are in respect of services to be delivered in 2015. Contractual income of this type is recognised monthly over the period to which it relates. It also includes deposits taken for work which has not yet been completed, as such income is only recognised when the work is substantially complete or the client software goes ‘live’. Also included in trade and other payables is £1.322m (2013: £0.918m) relating to deferred consideration and contingent consideration due to former FCP and ISV shareholders. The contingent consideration in respect of FCP is dependent on the level of revenue achieved by the Division in the periods up to 31 March 2015. There are four tranches of contingent consideration in respect of ISV and they are dependent on levels of revenue achieved in periods up until 30 September 2017 plus a deferred consideration payment payable in January 2015. Total revenue £’000 14 13 12 11 10 4,251 Recurring revenues £’000 14 13 12 11 10 3,248 2,536 Adjusted EBITDA £’000 14 13 12 11 10 1,358 1,633 5,929 5,271 4,529 2,402 2,242 1,998 Adjusted profit before tax £’000 14 13 12 11 10 1,405 1,182 1,824 1,801 1,684 Adjusted basic EPS pence 14 13 12 11 10 5.13 8.56 7.99 7.2 6.26 Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 14 Corporate Governance Report Corporate governance Dillistone Group Plc (the ‘Company’) is committed to maintaining high standards of corporate governance. The Company does not comply with the provisions of the UK Corporate Governance Code (the ‘Code’) in its entirety and it is not required to do so. However, the Board recognises the importance of sound corporate governance and will take appropriate measures to ensure that the Company complies with the main provision of the Code as far as practicable and to the extent appropriate given the Company’s size, assets, liabilities and other relevant information. The summary below describes the extent to which the Company complies with the Code. Leadership The Board comprises a Non-Executive Chairman, one Independent Non-Executive Director and five Executive Directors. All Directors are obliged to submit themselves for re-election at least every three years. The Chairman and Non-Executive Director are considered to be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. Giles Fearnley is the current Senior Independent Director and his shareholding of approximately 2.3% is not considered by the Board to change his independence. Effectiveness To enable the Board to discharge its duties, all Directors have full and timely access to all relevant information. They are also able to take independent professional advice as appropriate. The Board has two committees: Audit Committee The Audit Committee comprised the Chairman and the Non-Executive Director and usually meets twice during the year. The Finance Director, Group Chief Executive Officer (CEO) and external auditors attend by invitation. The Audit Committee makes recommendations to the Board on issues surrounding the appointment, resignation or removal of auditors and their remuneration. It discusses and agrees the scope of the audit with the external auditors before the audit. The Audit Committee reviews external audit activities, monitors compliance with statutory requirements for financial reporting and reviews the half-year and annual accounts before they are presented to the Board for approval. It is also required to review the effectiveness of the Group’s internal control systems, to review the Group’s statement on internal control systems prior to endorsement by the Board and to consider, from time to time, the need for a risk assessment of the Group’s internal control systems. Remuneration Committee The Remuneration Committee comprised the Chairman, the Non-Executive Director and, by invitation, the Group CEO and the Company Secretary. It is responsible for recommending to the Board the contract terms, remuneration and other benefits for Executive Directors, including the performance- related bonus scheme and participation in the Group’s long term share option schemes. The Board has not delegated a Nomination Committee; the whole Board is involved in the appointment of any new Director. The Board does not currently undertake an evaluation of its own performance or that of its committees. Accountability The Board meets at least four times each year and has adopted a formal schedule of matters specifically reserved for decision by it, thus ensuring that it exercises control over appropriate strategic, financial, operational and compliance issues. At these meetings the Board reviews trading performance, ensures adequate financing, sets and monitors strategy, examines investment and acquisition opportunities and discusses reports to shareholders. Internal controls The Board has overall responsibility for the Group’s system of internal controls. However, such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement. In order to discharge that responsibility in a manner which ensures compliance with laws and regulations and promotes effective and efficient operations, the Directors have established an organisation structure with clear operating procedures, lines of responsibility and delegated authority. There is an established framework of internal controls set out and approved by the executive management. The more important elements of this framework are as follows: Management structure The Board has overall responsibility for the Group and each Executive Director has been given responsibility for specific aspects of the Group’s affairs. Corporate accounting and procedures Responsibility levels are communicated throughout the Group as part of the corporate communication procedure. Accounting, delegation of authority and authorisation levels, segregation of duties and other control procedures, together with the general ethos of the Group are included in these communications, and standardised accounting policies are in place reflecting this policy. Dillistone Group Plc Annual Report and Accounts 2014Governance 15 Relations with shareholders The Group seeks to maintain good communications with shareholders. The Executive Directors make presentations to institutional shareholders covering the interim and full year results. The Group despatches the notice of Annual General Meetings (AGM), with an explanatory circular describing items of special business, at least 21 working days before the meeting. All shareholders have the opportunity formally or informally to ask questions at the Company’s AGM and the Chairman typically makes a statement on current trading conditions at that meeting. The Chairman of the Audit and Remuneration Committees attends the AGM and will answer questions that may be relevant to the remit of those committees. At each AGM the Chairman advises shareholders of the proxy voting details on each of the resolutions, which are dealt with on a show of hands. In addition, webinars are made following certain announcements, giving shareholders and other interested parties access to commentary from the Board. Auditor A resolution authorising the Directors to set the remuneration of the Auditor will be put to shareholders at the forthcoming AGM. Quality and integrity of personnel The integrity and competence of personnel is ensured through high recruitment standards and subsequent training courses. Quality personnel are seen as an essential part of the control environment and the ethical standards expected are communicated through senior members of staff. Budgetary process Each year the Board approves the annual budget, which includes an assessment of key assumptions underlying it. Performance is monitored and relevant action taken throughout the year by monthly reporting to the Board of updated forecasts together with information on key risk areas. Internal monitoring The Audit Committee considers and determines relevant action in respect of any control issues raised by the auditors. Given the size of the Group and the close day-to-day control exercised by the Executive Directors and senior management, no formal financial internal audit department is considered necessary. The Operations Director is responsible for maintaining registrations and quality related certifications and defining and agreeing the procedures, standards and practices to be followed in all non-financial aspects of the Group’s business. Risk management The Board formally reviews the risk register at least annually and the consideration of risks and in particular the identification of new risks are an agenda item at each Board meeting. Relationship with Company auditors The auditors have ready access to the Chairman of the Audit Committee and the Audit Committee meets at least annually with the auditors without any member of the executive being present. Remuneration The objective of the Group’s remuneration policy is to attract, motivate, and retain high quality individuals who will contribute significantly to shareholder value. The Remuneration Committee decides on the remuneration of the Directors and other senior management, which comprises a basic salary, benefits, bonus scheme, share options and longer term incentive plan. No Director is involved in deciding his or her own remuneration. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 16 Report to the Shareholders on Directors’ Remuneration Remuneration report Remuneration policy The objective of the Group’s remuneration policy is to attract, motivate, and retain high quality individuals who will contribute significantly to shareholder value. The Remuneration Committee decides on the remuneration of the Directors and other senior management, which comprises a basic salary, benefits, bonus scheme, share options and longer term incentive plan. Service contracts The Board’s policy is that service contracts of Executive Directors should provide for termination by the Group on one year’s notice. The service contracts of each of the current Executive Directors provide for such a period of notice. The independent Non-Executive Directors have letters of appointment providing fixed three-year service periods, which may be terminated by giving six months’ notice. Non-Executive Directors’ remuneration The fees for the Chairman and independent Non-Executive Director are determined by the Board. The Chairman and the Non-Executive Director are not involved in any discussions or decisions about their own remuneration. The Chairman and independent Non-Executive Director do not receive bonuses or pension contributions and are not entitled to participate in any of the Group’s share schemes. They are entitled to be reimbursed the reasonable expenses incurred by them in carrying out their duties as Directors of the Company. Executive Directors’ remuneration The remuneration package of the Executive Directors includes the following elements: Basic salary Salaries are normally reviewed annually taking into account inflation and salaries paid to Directors of comparable companies. Pay reviews also take into account Group and personal performance. The Board as a whole decides the remuneration of the Chairman and the Non-Executive Director. Performance related pay scheme There are two performance related pay schemes for Executive Directors. The first is an annual bonus scheme which is based upon the achievement of certain profit and commercial targets for the Group, as appropriate. A bonus of £22,000 was payable to the Executive Directors in respect of 2014 (2013: £66,000). The second scheme was introduced in 2011 and is a long term incentive plan linked to growth in earnings per share over a three year period. Executive Directors have been granted phantom share options at the ruling mid-market price at the time of the grant. The awards are subject to meeting challenging EPS growth targets and will be cash settled. The Remuneration Committee can also choose, when making the award, to grant share options in place of phantom options with the same growth targets. In 2013 an alternative pure cash bonus fixed as a percentage of salary was introduced with similar EPS growth targets. It is expected that annual awards will be made under this later scheme going forward. Where phantom options are awarded, the value of the award is calculated at each reporting period using a Black-Scholes model (see note 22 for further details). One of the phantom option schemes was replaced by a cash bonus scheme which fixes the maximum payout. The awards made in the period are included below: Directors’ remuneration (audited) Details of the remuneration of the Directors for the financial year are set out below: Executive Directors J S Starr R Howard A D James J P Pomeroy A Milne Non-Executive Directors M D Love G R Fearnley * Includes payments where salary sacrifice has been enabled. Salary and fees £’000 Annual bonus £’000 Pension payments* £’000 Benefits £’000 2014 Total £’000 93 64 84 83 78 33 12 5 4 4 4 5 – – 447 22 27 – 5 9 – – – 41 – 4 2 – 6 – – 12 125 72 95 96 89 33 12 522 2013 Total £’000 136 76 102 102 87 33 12 548 Dillistone Group Plc Annual Report and Accounts 2014Governance 17 Directors’ interests The interests of the Directors (including family interests) in the share capital of the Company at the year end are set out below: J S Starr R Howard A D James M D Love G R Fearnley A Milne J P Pomeroy Ordinary shares of 5 pence each At 31 December 2014 At 31 December 2013 3,564,443 3,554,443 3,300,000 3,300,000 101,494 450,622 453,435 59,109 13,888 101,494 703,254 453,435 59,109 39,682 In addition, the following Directors had total share options including the options granted under the LTIP scheme above. Long term incentive payments made in the period are not included in the above figures but are detailed below: LTIP award (not audited) – phantom options Total value of all phantom option LTIP awards carried at 31 December Total value of all phantom option LTIP awards carried at 31 December 2014* £’000 2013* £’000 Number of phantom options granted in year – – – – – – 11 9 – – 6 26 29 26 – – 17 72 J S Starr R Howard A D James J P Pomeroy A Milne LTIP award (not audited) – % of salary arrangement Total value of salary based LTIP awards carried at 31 December 2014* £’000 Total value of all salary based LTIP awards carried at 31 December 2013* £’000 A D James J P Pomeroy Options over ordinary shares of 5 pence each At 31 December 2014 109,589 111,233 At 31 December 2013 109,589 137,027 220,822 246,616 Julie Pomeroy exercised 25,794 options during the year at a price of 77p. 5 – – – – 5 47 40 34 31 29 181 Maximum payout awarded in period Paid in the year including employers NI J S Starr R Howard A D James J P Pomeroy A Milne 37 21 29 29 27 14 39 30 26 26 143 135 * Awards accrued over the period that they relate to and the valuation takes into account the likelihood of performance conditions being met. LTIP Award (not audited) – share options Number of options granted under LTIP scheme in year Total number of options granted under LTIP scheme at 31 December 2014 Total number of options granted under LTIP scheme at 31 December 2013 – – – 109,589 111,233 109,589 111,233 220,822 220,822 A D James J P Pomeroy These options were granted at 73p and carry the same performance conditions as the LTIP phantom option awards. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 18 Board of Directors Mike Love, aged 66 Non-Executive Chairman Mike Love has a PhD in theoretical physics and over 30 years’ experience in the software industry. He is currently Non- Executive Chairman of SciSys plc, also an AIM quoted company, and Director and Chairman at Redcliffe Precision Ltd. He was Group Managing Director of SciSys from 1986 to 2003 during which time he led a management buy-out of the business and floated it on AIM in 1997. He is a previous member of the AIM Advisory Group of the London Stock Exchange. Jason Starr, aged 43 Chief Executive Jason Starr joined Dillistone Systems in 1994. He became Marketing Manager in 1996 before becoming Managing Director of the UK business in 1998. Following the MBO, Jason became Managing Director of Dillistone Systems Ltd and subsequently became Group Chief Executive Officer. Jason is well known in the industry and has spoken at events in Asia, the US and Europe. Jason was appointed a Non-Executive Director of AIM listed IPPlus PLC from 1 January 2015. Rory Howard, aged 47 Operations Director Rory Howard has a BA (Honours) in Business Administration and is a PRINCE2 practitioner. Rory started his career with the Dixons Stores Group and from 1991 to 1994 he worked in the systems and control department as a technical support analyst working on their EPOS systems, data reporting and security. He then joined JATO Dynamics Ltd, a software company specialising in the automotive research market, as a database analyst, developing databases for pricing models for the large Alex James, aged 42 Product Development Director Alex graduated from Swansea University in 1995 with a degree in Psychology. In 1995 Alex joined Mallinckrodt Veterinary, working in quality control. In 1997 he moved to Responseability, a company that manages aspects of the recruitment process for clients, starting in administration before progressing into an account management role. Alex started at Dillistone in 1999 in a training/consultancy position prior to becoming the UK and then Global Projects Manager, being ultimately responsible for Jason has a BA (Honours) business studies degree from the London Guildhall University. Jason is the Group Chief Executive of Dillistone Group Plc and Managing Director of Dillistone Systems. automotive manufacturers. In 1998 he joined Dillistone Systems Limited as a project manager, and the following year became the Global Projects Manager, tasked with restructuring all implementations and data migrations procedures and operations. In 2003 Rory became Operations Director of Dillistone Systems Limited and a member of the Board. the implementation of all products and services to both new and existing clients. Alex joined the Board of Dillistone Systems Limited in January 2005 and the Group Board in February 2006. Alex is the Product Development Director for Dillistone Systems; departments under his responsibility are software development and technical integration. Dillistone Group Plc Annual Report and Accounts 2014Governance 19 Alistair Milne, aged 39 Director of Support Services Alistair started his career at Richmond Theatre in 1994, working in both the marketing department and box office. In 1997 he joined The Football Association, initially in a ticketing administration role, before progressing to a management role. Alistair then began working at the Shaw Theatre as Box Office Manager. He joined Dillistone Systems in 2003. He was initially appointed to the UK and then Global Support Manager role with responsibility for all aspects of support services. Julie Pomeroy, aged 59 Finance Director Julie is an experienced Finance Director of quoted and private companies. She graduated with an honours degree in Physics from Birmingham University and is a Chartered Accountant and Chartered Director. She also holds tax and treasury qualifications. Julie was group finance Director of Carter & Carter Group plc until October 2005 having joined in 2002 to help grow and float the business. Giles Fearnley, aged 60 Non-Executive Director A career in the passenger transport industry saw Giles lead an MBO in 1991, forming Blazefield Holdings Limited, a business operating bus networks principally across Yorkshire and Lancashire. This company was sold to Transdev in 2006. In 1997 he was appointed chief executive of Prism Rail PLC, having been one of that company’s founders, and held that position until its sale to National Express in 2000. He was promoted to the Dillistone Systems Limited Board in 2006 and joined the Group Board in January 2011. Alistair is the Director of Support Services; he oversees all Dillistone IT infrastructure and support services globally. She had previously been Chief Financial Officer of Weston Medical Group plc and prior to this Julie worked at East Midlands Electricity plc as Director of corporate finance. She was Finance Director of AIM quoted Biofutures International plc until July 2010. Julie is also a Non-Executive Director of Nottingham University Hospitals NHS Trust. Prism Rail operated four of the UK’s passenger rail franchises with a turnover of £500m per annum. Giles is currently Managing Director – Bus, UK and Ireland for First Group Plc. Giles served as Chairman of the Association of Train Operating Companies in 1999/2000 and as Chairman of The Confederation of Passenger Transport UK. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 20 Directors’ Report The Directors present their report and financial statements for the year ended 31 December 2014. Results and dividends The consolidated statement of comprehensive income for the year is set out on page 22. An interim dividend of 1.3p per share was paid in June 2014. A final dividend of 2.7p per share will be paid, subject to shareholder approval, on 24 June 2015. Directors The following Directors have held office since 1 January 2014 other than where stated: M D Love – Non-Executive Chairman J S Starr R Howard A D James J P Pomeroy G R Fearnley – Non-Executive Director A Milne The interests of the Directors (including family interests) in the share capital of the Company are listed on page 17. Jason Starr and Alex James are proposed for re-election at the forthcoming AGM. Both have service contracts with a one year notice period. Financial risk management Details of the Group’s financial risk management is set out in the Strategic Report section. Principal shareholders As at 23 April 2015, the Directors have been notified of the following shareholdings in excess of 3% of the Company’s issued share capital: J S Starr R Howard J McLaughlin Herald Investment Management Unicorn Asset Management CFS Independent M Love R Howells Ordinary shares of 5 pence each 3,564,433 3,300,000 2,572,122 1,767,444 1,595,301 870,889 703,254 650,000 Percentage 18.38% 17.02% 13.26% 9.11% 8.22% 4.49% 3.62% 3.35% Directors’ and officers’ insurance The Group maintains insurance cover for all Directors and officers of Group companies against liabilities which may be incurred by them while acting as Directors and officers. Annual General Meeting The Company’s Annual General Meeting will be held at Voyager Software Limited, 12 Cedarwood, Crockford Lane, Chineham Park, Basingstoke RG24 8WD on 18 June 2015 at 10:30 am. The Notice convening the Annual General Meeting and an explanation of the business to be put to the meeting is contained in the separate document to shareholders which accompanies this report. Auditor Grant Thornton UK LLP was appointed as auditor for the year ended 31 December 2014 and a resolution proposing their re-appointment as auditors to the Company will be put to the forthcoming Annual General Meeting. Directors’ responsibilities The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Company’s financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). 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 and profit or loss of the Company and Group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; • 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 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. The Directors confirm that so far as each Director is aware: • there is no relevant audit information of which the Company’s auditor is unaware; and • the Directors have taken all steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. On behalf of the Board J P Pomeroy Company Secretary 24 April 2015 Dillistone Group Plc Annual Report and Accounts 2014Governance Independent Auditor’s Report To the Members of Dillistone Group Plc for the year ended 31 December 2014 21 Opinion on other matter 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. 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. Paul Etherington BSc FCA CF Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London 24 April 2015 Independent auditor’s report to the members of Dillistone Group Plc We have audited the financial statements of Dillistone Group Plc for the year ended 31 December 2014 which comprise the consolidated statement of comprehensive income, the consolidated and parent company statements of changes in equity, the consolidated and parent company statement of financial position, the consolidated and parent company cash flow statements and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in 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 our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement, set out on page 20, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit 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 Financial Reporting Council’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 31 December 2014 and of the group’s profit for the year then ended; • the group financial statements have been properly prepared in accordance with IFRSs as adopted 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. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 22 Consolidated Statement of Comprehensive Income For the year ended 31 December 2014 Revenue Cost of sales Gross profit Administrative expenses Profits from operating activities Adjusted operating profit before acquisition related items Acquisition related items Operating profit Financial income Finance cost Profit before tax Tax expense Profit for the year Other comprehensive income net of tax: Items that will be reclassified subsequently to profit and loss Currency translation differences Total comprehensive income for the year net of tax Earnings per share – from continuing activities Basic Diluted The notes on pages 28 to 56 are an integral part of these consolidated financial statements. Note 3 6 2 5 8 8 9 10 10 2014 £’000 8,625 (1,108) 7,517 (6,115) 1,402 1,820 (418) 1,402 6 (103) 1,305 (160) 1,145 (8) 1,137 6.18p 5.95p 2013 £’000 8,101 (957) 7,144 (5,561) 1,583 1,793 (210) 1,583 8 (68) 1,523 (292) 1,231 (16) 1,215 6.76p 6.51p Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 23 Consolidated Statement of Changes in Equity For the year ended 31 December 2014 Balance at 31 December 2012 Comprehensive income Profit for the year ended 31 December 2013 Other comprehensive income Exchange differences on translation of overseas operations Total comprehensive income Transactions with owners Issue of share capital Share option charge Dividends paid Total transactions with owners Balance at 31 December 2013 Comprehensive income Profit for the year ended 31 December 2014 Other comprehensive income Exchange differences on translation of overseas operations Total comprehensive income Transactions with owners Issue of share capital Share option charges Dividends paid Total transactions with owners Share capital £’000 910 Share premium £’000 451 Merger reserve £’000 365 – – – 4 – – 4 – – – 47 – – 47 – – – – – – – Retained earnings £’000 2,528 1,231 – 1,231 – – (683) (683) Share option £’000 68 Foreign exchange £’000 152 Total £’000 4,474 – – – – 53 – 53 – 1,231 (16) (16) (16) 1,215 – – – – 51 53 (683) (579) 914 498 365 3,076 121 136 5,110 – – – 55 – – 55 – – – 934 – – 934 – – – – – – – 1,145 – 1,145 – 16 (723) (707) – – – – (3) – (3) – 1,145 (8) (8) – – – – (8) 1,137 989 13 (723) 279 Balance at 31 December 2014 969 1,432 365 3,514 118 128 6,526 The notes on pages 28 to 56 are an integral part of these consolidated financial statements. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 24 Company Statement of Changes in Equity For the year ended 31 December 2014 Balance at 31 December 2012 Comprehensive income Total comprehensive income for the year ended 31 December 2013 Transactions with owners Issue of share capital Share option charge Dividends paid Total transactions with owners Balance at 31 December 2013 Comprehensive income Total comprehensive income for the year ended 31 December 2014 Transactions with owners Issue of share capital Share option charge Dividends paid Total transactions with owners Balance at 31 December 2014 Share capital £’000 910 Share premium £’000 451 Merger reserve £’000 365 Retained earnings £’000 1,142 Share option £’000 68 – 4 – – 4 – 47 – – 47 – – – – – 715 – – (683) (683) – – 53 – 53 Total £’000 2,936 715 51 53 (683) (579) 914 498 365 1,174 121 3,072 – 55 – – 55 – 934 – – 934 – – – – – 896 – 16 (723) (707) – – (3) – (3) 896 989 13 (723) 279 969 1,432 365 1,363 118 4,247 The notes on pages 28 to 56 are an integral part of these consolidated financial statements. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements Consolidated and Company Statements of Financial Position As at 31 December 2014 25 ASSETS Non-current assets Goodwill Other intangible assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital Share premium Merger reserve Retained earnings Share option reserve Translation reserve Total equity Liabilities Non-current liabilities Trade and other payables Borrowings Deferred tax liability Current liabilities Trade and other payables Borrowings Current tax payable Total liabilities Total liabilities and equity Group Company Notes 2014 £’000 2013 £’000 2014 £’000 2013 £’000 12 13 14 15 16 17 20 22 18 19 9 18 19 3,415 6,317 299 – 10,031 41 1,784 1,929 3,754 2,745 4,833 127 – 7,705 78 1,790 1,399 3,267 – – – 7,599 7,599 – 331 387 718 – – – 5,675 5,675 – 365 78 443 13,785 10,972 8,317 6,118 969 1,432 365 3,514 118 128 6,526 666 325 1,152 4,669 162 285 7,259 914 498 365 3,076 121 136 5,110 459 – 901 4,313 – 189 5,862 13,785 10,972 969 1,432 365 1,363 118 – 4,247 666 325 – 2,917 162 – 4,070 8,317 914 498 365 1,174 121 – 3,072 459 – – 2,587 – – 3,046 6,118 The notes on pages 28 to 56 are an integral part of these consolidated financial statements. The financial statements were approved by the Board of Directors and authorised for issue on 24 April 2015. They were signed on its behalf by J P Pomeroy Director Company Registration No. 4578125 Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 26 Consolidated Cash Flow Statement For the year ended 31 December 2014 Operating activities Profit before tax Less taxation paid Adjustment for: Financial income Financial cost Depreciation and amortisation Share option expense Foreign exchange adjustments arising from operations Operating cash flows before movement in working capital Increase in receivables Decrease/(increase) in inventories Increase in payables Net cash generated from operating activities Investing activities Interest received Finance cost Purchases of property, plant and equipment Investment in development costs Acquisition of subsidiaries net of cash acquired Contingent consideration paid Net cash used in investing activities Financing activities Net proceeds from issue of share capital Bank loan received Bank loan repayments made Dividends paid Net cash generated from/(used in) by financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year The notes on pages 28 to 56 are an integral part of these consolidated financial statements. 2014 £’000 2013 £’000 1,305 (122) 1,523 (273) (6) 103 868 13 (3) 2,158 (81) 37 4 2,118 6 (2) (259) (814) (718) (550) (8) 68 621 53 14 1,998 (120) (15) 259 2,122 7 – (83) (747) (715) (185) (2,337) (1,723) 989 500 (13) (753) 753 534 1,399 (4) 1,929 51 – – (683) (632) (233) 1,643 (11) 1,399 Dillistone Group Plc Annual Report and Accounts 2014Financial Statements Company Cash Flow Statement As at 31 December 2014 Operating activities Profit before tax Less taxation paid Adjustment for: Financial cost Share option expense Operating cash flows before movements in working capital Decrease /(increase) in receivables Increase in payables Net cash generated from operating activities Investing activities Finance cost Investment in acquisitions Contingent consideration paid Net cash used in investing activities Financing activities Net proceeds from issue of share capital Bank loan received Bank loan repayments made Dividends paid Net cash from/(used) in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The notes on pages 28 to 56 are an integral part of these consolidated financial statements. 27 2014 £’000 2013 £’000 896 – 103 13 1,012 36 123 1,171 (2) (1,063) (550) (1,615) 989 500 (13) (723) 753 309 78 387 715 – 68 53 836 (334) 1,214 1,716 – (832) (185) (1,017) 51 – – (683) (632) 67 11 78 Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 28 Notes to the Financial Statements For the year ended 31 December 2014 Dillistone Group Plc (the ‘Company’) is a company incorporated in England and Wales. The financial statements are presented in thousand Pounds Sterling. The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). The parent company financial statements present information about the Company as a separate entity and not about its Group. Both the Group financial statements and the Company financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards (’IFRS’) as adopted by the European Union (’EU’), IFRIC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. In publishing the Company financial statements here together with the Group financial statements, the Company has taken advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes in these financial statements. 1. Accounting policies 1.1 Basis of accounting The consolidated financial statements have been prepared using the significant accounting policies and measurement bases summarised below: Significant estimates In the application of the Group’s accounting policies the Directors are required to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The key areas are summarised below: Valuation of share-based payments The estimation of share-based payment costs requires the selection of an appropriate valuation model and consideration as to the inputs necessary for the valuation model chosen. The Group has made estimates as to the volatility of its own shares, the probable life of options granted, leaver rates and the time of exercise of those options. The model used by the Group is a Black-Scholes valuation model. Further details are shown in note 22. Impairment of goodwill and other intangible assets There are a number of assumptions management have considered in performing impairment reviews of goodwill and intangible assets which include an estimate of the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate the recoverable amount. See note 12. Business combinations On initial recognition, the assets and liabilities of the acquired business are included in the consolidated statement of financial position at their fair values. In measuring fair value, management uses estimates about future cash flows and discount rates. However, actual results may vary. Details of acquired assets and liabilities are given in note 23. Contingent consideration Where contingent consideration is payable in cash and discounting would have a material effect, management uses an appropriate discount rate. As the contingent consideration is dependent upon future trading performance, an estimate of the present value of the likely consideration payable is made at each reporting date. See note 23. Judgements in applying the Group’s accounting policies In the process of applying the Group’s accounting policies, management make various judgements that can significantly affect the amounts recognised in the financial statements. The critical judgements are considered to be the following: Customers’ practical acceptance of licence software As detailed in note 1.4, perpetual licence fee revenues are recognised on practical acceptance of the software. The Group uses the ‘live’ date as the basis of determining the timing of customer practical acceptance, thereby reducing the judgement required to ascertain the timing of licence revenue recognition. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 29 1. Accounting policies continued Capitalisation of internal development expenditure Management exercises judgement in establishing both the technical feasibility of completing an intangible asset which can be used internally or sold and the degree of certainty that a market exists for the asset, or its output, for the generation of future economic benefits. In addition, amortisation rates are based on estimates of the useful economic lives and residual values of the assets involved. The assessment of these useful economic lives is made by projecting the economic lifecycle of the asset which is subject to alteration as a result of product development and innovation. Amortisation rates are changed where economic lives are re-assessed and technically obsolete items written off where necessary. The carrying value of capitalised development is reviewed for impairment at each accounting period end. See note 13. Valuation of assets and liabilities Management has made a number of assumptions with regards to the models used to value assets and liabilities at the statement of financial position date. Valuation techniques commonly used by market practitioners are applied. In respect of the provision for bad and doubtful receivables and credit note provisions, management has made relevant judgements based on discussions with the account managers as regards the recoverability of trade receivables. Valuation of separately identifiable intangible assets As detailed in note 1.7, separately identifiable intangible assets are identified and amortised over a defined period. The Directors use an acknowledged approach but this is reliant upon certain judgements, including the assumptions to be used in the capital asset pricing model, which they determine are reasonable by reference to companies in similar industries. The accounting policies set out below have, unless otherwise stated, been applied consistently by the Group to all periods presented in these financial statements. 1.2 Going concern The Group’s business activities and financial position, together with the factors likely to affect its future development, performance and position, are set out in the CEO’s Review and Financial Review on pages 6 to 13. In addition, note 24 to the financial statements includes the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its exposures to credit risk and liquidity risk. The Group prepare budgets and cash flow forecasts to ensure that the Group can meet its liabilities as they fall due. The Group has considerable financial resources together with well established relationships with a number of customers and suppliers across different geographic areas. In addition a substantial proportion of its revenue is recurring. As a consequence, the Directors believe that the Company is well placed to manage its business risks successfully despite the current uncertain economic outlook. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. 1.3 Basis of consolidation The Group financial statements consolidate those of the parent company and all of its subsidiaries as of 31 December 2014. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All subsidiaries have a reporting date of 31 December. All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a Group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. 1.4 Revenue General Revenue is the fair value of the total amount receivable by the Group for supplies of products and services which are provided in the normal course of business. VAT or similar local taxes and trade discounts are excluded. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 30 Notes to the Financial Statements continued For the year ended 31 December 2014 1. Accounting policies continued Licensing (excluding SaaS) The Group licences software under licence agreements. Perpetual licence fee revenues are recognised on practical acceptance of the software, when all obligations have been substantially completed. This is when the customer has accepted the product, the risks and rewards of ownership have been transferred, it is probable that the economic benefits of the transaction will flow to the Group, all costs and revenue in relation to the transaction can reliably be measured and the Group has no further managerial involvement over the goods to the degree usually associated with ownership. To the extent that payments have been received in advance for licences, where practical acceptance has not yet been reached, these amounts are recognised as deferred income. Professional services The Group provides professional services which include installation, consulting, data translation and training. Such revenues are recognised as the services are completed or, where they are part of the sale and installation of software, they are typically recognised when the obligations under the contract are complete. To the extent that payments have been received in advance for such services these amounts are recognised as deferred income. Product support, hosting and software as a service (SaaS) Revenues from support, hosting or SaaS agreements are recognised over the period to which they relate but only after practical acceptance of the software, as defined above, has been received. Where revenue is invoiced in advance for such services, the amount in advance is included in deferred revenue and released over the period to which the service relates. Third party revenues The Group sells, predominantly as principal, software developed by other organisations together with services that are bought in from third parties. Sales of third party software are recognised in the period in which the sale occurs. Services are recognised in the period in which they are provided. Tokens The Group sells tokens to access certain services within the business. Tokens are normally bought in bundles and can be used over time. Tokens currently do not have a fixed expiry period. Revenue is only recognised on use. 1.5 Share-based payments The Company operates two share-based payment schemes and one cash based scheme. The first is an equity settled share-based compensation plan (share options) for remuneration of its employees. It can also be used in conjunction with a long term incentive plan for executives. All employee services received in exchange for the grant of any share-based compensation are measured at their fair values. These are indirectly determined by reference to the share option awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. profitability or sales growth targets). All equity-settled share-based compensation is ultimately recognised as an expense in the profit or loss with a corresponding credit to share-based payment reserve, net of deferred tax where applicable. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of shares options expected to vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to expenses recognised in prior periods is made if fewer share options ultimately are exercised than originally estimated. Upon exercise of share options, the proceeds received, net of any directly attributable transaction costs, up to the nominal value of the shares issued are reallocated to share capital with any excess being recorded as additional share premium. The second scheme is a cash settled share-based compensation plan for Directors. Under this scheme, Directors are granted ‘phantom’ options which have performance conditions related to the growth in earnings per share of the Group. The options will automatically be exercised following the publication of the Annual Report of the Company, three years after the grant. These phantom options are revalued at each reporting date using a Black-Scholes model and the necessary movement in the liability is recognised through the income statement. The liability is included as appropriate in current and non-current liabilities. The Directors agreed to waive their rights under the plan maturing in 2014 and replace it with a capped cash bonus scheme with the similar performance conditions and which matures in the same timeframe. Where there is a modification to a cash settled scheme, the change in fair value between the current and previous scheme is immediately recognised in the profit or loss. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 31 1. Accounting policies continued 1.6 Long term incentive plan – capped cash bonus The LTIP awards granted in 2014 were based on a capped cash bonus with performance conditions related to the growth in earnings per share of the Group. These awards automatically mature following the publication of the Annual Report of the Company, three years after the period to which the grant relates. The liability is accrued and recognised through the income statement. 1.7 Business combinations The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of a) fair value of consideration transferred, b) the recognised amount of any non-controlling interest in the acquiree and c) acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (ie gain on a bargain purchase) is recognised in profit or loss immediately. Where contingent consideration relates to the results spread over different accounting periods, the fair value of such consideration is recalculated at each year end and any adjustment is recognised in profit or loss immediately. 1.8 Adjusted operating profit Adjusted operating profit excludes acquisition costs and related intangible amortisation and movements in deferred consideration and other one off costs which can include, as an example, buying out onerous contracts acquired through an acquisition. 1.9 Impairment testing of goodwill, other intangible assets and property, plant and equipment For impairment assessment purposes, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash generating units). As a result, some assets are tested individually for impairment and some are tested at cash generating unit level. Goodwill is allocated to those cash generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors goodwill. Cash generating units to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s or cash generating unit’s carrying amount exceeds its recoverable amount, which is the higher of fair value less costs to sell and value-in-use. To determine the value-in-use, management estimates expected future cash flows from each cash generating unit and determines a suitable interest rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Group’s latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements. Discount factors are determined individually for each cash generating unit and reflect management’s assessment of respective risk profiles, such as market and asset-specific risks factors. Impairment losses for cash generating units reduce first the carrying amount of any goodwill allocated to that cash generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment charge is reversed if the cash generating unit’s recoverable amount exceeds its carrying amount. 1.10 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 32 Notes to the Financial Statements continued For the year ended 31 December 2014 1. Accounting policies continued 1.11 Intangible assets Internal development costs Costs incurred on product development relating to the design and development of new or enhanced products are capitalised as intangible assets when it is reasonably certain that the development will provide economic benefits, considering its commercial and technological feasibility and the resources available for the completion and marketing of the development, and where the costs can be measured reliably. The expenditures capitalised are the direct labour and subcontracted costs, which are managed and controlled centrally. Product development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised product development expenditure for versions of the Group’s FileFinder product (up to version 9) and for expenditure on subsequent enhancements and releases to FileFinder 10 and FileFinder Anywhere is amortised over its useful life of three years, commencing a year following the costs being incurred. Maintenance costs are expensed. Capitalised product development expenditure for the Company’s FileFinder version 10, the Browser version of FileFinder and Voyager Infinity platform is amortised over its useful life of 10 years or to 30 June 2021, whichever is the shorter period, commencing in the year in which the product is first brought into use. Capitalised product development expenditure is subject to regular impairment reviews and is stated at cost less any accumulated impairment losses and amortisation. Any impairment taken during the year is shown under administrative expenses on the consolidated statement of comprehensive income. Acquired as part of a business combination In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group. Where an intangible asset might be separable, but only together with a related tangible or intangible asset, the Group of assets is recognised as a single asset separately from goodwill where the individual fair values of the assets in the Group are not reliably measurable. Where the individual fair values of the complementary assets are reliably measurable, the Group recognises them as a single asset provided the individual assets have similar useful lives. Subsequent to initial recognition, intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is provided to write off the cost of each intangible asset over its useful economic life as follows: Intangible assets Brand Brand and IP Developed technology Contractual customer relationships Non-contractual customer relationships Estimated life 15 years 15 years 6–11.25 years 1.25 years 10–10.25 years 1.12 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation on these assets is provided at rates estimated to write off the cost, less estimated residual value, of each asset over its expected useful life as follows: Leasehold land and buildings Office and computer equipment Fixtures, fittings and equipment the lower of 5 years or the remaining lease period 3-5 years straight line 4 years straight line 1.13 Financial assets The Group classifies its financial assets under the definitions provided in International Accounting Standard 39 (IAS 39) Financial Instruments: Recognition and measurement, depending on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Management considers that the Group’s financial assets fall under the ‘loans and receivables’ category. Loans and receivables are non-derivative financial assets with fixed or determined payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date, which are classified as non-current assets. The Group’s loans and receivables comprise trade receivables, intercompany trading balances (in relation to Company accounts), and cash and cash equivalents. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 33 1. Accounting policies continued Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method, less any provision for impairment. Receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty may default. Receivables that are not considered to be individually impaired are reviewed for impairment in groups. The impairment loss estimate is then based on recent historical counterparty default rates and current economic conditions. Derecognition of financial assets occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. An assessment for impairment is undertaken at least at each statement of financial position date whether or not there is objective evidence that a financial asset or a group of financial assets is impaired. 1.14 Financial liabilities The Group classifies its financial liabilities under the definitions provided in IAS 39, either as financial liabilities at fair value through profit or loss, or financial liabilities measured at amortised cost. Management considers that the Group’s financial liabilities fall under the ‘financial liabilities measured at amortised cost’ category other than contingent consideration which is measured at fair value and movements in fair value are recognised in the profit or loss. The Group’s ‘financial liabilities measured at amortised cost’ comprise trade payables, intercompany trading balances (in relation to Company accounts), bank loans and accruals. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 1.15 Investments Investments in subsidiary companies are included at cost in the accounts of the Company less any amount written off in respect of any impairment in value. 1.16 Leases Finance leases are recognised as being those that transfer substantially all the risks and rewards of ownership. Assets held under finance leases are capitalised and the outstanding future lease obligations are shown in payables at the present value of the lease payments. They are depreciated over the term of the lease or their useful economic lives, whichever is the shorter. The interest element (finance charge) of lease payments is charged to profit or loss over the period of the lease. All other leases are regarded as operating leases and the payments made under them are charged to profit or loss in the period in which they are incurred on a straight line basis over the lease term. The Group does not act as a lessor. 1.17 Inventories Inventories are stated at the lower of cost and net realisable value. Cost includes all directly attributable expenses. Costs of ordinarily interchangeable items are assigned using the first in, first out cost formula. Net realisable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. 1.18 Cash and cash equivalents 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 or less and which are subject to an insignificant risk of changes in value. 1.19 Equity Equity comprises the following: • ‘Share capital’ represents the nominal value of equity shares. • ‘Share premium’ represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. • ‘Merger reserve’ is used where more than 90% of the shares in a subsidiary are acquired and the consideration includes the issue of new shares by the Company, thereby attracting merger relief under the Companies Act 2006. • ‘Share option reserve’ represents equity-settled share-based employee and non-employee remuneration until such share options are exercised. • ‘Retained earnings’ represents retained profits and losses. • ‘Translation reserve’ represents translation differences arising on the consolidation of investments in overseas subsidiaries. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 34 Notes to the Financial Statements continued For the year ended 31 December 2014 1. Accounting policies continued 1.20 Foreign currency translation The consolidated financial statements are presented in Sterling, which is also the functional currency of the parent company. Monetary assets and liabilities denominated in foreign currencies are translated into Sterling at the rates of exchange ruling at the statement of financial position date. Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. All differences are taken to profit and loss. On consolidation, the assets and liabilities of the Group’s overseas subsidiaries are translated from their functional currency to Sterling at exchange rates prevailing on the statement of financial position date. Income and expenses have been translated from their functional currency into Sterling at the average rate for each month over the reporting period. Exchange differences are charged/credited to other comprehensive income and recognised in the currency translation reserve in equity. 1.21 Income taxes Current income tax assets and liabilities comprise those obligations to fiscal authorities in the countries in which the Group carries out its operations. They are calculated according to the tax rates and tax laws applicable to the fiscal period and the country to which they relate. Tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amount of assets and liabilities in the consolidated financial statements with their respective tax bases. However, deferred tax is not provided on the initial recognition of goodwill, or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with investments in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the statement of financial position date. Tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. 1.22 Defined contribution pension scheme The pension costs charged in profit or loss represent the contributions payable by the Group during the year. 1.23 New accounting standards (i) New and amended standards adopted by the Group: IFRS 10 ‘Consolidated Financial Statements’ (IFRS 10) IFRS 10 supersedes IAS 27 ‘Consolidated and Separate Financial Statements’ (IAS 27) and SIC 12 ‘Consolidation-Special Purpose Entities’. IFRS 10 revises the definition of control and provides extensive new guidance on its application. These new requirements have the potential to affect which of the Group’s investees are considered to be subsidiaries and therefore to change the scope of consolidation. The requirements on consolidation procedures, accounting for changes in non-controlling interests and accounting for loss of control of a subsidiary are unchanged. Management has reviewed its control assessments in accordance with IFRS 10 and has concluded that there is no effect on the classification (as subsidiaries) of any of the Group’s investees held during the period or comparative periods covered by these financial statements. IFRS 12 ‘Disclosure of Interests in Other Entities’ (IFRS 12) IFRS 12 integrates and makes consistent the disclosure requirements for various types of investments, including unconsolidated structured entities. It introduces new disclosure requirements about the risks to which an entity is exposed from its involvement with structured entities. Note 15 illustrates the application of IFRS 12 in the current year. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 35 1. Accounting policies continued (ii) Standards, amendments and interpretations which are effective for reporting periods beginning after the date of these financial statements which have not been adopted early: Standard IFRS 9 IFRS 15 Financial instruments Revenue from contracts with customers Description Effective date 1 January 2015 1 January 2017 2. Reconciliation of adjusted operating profits to consolidated statement of comprehensive income Adjusted operating profits 2014 £’000 Acquisition related items 2014* £’000 Note 8,625 (1,108) 7,517 (5,697) 1,820 6 (2) 1,824 (240) 1,584 – – – (418) (418) – (101) (519) 80 (439) Adjusted operating profits 2013 £’000 Acquisition related items 2013* £’000 8,101 (957) 7,144 (5,351) 1,793 8 – 1,801 (346) 1,455 – – – (210) (210) – (68) (278) 54 (224) 2014 £’000 8,625 (1,108) 7,517 (6,115) 1,402 6 (103) 1,305 (160) 1,145 2013 £’000 8,101 (957) 7,144 (5,561) 1,583 8 (68) 1,523 (292) 1,231 (8) – (8) (16) – (16) 1,576 (439) 1,137 1,439 (224) 1,215 10 10 8.56p 8.23p 6.18p 5.95p 7.99p 7.70p 6.76p 6.51p Revenue Cost of sales Gross profit Administrative expenses Results from operating activities Financial income Financial cost Profit before tax Tax expense Profit for the year Other comprehensive income net of tax: Currency translation differences Total comprehensive income for the year net of tax Earnings per share – from continuing activities Basic Diluted * See accounts note 5. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 36 Notes to the Financial Statements continued For the year ended 31 December 2014 3. Segment reporting The Board principally monitors the Group’s operations in terms of results of the two divisions, Dillistone Systems and Voyager Software. Segment results reflect management charges made or received. Intercompany balances are excluded from segment assets and liabilities. Divisional segments For the year ended 31 December 2014 Recurring income Non-recurring income Third party revenues Segment revenue Segment EBITDA Depreciation and amortisation expense Segment result Acquisition related amortisation Acquisition related charges Operating profit/(loss) Financial income Loan interest Acquisition related interest expenses Income tax expense Profit after tax Dillistone £’000 3,186 1,371 – 4,557 1,597 (429) 1,168 – – 1,168 5 Voyager £’000 2,743 914 411 4,068 802 (153) 649 – – 649 1 Interdivisional revenue £’000 Central £’000 – – – – – – – – 3 – 3 (286) (132) (415) – (2) (101) Total £’000 5,929 2,285 411 8,625 2,402 (582) 1,820 (286) (132) 1,402 6 (2) (101) (160) 1,145 Additions of non-current assets 720 353 – 1,073 Segment assets Intangibles and goodwill Total Segment liabilities 2,546 2,003 4,549 1,107 884 1,991 400 6,845 7,245 4,053 9,732 13,785 3,097 1,376 2,796 7,269 Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 37 Total £’000 5,271 2,428 402 8,101 2,242 (449) 1,793 (172) (38) 1,583 8 (68) (292) 1,231 Dillistone £’000 3,248 1,675 – 4,923 2,013 (358) 1,655 – – 1,655 7 Voyager £’000 2,023 777 402 3,202 598 (91) 507 – – 507 1 Interdivisional revenue £’000 Central £’000 – (24) – (24) – – – – (369) – (369) (172) (38) (579) – (68) 546 2,341 1,870 4,211 284 971 691 1,662 – 830 82 5,017 5,099 3,394 7,578 10,972 2,959 1,009 1,894 5,862 3. Segment reporting continued For the year ended 31 December 2013 Recurring income Non-recurring income Third party revenues Segment revenue Segment EBITDA Depreciation and amortisation expense Segment result Acquisition related amortisation Acquisition related charges Operating profit/(loss) Financial income Acquisition related interest expenses Income tax expense Profit after tax Additions of non-current assets Segment assets Intangibles and goodwill Total Segment liabilities Products and services The following table provides an analysis of the Group’s revenue by products and services: Revenue Recurring income Non-recurring income Third party revenues 2014 £’000 5,929 2,285 411 8,625 2013 £’000 5,271 2,428 402 8,101 Recurring income includes all support services, SaaS and hosting income. Non-recurring income includes sales of new licences, and income derived from installing those licences including training, installation, and data translation. Third party revenues arise from the sale of third party software. It is not possible to allocate assets and additions between recurring, non-recurring income and third party revenue. No customer represented more than 10% of revenue of the Group. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 38 Notes to the Financial Statements continued For the year ended 31 December 2014 4. Geographical analysis The following table provides an analysis of the Group’s revenue by geographic market. The Board does not review the business from a geographical performance viewpoint and this analysis is provided for information only. Revenue UK US Australia Non-current assets by geographical location UK US Australia 5. Acquisition related items Included within administrative expenses: Estimated change in fair value of contingent consideration (note 23) Amortisation of acquisition intangibles Fees relating to the acquisition of ISV/FCP (note 23) Included within finance cost: Unwinding of discount on contingent consideration (note 8) 6. Profits from operating activities Profits from operating activities is stated after charging: Depreciation Amortisation Loss on foreign exchange transactions Operating lease rentals – land and buildings Money purchase pension contributions Fees receivable by the Group auditors: Audit of financial statements Other services: Audit of accounts of subsidiary of the Company Other services relating to taxation All other services 2014 £’000 6,859 1,198 568 8,625 2014 £’000 10,025 4 2 10,031 2013 £’000 6,188 1,228 685 8,101 2013 £’000 7,698 5 2 7,705 2014 £’000 2013 £’000 (9) 286 141 418 101 519 (57) 172 95 210 68 278 2014 £’000 2013 £’000 94 773 3 207 179 24 50 61 45 93 528 2 176 97 22 43 34 33 Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 7. Employees The average number of employees was: Operations Management Employee numbers Their aggregate remuneration comprised: Wages and salaries Social security costs Pension costs Share-based payments charged and share-based LTIP LTIP non share-based 39 2014 96 7 103 2014 £’000 4,089 437 179 (33) (40) 4,632 2013 87 7 94 2013 £’000 3,713 410 97 102 84 4,406 The aggregate remuneration includes salary cost and Directors’ remuneration totalling £792,000 (2013: £724,000) that have been capitalised in intangible assets. Key management of the Group are the Directors and the Divisional Directors of Voyager Software. Remuneration of key management was as follows: 2014 £’000 Wages and salaries Social security costs Pension costs Share-based payments charged and share-based LTIP LTIP non share-based 662 74 51 (49) (40) 698 2013 £’000 699 83 36 80 84 982 Details of Directors’ emoluments, share options and pension entitlements are given in the Report to the Shareholders on Directors’ Remuneration on pages 16 to 17. 8. Financial income Interest receivable Finance cost on bank loan Unwinding of discount on contingent consideration 2014 £’000 6 (2) (101) (97) 2013 £’000 8 – (68) (60) Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 40 Notes to the Financial Statements continued For the year ended 31 December 2014 9. Tax expense Current tax Deferred tax Deferred tax re acquisition intangibles Income tax expense for the year Factors affecting the tax charge for the year Profit before tax UK rate of taxation Profit before tax multiplied by the UK rate of taxation Effects of: Overseas tax rates Impact of deferred tax not provided Enhanced R&D relief Disallowed expenses Rate change impact on deferred tax Prior year adjustments Tax expense Deferred tax provided in the financial statements is as follows: Accelerated intangible amortisation Provisions Acquisition intangibles 2014 £’000 200 40 (80) 160 2013 £’000 308 38 (54) 292 1,305 21.5% 281 1,523 23.25% 354 84 – (99) 75 (37) (144) 160 49 (15) (112) 103 (27) (60) 292 Company 2014 £’000 2013 £’000 – – – – – – – – 2014 £’000 473 (7) 686 1,152 Group Movement £’000 40 2 209 251 2013 £’000 433 (9) 477 901 The UK corporation tax rate in the year fell from 23% to 21% giving an effective rate for the year of 21.5%. The tax rate is expected to fall again to 20% in April 2015. Where deferred tax is provided in relation to the UK it has been provided at 20%. The tax charge is impacted by the higher rates of corporation tax payable in the US and Australia partially offset by the R&D tax credits available to both Dillistone Systems, Voyager Software, FCP and ISV. The release of prior year provisions relate in part to the agreement of the prior years’ tax position of the branch operation in German. The Group has gross tax losses and temporary timing differences of £292,000 (2013: £227,000) for which no deferred tax asset has been recognised. 10. Earnings per share Profit attributable to ordinary shareholders Weighted average number of shares Basic earnings per share Weighted average number of shares after dilution Fully diluted earnings per share 2014 Using adjusted operating profit 2014 £1,584,000 £1,145,000 18,512,594 18,512,594 6.18 pence 8.56 pence 19,243,357 19,243,357 5.95 pence 8.23 pence 2013 Using adjusted operating profit £1,455,000 18,211,321 7.99 pence 18,902,055 7.70 pence 2013 £1,231,000 18,211,321 6.76 pence 18,902,055 6.51 pence Reconciliation of basic to diluted average number of shares Weighted average number of shares (basic) Effect of dilutive potential ordinary shares – employee share plans Weighted average number of shares after dilution 2014 2013 18,512,594 730,763 18,211,321 690,734 19,243,357 18,902,055 Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 41 11. Profit for the financial year As permitted by section 408 of the Companies Act 2006, the parent company’s profit and loss account has not been included in these financial statements. The profit for the financial year for the parent company was £896,000 (2013: £715,000). 12. Goodwill Group Cost At 1 January 2013 Additions At 31 December 2013 Additions At 31 December 2014 Carrying amount At 31 December 2014 At 31 December 2013 Goodwill £’000 2,490 255 2,745 670 3,415 3,415 2,745 At the year end date an impairment test has been undertaken by comparing the carrying values of goodwill with the recoverable amount of the cash generating unit (CGU) to which the goodwill has been allocated. The recoverable amount of the cash generating unit is based on value-in-use calculations. These calculations use cash flow projections covering a three year period based on financial budgets and a calculation of the terminal value, for the period following these formal projections. The key assumptions used for value-in-use calculations are those regarding growth rates, increases in costs and discount rates. The discount rate is reviewed annually to take into account the current market assessment of the time value of money and the risks specific to the cash generating units and rates used by comparable companies. The pre-tax discount rate used to calculate value-in-use is in a range of 12% to 19.4% (2013: 12%) and for Voyager consolidated a rate of 19.4% has been used. Growth rates for forecasts take into account historic experience and current market trends. Costs are reviewed and increased for inflation and other cost pressures. The long term growth rate used for the terminal value calculation is 2% (2013: 2%) for all CGUs. The allocation of goodwill across the CGUs is as follows: Dillistone UKMEA Dillistone Europe Dillistone Australia Dillistone US Voyager consolidated FCP ISV Opening £’000 290 110 40 54 1,996 255 – 2,745 Addition £’000 Impairment £’000 – – – – – – 670 670 – – – – – – – – Closing £’000 290 110 40 54 1,996 255 670 3,415 Sensitivities To reduce the headroom in the impairment calculation to £nil for the Voyager consolidation, goodwill would require a reduction of terminal growth rate to 0% and an increase in the discount rate to 36%. Alternatively, cash flows would need to fall by 55%. For FCP, cash flows would need to reduce by over 90% to reduce the headroom to £nil. For ISV cash flows would need to fall by 70% to reduce the headroom to £nil. No meaningful sensitivity for the Dillistone goodwill reduces the headroom to £nil. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 42 Notes to the Financial Statements continued For the year ended 31 December 2014 13. Other intangible assets Group Cost At 1 January 2013 Additions through acquisition at fair value Additions At 31 December 2013 Additions through acquisition at fair value Additions At 31 December 2014 Amortisation At 1 January 2013 Charge for the year At 31 December 2013 Charge for the year At 31 December 2014 Carrying amount At 31 December 2014 At 31 December 2013 Acquisition intangibles can be summarised as follows: Cost At 1 January 2014 Additions Amortisation At 31 December 2014 Development costs £’000 Acquisition intangibles £’000 3,053 15 747 3,815 – 814 4,629 899 356 1,255 487 1,742 1,178 1,551 – 2,729 1,443 – 4,172 284 172 456 286 742 Total £’000 4,231 1,566 747 6,544 1,443 814 8,801 1,183 528 1,711 773 2,484 2,887 2,560 3,430 2,273 6,317 4,833 Developed technology £’000 Brand and IP £’000 Contractual and non- contractual relationship £’000 388 – (53) 335 – 614 (10) 604 1,720 829 (210) 2,339 Brand £’000 165 – (13) 152 Total £’000 2,273 1,443 (286) 3,430 Intangible assets under development are reviewed each reporting period for impairment prior to amortisation. Forecasts of future revenue are prepared and these are discounted and compared to the carrying value. Sensitivities are carried out including applying differing growth and attrition rates as well as alternative discounts rates. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements Land and buildings £’000 Office & computer equipment £’000 Fixtures and fittings £’000 Motor Vehicles £’000 166 – – – – 166 – 185 – (166) 185 164 – 1 – 165 – 7 (166) 6 179 1 545 (5) 77 11 (25) 603 2 66 4 – 675 440 (4) 73 (25) 484 2 83 – 569 106 119 130 – 6 3 – 139 2 8 1 – 150 113 – 19 – 132 2 3 – 137 13 7 – – – – – – – – 2 – 2 – – – – – – 1 – 1 1 – 43 Total £’000 841 (5) 83 14 (25) 908 4 259 7 (166) 1,012 717 (4) 93 (25) 781 4 94 (166) 713 299 127 Investments in subsidiaries £’000 4,111 1,564 5,675 1,924 7,599 14. Property, plant and equipment Group Cost At 1 January 2013 Currency impact Additions Additions by acquisition Disposals At 31 December 2013 Currency impact Additions Additions by acquisition Disposals At 31 December 2014 Depreciation At 1 January 2013 Currency impact Charge for the year Eliminated on disposal At 31 December 2013 Currency impact Charge for year Eliminated on disposal At 31 December 2014 Carrying amount At 31 December 2014 At 31 December 2013 15. Non-current asset investments Company Cost At 1 January 2013 Additions At 31 December 2013 Additions At 31 December 2014 Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 44 Notes to the Financial Statements continued For the year ended 31 December 2014 15. Non-current asset investments continued The Company has the following subsidiary undertakings: Name Dillistone Systems Limited Dillistone Systems (Australia) Pty Limited Dillistone Systems (US) Inc FCP Internet Limited FCP Internet Holdings Limited ISV Software Limited Woodcote Software Limited Voyager Software Limited Voyager Software (Australia) Pty Limited 16. Inventories Licences for resale 17. Trade and other receivables Trade and other receivables Group receivables Other current assets Prepayments and accrued income Principal activity Holding of ordinary shares Registered Sale of computer software and related support services 100% England & Wales Sale of computer software and related support services 100% (indirect) Australia Sale of computer software and related support services Provision of software services and related consultancy services 100% USA 100% England & Wales Intermediate holding company 100% England & Wales Provision of software services and related consultancy services 100% England & Wales Dormant company 100% England & Wales Sale of computer software and related support services 100% England & Wales Sale of computer software and related support services 100% (indirect) Australia Group Company 2014 £’000 41 2013 £’000 78 2014 £’000 – 2013 £’000 – Group Company 2014 £’000 1,531 – 47 206 1,784 2013 £’000 1,565 – 61 164 1,790 2014 £’000 – 318 – 13 331 2013 £’000 – 354 7 4 365 The carrying value of trade receivables is considered a reasonable approximation of fair value. All of the receivables have been reviewed for indicators of impairment. The movement in the provision is shown below: At start of year Movement in the year At the year end 2014 £’000 90 (27) 63 2013 £’000 83 7 90 Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 17. Trade and other receivables continued The ageing profile of trade receivables as at the year end is as follows: Current Past due date: 31-60 days overdue More than 60 days overdue Total 18. Trade and other payables Current liabilities Trade and other payables Group payables Deferred income Accruals Contingent consideration Non-current liabilities Contingent consideration Cash settled share-based provision 2014 £’000 1,317 88 126 1,531 Company 2014 £’000 42 1,971 – 397 507 2,917 666 – 666 Group 2014 £’000 594 – 2,711 857 507 4,669 666 – 666 2013 £’000 612 – 2,475 660 566 4,313 352 107 459 Contingent consideration is valued at fair value. The total amounts included are as follows: In current liabilities In non-current liabilities Further details of the contingent consideration are given in note 23. Group Company 2014 £’000 507 666 1,173 2013 £’000 566 352 918 2014 £’000 507 666 1,173 45 2013 £’000 1,272 121 172 1,565 2013 £’000 53 1,623 – 345 566 2,587 352 107 459 2013 £’000 566 352 918 Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 46 Notes to the Financial Statements continued For the year ended 31 December 2014 19. Borrowings Borrowings at amortised cost Current bank borrowings Non current bank borrowings Total bank borrowings Group Company 2014 £’000 162 325 487 2013 £’000 – – – 2014 £’000 162 325 487 2013 £’000 – – – The Directors consider that the fair value of borrowings approximates to the carrying value. The borrowings consist of a bank loan repayable over 3 years from HSBC Bank plc secured by a fixed and floating charge over the assets of the Group and is supported by a cross guarantee between the Company and the Group’s principal subsidiaries. The loan was to provide part funding for the acquisition of ISV. The loan carries interest at 2.75% over UK base rate. The loan includes an option for early repayment at any time during the 3 year period. An early repayment fee of 1% of the amount prepaid must be made if the option is exercised. Management have review the term of the prepayment option and deem it to be closely related to the underlying debt instrument and hence has not been separated from the host instrument. The carrying amount of the bank borrowings is considered to be a reasonable approximation of the fair value of the debt. 20. Share capital Allotted, called up and fully paid Ordinary shares of 5 pence each 2014 £’000 969 2013 £’000 914 On 29 September 2014 526,316 new ordinary shares of 5p were placed at a price of 95p raising £500,000 (before expenses). These monies were raised to finance the acquisition of ISV. On 3 October 2014 a further £250,000 was raised from the placing of 263,158 shares at 95p and additional £250,000 raised by a similar placing on 7 November 2014. Share options totalling 59,794 were exercised by employees in the period at an exercise price of 77p. In November 2013, WH Ireland, the Company’s nomad and broker, exercised a warrant over 69,930 shares at a price of 71.5p. Shares issued and fully paid Beginning of the year Shares issued on placing Shares issued on exercise of options Shares issued and fully paid 2014 2013 18,275,120 1,052,632 59,794 18,205,190 – 69,930 19,387,546 18,275,120 21. Operating lease arrangements The Group leases offices under non-cancellable operating lease agreements. At 31 December 2014, the Group had future total commitments under non-cancellable operating leases as follows: Commitments payable: Within one year Between two and five years 2014 £’000 682 229 453 2013 £’000 202 154 48 Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 47 22. Share options Share-based payments There are two share option schemes in operation: an Enterprise Management Incentive Scheme (the ‘EMI Scheme’) which complies with the requirements of HMRC and a scheme which has not been approved by HMRC (the ‘Unapproved Scheme’). The terms and conditions of both schemes are the same. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are normally forfeited if the employee leaves the Company before the options become available to exercise, which would normally be three years after grant. Performance conditions are associated with the options granted on 29 May 2012. There was one grant of options in 2014. The weighted average share price of all grants in 2014 was 97p. The fair values of the services received in exchange for share-based payments were calculated using a Black-Scholes pricing model. The inputs into the model were as follows: Date of grant Number granted Share price on issue date Exercise price Expected volatility Vesting period Leaver rate over vesting period Risk-free rate 8 December 2014 245,000 97.00p 97.00p 30% 3.3 years 10% 1.00% Expected dividend yield 4.0% Expected volatility takes into account historic volatility of the share price and its current trend. During 2013 the Group made two grants of options. The fair values of the services received in exchange for share-based payments were calculated using a Black-Scholes pricing model. The inputs into the model were as follows: Date of grant 8 July 2013 25 November 2013 Number granted Share price on issue date 38,000 20,000 79.50p 115.00p Exercise price 79.50p 115.00p Expected volatility Vesting period 30% 3.3 years 30% 3.0 years Leaver rate over vesting period 18% 0% Risk-free rate 0.86% 0.86% Expected dividend yield 3.0% 3.0% Details of the number of share options and the weighted average exercise price (WAEP) outstanding during the year are as follows: Outstanding at beginning of year Granted during year Exercised during year Forfeited during year Outstanding at the end of the year Exercisable at the year end * Adjusted for the 2 for 1 bonus issue where appropriate. 2014 2013 No of options* 754,355 245,000 (59,794) (9,000) 930,561 413,739 WAEP* 74.74 97.00 77.00 78.94 80.41 72.95 No of options* 743,355 58,000 – (47,000) 754,355 62,739 WAEP* 74.09 91.74 – 85.49 74.74 59.20 In the year Julie Pomeroy exercised 25,794 options at an exercise price of 77p. The market value of the shares at the date of exercise was 95p. The Company’s mid-market share price on 31 December 2014 was 97.0p. The Company’s mid-market share price on 31 December 2014 was 97.0p. The fair value of all options granted is shown as an employee expense with a corresponding increase in equity. The employee expense is recognised equally over the time from grant until vesting of the option. The expense charged takes into account the likelihood of performance targets being met. The employee expense for the year was £13,000 (2013: £53,000). The reduction in charge reflects the current expectation that share options with performance conditions will not fully vest. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 48 Notes to the Financial Statements continued For the year ended 31 December 2014 22. Share options continued Share options remaining in the schemes are as follows: Scheme type Unapproved EMI Unapproved EMI Unapproved EMI EMI EMI Unapproved EMI Date of grant Exercise from Lapse date 03/05/2006 14/09/2007 14/01/2011 21/09/2011 21/09/2011 29/05/2012 08/07/2013 25/11/2013 08/12/2014 08/12/2014 03/05/2009 14/09/2010 14/01/2014 21/09/2014 21/09/2014 29/05/2015 08/07/2016 25/11/2016 08/12/2017 08/12/2017 02/05/2016 13/09/2017 13/01/2021 20/09/2021 20/09/2021 28/05/2022 07/07/2023 24/11/2023 08/12/2024 08/12/2024 Options remaining 26,739 36,000 30,000 303,000 18,000 220,822 31,000 20,000 10,000 235,000 930,561 Exercise price (p) 5.38 99.17 58.33 77.00 77.00 73.00 79.50 115.00 97.00 97.00 59,794 share options were exercised during the year at a weighted average exercise price of 77.0p and the weighted average share price at the date of exercise was 95.8p. The weighted average remaining contractual life of options at 31 December 2014 was 7.5 years (2013: 8.5 years). Cash settled options During 2011 the Board introduced a long term incentive scheme for Directors. The scheme granted phantom options to the participants and these options are cash settled on the vesting date, which will be the date of the publication of the appropriate Annual Report. The amount payable will be the increase in share price between the date of grant and vesting multiplied by the number of phantom options granted multiplied by the performance factor. The performance factor is based on the percentage rise in the earnings per share over the period. The fair values of the services received in exchange for cash based option payments were calculated using a Black-Scholes pricing model at 31 December 2014 and adjusted for the probability of the performance conditions being obtained. The inputs into the model were as follows Date of grant 29 May 2012 * Adjusted for the 2 for 1 bonus issue. Number granted* Share price on issue date* 384,932 73p Exercise price * 73p Expected volatility Remaining period to vesting Leaver rate over vesting period Risk-free rate Expected dividend yield 60% 0.33 years 0% 0.4% 4.00% The phantom options granted in 2011 pursuant to the Company’s 2011 long term incentive plan (LTIP) with exercise conditions linked to share price growth and growth in earnings per share over a three year period (measured by taking the earnings per share in the 2013 statutory accounts compared to the earnings per share in the 2010 statutory accounts). As a result of rise in the Company’s share price which meant that the awards could exceed one third of salary, the Executive Directors waived their right to the excess and the LTIP awards were amended so that the awards took the form of a cash bonus with a maximum pay-out, if all exercise conditions were met in full, of one third of annual salary (as at the date of award) but with no link to share price. Performance conditions remain in place. £135,000 was paid out in respect of these Awards in 2014. Awards from 2013 onwards under a long term incentive plan take the form of a cash bonus of up to one third annual salary with appropriate performance conditions in place and are not share-based. The total release charged in respect of all LTIP plans for the year was £(86,000) (2013: charge £133,000). In addition £135,000 of the 2011 LTIP plan was paid out in the year and this payment has been set against salaries & wages and social security. There is a release of £46,000 in respect of the LTIP schemes which are share-based and require separate disclosure under IFRS 2. The total liability carried forward was £32,000 (2013: £252,000) and is included in current liabilities. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 49 23. Acquisitions On 29 September 2014 the Group signed an agreement to acquire the entire share capital of ISV Software Limited (‘ISV’) for an estimated consideration before fees of £1.924m, which was satisfied as detailed below. This was part of the Group’s strategy to broaden our offering to the recruitment sector. The acquisition was completed on 3 October 2015. ISV (www.isvgroup.com) is a UK based supplier of training and testing services, primarily to the recruitment industry. ISV works with 9 of the 10 largest recruitment agencies in the UK (by office numbers) and 7 of the 10 largest by revenue. It offers over 200 published materials/tests covering many business sectors and over 500,000 tests were carried out in 2014 for over 350 clients. For the year ended 31 December 2013 the unaudited accounts of ISV showed profit before tax and profit after tax of £162,000 and £159,000 respectively on revenues of £750,000. These accounts also showed net assets of £256,000 as at 31 December 2013. Following the acquisition the revenues and profits have been restated to reflect accounting for deferred income on annual contracts and the income in respect of token sales. ISV forms part of the Voyager Software division. The details of the business combination are as follows: Book value £’000 Fair value adjustments £’000 Fair value intangibles adjustments £’000 14 – 105 345 464 (303) – – 161 (7) – (10) – (17) (38) (7) – (62) Assets Non-current assets Property, plant and equipment Intangible assets Current assets Trade and other receivables Cash and cash equivalents Total assets Liabilities Trade and other payables Tax liability Deferred tax liability Net assets acquired Goodwill Satisfied by Initial Cash consideration Deferred cash consideration (discounted) Cash consideration in relation to surplus working capital Contingent consideration Consideration transferred Amount settled in cash consideration in period Cash and cash equivalents acquired Net cash outflow on acquisition Acquisition costs charged to expenses Net cash paid relating to acquisition Fair value £’000 7 1,443 95 345 – 1,443 – – 1,443 1,890 – – (289) 1,154 (341) (7) (289) 1,253 671 1,924 850 148 213 713 1,924 £’000 1,063 (345) 718 141 859 Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 50 Notes to the Financial Statements continued For the year ended 31 December 2014 23. Acquisitions continued The total consideration of £1,924,000 net of cash acquired of £345,000 was £1,579,000. The fair value adjustment of £62,000 relates mainly to the writing down of property, plant and equipment to their fair value and adopting more closely the accounting policies adopted by the Group. Fees of £141,000 were expensed and included in acquisition related costs. In addition, following a detailed review of the fair value of assets and liabilities acquired, in accordance with IFRS 3 Business Combinations the Group has recognised two intangible assets totalling £1,443,000 made up as follows: Intangible assets Brand/IP Customer relationships £’000 614 829 1,443 Estimated life 15 years 10 years Goodwill of £671,000 represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill arising on the acquisition consists largely of the workforce value, synergies and economies of scale expected from combining the operations with Dillistone Group companies. From the date of acquisition to 31 December 2014, the acquired companies contributed £195,000 to revenue and £18,000 to profit before taxation. In the last financial year, being the year ended 31 December 2013, the acquired companies made a profit before taxation of £162,000. However, as no audited accounts had previously been required and changes in the accounting policies including those for deferred income on annual contracts and token sales, pro-forma profit or loss of the combined entity for the complete 2014 reporting period cannot readily be determined. As part of the acquisition, deferred consideration of £150,000 is payable in January 2015. The Group also agreed to pay additional consideration based on surplus working capital retained in the business at completion. Following a completion accounts verification process, an amount of £213,000 was agreed to be paid to the vendors and this was paid in the year. In addition, the vendors are entitled to contingent consideration as follows: • 30% of net revenues in the three month period to 31 December 2014. • 30% of net revenues in the year to 31 December 2015 less £15,000. • 30% of net revenues in the year to 31 December 2016 less £15,000. • 30% of net revenues in the nine month period to 30 September 2017 less £25,000. The fair value of the contingent consideration has been calculated based on the information available at the time of the acquisition. The contingent consideration as at acquisition has been discounted at an annual rate of 3.48% with a resulting charge in the 2014 accounts of £6,000. The value of the contingent consideration at 31 December 2014 was £713,000. The maximum total consideration, including contingent consideration, payable is capped at £2,500,000. Contingent consideration payable in respect of earlier acquisitions As part of the acquisition of Voyager Software in 2011, the Group agreed to pay additional contingent consideration. During 2014 it made the final payment due of £129,000. A £2,000 discount was charged in 2014. As part of the acquisition of FCP, the Group agreed to pay the vendors contingent consideration over the period to 31 March 2015. During 2014, contingent consideration of £421,000 was paid. At the year end the Group had a liability for contingent consideration calculated as follows: • Up to 50% of recurring revenues in the nine month period to 31 December 2014. The percentage varies depending on the level of recurring revenues. • Up to 50% of recurring revenues in the three month period to 31 March 2015. The percentage varies depending on the level of recurring revenues. In the 2014 accounts, the amounts payable under the contingent consideration have been reduced by £9,000 based on the revenues for 2014 and on the estimated revenue for 2015. This contingent consideration had originally been discounted at 16.99% but following the acquisition of ISV and the availability of bank finance the rate has been reduced to 3.48%. The discount charged to the profit and loss account in 2014 totalled £93,000. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 51 24. Financial instruments The Group uses various financial instruments; these include cash, bank deposits, bank loans and various items such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to provide finance for the Group’s operations. The Group’s finance department maintains liquidity, manages relations with the Group’s bankers, identifies and manages foreign exchange risk and controls Group treasury operations. Treasury dealings such as investments and foreign exchange are conducted only to support underlying business transactions. Consequently, the Group does not undertake speculative foreign exchange dealings for which there is no underlying exposure. The Group’s policies for management of the financial risks to which it is exposed are outlined below. (i) Interest rate risk The Group is exposed to interest rate risk on its floating rate borrowings and its financial assets. The interest rate profile of the Group’s financial assets at 31 December 2014 was: At 31 December 2014 Trade and other receivables (current assets) Cash and cash equivalents Total The interest rate profile of the Group’s financial assets at 31 December 2013 was: At 31 December 2013 Trade and other receivables (current assets) Cash and cash equivalents Total Group Company Non interest bearing financial assets £’000 Floating rate financial assets £’000 Non interest bearing financial assets £’000 Floating rate financial assets £’000 1,531 – 1,531 – 1,929 1,929 318 – 318 – 387 387 Group Company Non interest bearing financial assets £’000 1,565 – 1,565 Floating rate financial assets £’000 – 1,399 1,399 Non interest bearing financial assets £’000 Floating rate financial assets £’000 354 – 354 – 78 78 Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 52 Notes to the Financial Statements continued For the year ended 31 December 2014 24. Financial instruments continued The table below shows the Group’s financial liabilities split by those bearing interest at floating rates and those that are non interest bearing. 31 December 2014 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Bank borrowings Contingent consideration (current liabilities) Contingent consideration (non-current liabilities) 31 December 2013 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Bank borrowings Contingent consideration (current liabilities) Contingent consideration (non-current liabilities) Group Company Non interest bearing financial liabilities £’000 Floating rate financial liabilities £’000 Non interest bearing financial liabilities £’000 Floating rate financial liabilities £’000 4,162 – – 507 666 5,335 – – 487 – – 487 2,410 – – 507 666 3,583 – – 487 – – 487 Non interest bearing financial liabilities £’000 Floating rate financial liabilities £’000 Non interest bearing financial liabilities £’000 Floating rate financial liabilities £’000 3,747 107 – 566 352 4,772 – – – – – – 2,021 107 – 566 352 3,046 – – – – – – The benchmarks for interest rates on floating rate financial assets and financial liabilities are bank base rates for the currencies in which the assets are held. Sensitivities of movements in interest rates have been considered by Directors and reasonably possible movements in interest rates are not considered to have a material impact on future Group profits or equity. (ii) Credit risk The Group’s principal financial assets are cash and cash equivalents and trade and other receivables. Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers and monies on deposit with financial institutions. Historically, the cash collection profile has been very good. Debt aging and collections are monitored on a regular basis and for new customers deposits are usually required. Some of the unimpaired trade receivables are past due as at the reporting date. Information on financial assets past due but not impaired are included in note 17. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The Group has no significant concentration of credit risk. The Group’s maximum exposure to credit risk at the reporting date is represented by the carrying value of financial assets, as follows: Trade and other receivables (current assets) Cash and cash equivalents Total Group Company 2014 £’000 1,531 1,929 3,460 2013 £’000 1,565 1,399 2,964 2014 £’000 318 387 705 2013 £’000 354 78 432 Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 53 24. Financial instruments continued (iii) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure it has sufficient liquidity to meet its liabilities when due. As at 31 December 2014, the Group and Company’s financial liabilities (being trade and other payables and deferred income, payroll taxes, VAT or similar taxes and bank borrowings) have contractual cash flows as summarised below: Group 31 December 2014 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Bank borrowings 31 December 2013 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Company 31 December 2014 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Bank borrowings 31 December 2013 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Carrying amount £’000 4,669 666 487 5,822 Carrying amount £’000 4,313 459 4,772 Carrying amount £’000 2,917 666 487 4,070 Carrying amount £’000 2,587 459 3,046 < 1 year £’000 1–2 years £’000 2–5 years £’000 4,669 – 162 4,831 < 1 year £’000 4,313 – 4,313 – 245 167 412 – 421 158 579 1–2 years £’000 2–5 years £’000 – 424 424 – 35 35 < 1 year £’000 1–2 years £’000 2–5 years £’000 2,917 – 162 3,079 < 1 year £’000 2,587 – 2,587 – 245 167 412 – 421 158 579 1–2 years £’000 2–5 years £’000 – 424 424 – 35 35 The Group would normally expect that sufficient cash is generated in the operating cycle to meet contractual cash flows as disclosed above. In addition the Group has significant cash balances as at the year end to minimise any liquidity risk. (iv) Foreign currency risk The Group is exposed to foreign currency risk on sales and purchases which are denominated in a currency other than Sterling. Exposures to currency exchange rates are primarily denominated in US Dollars ($), Australian Dollars (AUD) and Euros (€). The Group does not use derivatives to hedge translation exposures arising on the consolidation of its overseas operations. Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 54 Notes to the Financial Statements continued For the year ended 31 December 2014 24. Financial instruments continued At the year end, the Group had assets totalling £551,000 and liabilities totalling £356,000 denominated in Euros (2013: assets totalling £1,322,000 and liabilities totalling £518,000), assets totalling £1,537,000 and liabilities totalling £1,181,000 denominated in US Dollars (2013: assets totalling £602,000 and liabilities totalling £573,000) and assets totalling £370,000 and liabilities totalling £319,000 denominated in Australian Dollars (2013: assets totalling £353,000 and liabilities totalling £259,000). If each of the exchange rates weakened by 5%, the impact on the income statement would as follows: Euros US Dollars Australian Dollars Group 2014 £’000 5 14 4 23 2013 £’000 2 14 9 25 At the year end, the Company had liabilities totalling £99,000 denominated in Euros (2013: liabilities totalling £183,000), assets totalling £124,000 denominated in US Dollars (2013: assets totalling £225,000) and assets totalling £61,000 denominated in Australian Dollars (2013: assets totalling £22,000). Capital risk management The Group’s objectives when managing capital are to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders. The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, sell assets or take on bank debt. The decision to take on some element of debt gives the Group additional flexibility in its capital structure and enables it to lower its cost of capital. The Group considers its capital to include share capital, share premium, merger reserve, translation reserve, share option reserve and retained earnings. Net cash comprises borrowings less cash and cash equivalents. Total borrowings Less cash or cash equivalents Net cash Total equity Total capital gearing ratio Note 19 2014 £’000 2013 £’000 487 (1,929) (1,442) 6,516 0% – (1,399) (1,399) 5,110 0% Dillistone Group Plc Annual Report and Accounts 2014Financial Statements 55 24. Financial instruments continued Summary of financial assets and liabilities by category The carrying amounts of the financial assets and liabilities as recognised at the statement of financial position date of the years under review may also be categorised as follows: Group Company Loans and receivables Cash and cash equivalents Trade and other receivables Financial liabilities held at amortised cost Trade and other payables Borrowings Financial liabilities held at fair value Contingent consideration 2014 £’000s 2013 £’000s 2014 £’000s 2013 £’000s 1,929 1,531 3,460 4,162 487 1,173 5,822 1,399 1,565 2,964 3,854 – 918 4,772 387 318 705 2,410 487 1,173 4,070 78 361 439 2,128 – 918 3,046 25. Fair value measurement of financial instruments Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three Levels of a fair value hierarchy. The three Levels are defined based on the observability of significant inputs to the measurement, as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. • Level 3: unobservable inputs for the asset or liability. The following table shows the Levels within the hierarchy of financial assets and liabilities measured at fair value on a recurring basis at 31 December 2014 and 31 December 2013: 2014 £’000 Level 3 2013 £’000 Level 3 Contingent consideration 1,173 918 The Group’s finance team performs valuations of financial items for financial reporting purposes, including Level 3 fair values, in consultation with third party valuation specialists for complex valuations. Valuation techniques are selected based on the characteristics of each instrument, with the overall objective of maximising the use of market-based information. The finance team reports directly to the Group Finance Director and to the Audit Committee. The valuation techniques used for instruments categorised in Level 3 are described below: Contingent consideration (Level 3) The fair value of contingent consideration relates to the acquisitions of FCP Internet and ISV Software (see note 23) and is estimated using a present value technique. The contingent consideration of £1,173,000 is included at fair value which is mainly based on actual, budget or forecast revenues prepared by the finance team. The contingent consideration is discounted. The discount rate used to discount the contingent consideration at 31 December 2014 is 3.48% and is based on an after tax estimated of the Group’s current borrowing rate. The reconciliation of the carrying amounts of financial instruments classified within Level 3 is as follows: At start of year Acquired through business combination Paid in year Movement in fair value recognised in profit or loss under finance costs Movement in fair value recognised in profit or loss under admin costs At the year end 2014 £’000 (918) (713) 550 (101) 9 (1,173) 2013 £’000 (360) (733) 185 (68) 58 (918) Dillistone Group Plc Annual Report and Accounts 2014Strategic ReportGovernanceFinancial Statements 56 Notes to the Financial Statements continued For the year ended 31 December 2014 26. Control No individual shareholder, or shareholders acting in concert, hold more than 50% of voting shares, and accordingly there is not considered to be an ‘ultimate controlling party’. 27. Related party transactions Group The Directors received dividends paid by the Company of £313,000 (2013: £318,000). In the year Julie Pomeroy exercised 25,794 options at an exercise price of 77p. The market value of the shares at the date of exercise was 95p. During the year, Mike Love bought 252,632 shares at a price of 95p. In addition, Jason Starr also bought 10,000 shares at the same price. Company The Company has a related party relationship with its subsidiaries, its Directors, and other employees of the Company with management responsibility. During the year the Company received a management charge of £96,000 (2013: £62,000) and a dividend of £111,000 from its subsidiary company Dillistone Systems (US) Inc (2013: £210,000). At the year end Dillistone Systems (US) Inc owed £122,000 (2013: owed by £209,000) to the Company. During the current year Dillistone Systems Limited paid a dividend of £1,000,000 (2013: £1,000,000) to Dillistone Group Plc and a management charge of £237,000 (2013: £178,000). At the year end Dillistone Systems Limited was owed £1,294,000 (2013: £1,588,000). The Company received a management charge during the year from Dillistone Systems (Australia) Pty Limited of £34,000 (2013: £55,000) and at the year end was owed £62,000 (2013: owed by the Company £28,000). Voyager Software paid a management charge of £144,000 (2013: £144,000) and owed the Company £115,000 at the year end (2013: £29,000). Woodcote Software owed the Company £13,000 at the year end (2013: £13,000). FCP Internet Limited paid a management charge of £71,000 and was owed by the Company £365,000 at the year end (2013: owed to the Company £67,000). A management charge of £15,000 was received from ISV Software and at the year end the Company owed ISV £200,000 (2013: nil). Management charges payable by Group members to Dillistone Group Plc relate to management support provided directly to them. 28. Dividends The dividends paid in 2014 and 2013 were £723,000 (3.90p per share) and £683,000 (3.75p per share). A final dividend in respect of the year ended 31 December 2014 of 2.7p per share will be paid on 24 June 2015. These financial statements do not reflect this dividend. Dillistone Group Plc Annual Report and Accounts 2014Financial Statements Directors and Advisers Directors M D Love – Non-Executive Chairman G R Fearnley – Non-Executive Director J S Starr – Chief Executive R Howard – Operations Director A D James – Product Development Director J P Pomeroy – Finance Director A F Milne – Director of Support Services Secretary J P Pomeroy Company number 4578125 Registered office 50 Leman St London E1 8HQ Independent auditors Grant Thornton UK LLP Grant Thornton House Melton Street Euston Square London NW1 2EP Principal bankers HSBC Bank Plc Basingstoke Commercial Centre 8 London Street Basingstoke RG21 7NU Solicitors Ashfords LLP Tower Wharf Cheese Lane Bristol BS2 0JJ Nominated adviser WH Ireland Limited 24 Martin Lane London EC4R 0DR Broker WH Ireland Limited 24 Martin Lane London EC4R 0DR Registrars Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Dillistone Group Plc 50 Leman St London E1 8HQ T +44 (0)20 7749 6100 www.dillistonegroup.com