23961.04 – 13 May 2016 5:25 PM – Proof 6Dillistone Group Plc Annual Report and Accounts for the year ended 31 December 2015Annual Report and Accounts for the year ended 31 December 2015Stock code: DSGEmpowering recruitment globally through technologyDillistone AR2015.indd 313/05/2016 17:27:02 23961.04 – 13 May 2016 5:25 PM – Proof 6ContentsHighlights01Timeline02Dillistone Group at a Glance04Chairman’s Statement06CEO’s Review07Financial Review12Strategic ReportCorporate GovernanceBoard of Directors16Corporate Governance Report18Report to the Shareholders on Directors’ Remuneration20Directors’ Report23Financial StatementsIndependent Auditor’s Report26Consolidated Statement of Comprehensive Income27Consolidated Statement of Changes in Equity28Company Statement of Changes in Equity 29Consolidated and Company Statements of Financial Position30Consolidated Cash Flow Statement31Company Cash Flow Statement32Notes to the Financial Statements33Directors and Advisers IBCInvestor relations websiteVisit our investor relations website at www.dillistonegroup.com for further information about Dillistone Group Plc.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.Welcome to theDillistoneAnnual Report 2015Dillistone Group Plc is a global leader in the supply of technology solutions and services to the recruitment industry worldwide.Read further within the report...Look out for the following icons throughout this report:Dillistone Group Plc | Annual Report & Accounts 2015stock code: DSGDillistone AR2015.indd 413/05/2016 17:27:04 23961.04 – 13 May 2016 5:25 PM – Proof 6HighlightsCommenting on the results and prospects, Mike Love, Non-Executive Chairman, said:“The Group has seen record levels of revenue and recurring revenue in 2015. It has continued to invest strongly in its businesses to ensure its clients remain at the forefront of technology, paving the way for continued success in future years.”“This represents our fourth successive year on year increase in the dividend, in line with our progressive dividend policy, illustrating the Board’s confidence in the future prospects of the Group, which has been reinforced by an excellent order book in the first quarter.”Dr Mike Love Non-Executive Chairman2015£1.21m2014£1.15m2013£1.23m2015£6.61m2014£5.93m2013£5.27mLook out for the following definitions throughout this report:Highlights for the year ❯Revenues up 9% from 2014 to £9.44m ❯Record level of recurring revenues of £6.61m, up 11% from 2014 ❯Recurring revenues, representing 70% of Group revenue, covered 100% of administrative expenses before acquisition related costs ❯Profit after tax for the year up 6% to £1.21m ❯Basic earnings per share increased to 6.20p ❯Final dividend of 2.75p per share recommended, making total dividend for the year of 4.1p (a yield of 5% on a share price of 80.5p) ❯Cash funds of £1.60m (2014: £1.93m) after acquisition related payments of £0.67m. Bank borrowings total of £0.33m (2014: £0.49m) ❯Dillistone Systems division – further product investment leading to increase in client retention rate, new sales and revenues ❯Voyager Software division – launch of cloud hosted version of Infinity; launch of integration of ISV FastPath and Infinity; and launch of version 6 of EvolvePost period end ❯Strong first quarter – FileFinder Anywhere new client orders up over 70% and Voyager Software division orders up circa 50% ❯Launch of FileFinder Anywhere Essentials in March 2016 – the only truly browser based product from a mainstream supplier to the executive search market ❯New product launch expected in Voyager Software division in 2016Adjusted operating profit is statutory operating profit before acquisition costs, related intangible amortisation, movements in contingent consideration and other one-off costs relating to acquisitions.Adjusted EBITDA is adjusted operating profit with depreciation and amortisation added back. Profit after tax6%Recurring revenues11%Read more on our performance on pages 06 to 13www.dillistonegroup.comStrategic ReportGovernanceFinancial Statements01Dillistone AR2015.indd 113/05/2016 17:27:05 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Timeline 1983 1990 2003 2006 2008 2011 2012 2013 2014 2015 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. 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. 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. In 2006, the Group floated on the AIM market of the London Stock Exchange (DSG.L). In 2008, a decision was taken to significantly increase R&D expenditure, and the development of the next generation of FileFinder began. In March 2011, FileFinder 10 was released after over two years of development. In September 2011, the Group made its first acquisition: Voyager Software. In September 2012, Voyager Infinity was launched after three years of development. In July 2013, the Group made its second acquisition: FCP Internet. In October 2014, the Group acquired ISV Software. 2014 saw the release of FileFinder Anywhere, a market leading product suited to mobile working. Voyager Software division – launch of cloud hosted version of Infinity; launch of integration of ISV FastPath and Infinity; and launch of version 6 of Evolve. Read more on Voyager Infinity and ISV FastPath on pages 05 and 14 02 Dillistone AR2015.indd 2 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:06 23961.04 – 13 May 2016 5:25 PM – Proof 6www.dillistonegroup.comStrategic ReportDillistone Group at a Glance4Chairman’s Statement6CEO’s Review7Financial Review1203“ FileFinder gives us the ability to support our core business regardless of the local technology infrastructure. A multi-platform solution is a first for executive search software and we are delighted to be able to implement this. To TRANSEARCH, Dillistone represents unparalleled support, a partner that understands our business, and provides an ever evolving software solution – which is the bedrock of our 16 year relationship.”Celeste Whatley Chief Operating Officer for TRANSEARCH InternationalDillistone AR2015.indd 313/05/2016 17:27:07 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Dillistone Group at a Glance Dillistone Group Plc is a global leader in the supply of technology solutions and services to the recruitment industry. Operating across 60 countries, working with over 2,000 firms, we are made up of two divisions. Dillistone Systems division Dillistone Systems is a leading global supplier of technology and services to executive search firms and to in-house search teams at major corporations and not-for-profit organisations. The Division’s principal product is the FileFinder Anywhere suite, which is typically delivered from the cloud via a range of Apps. The Division is headquartered in the UK, but has offices in the United States, Australia and Germany 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. 04 Dillistone Systems division products FileFinder is designed specifically for the executive recruiting market with FileFinder Anywhere being the latest generation of the suite. FileFinder Anywhere is available in two forms – Essentials and Premium. 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 (desktop or web versions). Read more on Dillistone Systems on page 09 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 permanent, contract and temporary 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 Dillistone AR2015.indd 4 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:09 23961.04 – 13 May 2016 5:25 PM – Proof 6services – 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 60 people.Voyager Software divisionProductsVoyager Software provides a range of products to all levels of the recruitment market.Front office productsVoyager Infinity manages the work of recruiters working to fill permanent and longer-term contract/temporary vacancies delivering measurable performance efficiencies and audit trails. Voyager Infinity SaaS has all of the great features of Infinity available as a managed service on the Azure Cloud with affordable set-up and affordable monthly cost.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.Middle and back office productsVoyager Mid-Office, Voyager’s flexible Pay & Bill solution, automates the processing of large volumes of timesheets 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.Virtual VoyagerAlongside the native Cloud products with Virtual Voyager, all Voyager products can be hosted and delivered to any customer PC with an Internet connection.EvolveThrough FCP Internet, the division also provides its evolveTM solution. evolve™ has been designed to deliver an effective workflow solution for all sizes and types of recruitment business. It is delivered only as a SaaS product.ISV FastPathThrough ISV, the division provides its FastPath solution and is developing its new ISV Online product. This software delivers pre-employment skills testing and training tools to recruitment businesses and corporates.Read more on Voyager Software on page 09 Main Group officeswww.dillistonegroup.comStrategic ReportGovernanceFinancial Statements05Dillistone AR2015.indd 513/05/2016 17:27:13 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Chairman’s Statement The Group has made significant progress in 2015. Product development has continued to be a priority throughout the year with a number of upgrades and new product launches successfully achieved with more expected in 2016. The Group also delivered its best ever revenue performance with revenue up 9% to £9.437m. The continued investment in the Dillistone Systems division meant that, as anticipated in the interim statement and despite this growth in revenue, the Group saw a 21% fall in operating profit to £1.108m. Profit after tax rose 6% to £1.212m, benefitting from a tax credit in the year. Basic EPS improved to 6.20p. ISV (www.isvgroup.com), which was acquired in October 2014, has been successfully integrated into the Voyager Software division and is investing in its own product development with a new product, ISV Online, due for launch in 2016. Dividends The Board was pleased to increase the interim dividend payment in September 2015 to 1.35p (2014: 1.3p) and has recommended an increased final dividend of 2.75p per share (2014: 2.7p), subject to shareholder approval, payable on 24 June 2016 to holders on the register on 27 May 2016. Shares will trade exdividend from 26 May 2016. This takes the total dividend based on the 2015 results to 4.10p (2014: 4.00p), and gives a yield of 5.1% on a share price of 80.5p. This represents our fourth 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. 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 our staff. Outlook At the time of our interim statement in 2015, the Board explained that increased competition in the executive search software sector in which Dillistone Systems operates necessitated an increased investment to remain competitive. We stated that we believed that we were experiencing early signs of improved performance, noting a year on year upturn in orders, but warned that the increased investment would reduce profitability in 2015. The Dillistone Systems division has continued – and will continue – to invest in improving products and services, and we are delighted to report further success in the market. Dillistone Systems’ core product – FileFinder Anywhere – has seen new client orders grow by more than 70% in the first quarter of 2016, when compared to the same period in 2015. Pleasingly, this growth is based on significant increases in both the number of new client wins and the value of those contracts. This, combined with continuing demand from existing clients, meant that our 12 month order book to March 2016 is at its strongest since 2013. Our Voyager Software division has also enjoyed a strong start to the year. This Division offers a number of products and while performance has varied across the range, it is pleasing to note that the strong performance by several of its leading products has seen orders grow in Q1 by around 50% compared to the same quarter in 2015. While the Group is not immune to potential economic instability, at this stage the expectation is that this strong order growth will continue. Both divisions are reporting that a growing proportion of incoming business is on a recurring basis, which is good for the longer term but is less positive in the short term. However, the results to date, coupled with our strengthening implementation pipeline, give us confidence that not only will the first half results show improvement over the second half of 2015, but we will see that trend continuing into the second half of this current year. 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 1.9% to 2.75p (2014: 2.7p). Dr Mike Love Non-Executive Chairman 26 April 2016 “ The Group delivered its best ever revenue performance with revenue up 9% to £9.437m.” Dr Mike Love Non-Executive Chairman Revenue analysis 2015 Recurring Non-recurring Third party 70% 25% 5% 06 Dillistone AR2015.indd 6 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:14 23961.04 – 13 May 2016 5:25 PM – Proof 6CEO’s Review“ The Board is confident that both Divisions have strong futures.”Jason Starr Chief ExecutiveDillistone Group Plc is a global leader in the supply of technology solutions and services to the recruitment industry worldwide.Strategy and objectivesThe Group’s strategy is to grow the business both organically and through acquisition. This strategy is made possible through 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 delivering progressive career development;• increase our profitability and deliver increased shareholder value year on year in conjunction with following a progressive dividend policy.Key performance indicators (KPIs)The Board and management use absolute figures to monitor the performance of the business in the following financial KPIs:FY 2015 £’000FY 2014£’000measure used by managementTotal revenues9,4378,625year on year growthRecurring revenues6,6065,929year on year growthNon-recurring revenues2,3332,285year on year growthAdjusted profit before tax1,4161,824year on year growthCash less borrowings1,2701,443sufficient cash resources maintainedAdjusted profit before tax is statutory profit before acquisition costs, related intangible amortisation, movements in contingent consideration and other one-off costs relating to acquisitions.In addition, the Board monitors order levels and employee numbers as well as performance against budget.49%Dillistone51%VoyagerDivisional revenue analysis 2015Read more about our divisions on page 09www.dillistonegroup.comStrategic ReportGovernanceFinancial Statements07Dillistone AR2015.indd 713/05/2016 17:27:14 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG CEO’s Review continued Our business model wE utIlISE Our IP, human and physical capabilities tO DElIVER Products and services thAt PROVIDE Short and long term value for our clients AnD GEnERAtE Short and long term value for our shareholders 08 Global thought leaders: • Offices in UK, Germany, USA, and Australia • Data centres in Europe, USA, Brazil, Singapore, and Australia • Around 120 staff • • Our suite of innovative recruitment software is packaged with an end-to-end service Additional services include training, data translation, support services and running conferences • Our data centres enable us to offer optional hosting In 2000+ firms across 60 countries, our clients are situated across the entire recruitment landscape. They say that we provide them with: • • Stability, flexibility and functionality Easy access to their data • Rapid deployment • Ongoing development ensures upgrade path for clients Our large client base means that we do not depend on a small number of clients. We generate revenue typically through three pricing mechanisms: • Upfront licence fee plus recurring support fee • Software as a Service (SaaS) subscription basis • Hybrid model incorporating upfront payment and recurring support and hosting fees Dillistone AR2015.indd 8 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:14 23961.04 – 13 May 2016 5:25 PM – Proof 6Group review of the business2015 saw recurring revenues grow 11% to £6.606m (2014: £5.929m) reflecting, in part, the full year impact of the acquisition of ISV in October 2014. Non-recurring revenues increased 2% to £2.333m (2014: £2.285m). As a result, overall revenues increased by 9% to £9.437m (2014: £8.625m) with recurring revenues representing 70% of Group revenues (2014: 69%). Overheads have increased across the business in part reflecting the full year impact of ISV but also reflecting the increased investment in Dillistone Systems as forewarned in the interim statement. This resulted in a 5% fall in adjusted EBITDA to £2.285m (2014: £2.402m). Operating profits before acquisition related items fell 22% to £1.424m (2014: £1.820m) and pre-tax profits before acquisition related items also fell 22% to £1.416m (2014: £1.824m).Divisional reviewsDillistone SystemsThe 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.Dillistone Systems’ head office is in London and it has offices in the US, Germany and Australia. The Division accounts for 49% (2014: 53%) of the Group’s revenue and it saw revenue grow 1% to £4.620m (2014: £4.557m).It was pleasing to see revenue return to growth in 2015 after the 9% fall in 2014. However, increased competition means that the Division has to work harder to win business and retain clients, and this has required and continues to require ongoing investment in our products, in our services, and in our infrastructure, which inevitably leads to higher cost of sales and administrative expenses, which was further aggravated by the strength of Sterling in 2015. Depreciation and amortisation also increased by 36% in the Division, reflecting the first full year amortisation charge of the FileFinder browser product, for which costs were capitalised in previous periods. This has led to segmental EBITDA decreasing by 11% to £1.425m (2014: £1.597m) and operating profit falling 24% to £0.891m (2014: £1.168m).In our interim announcement released to the market in 2015, we explained our increased investment, noted a pleasing increase in product sales and explained our confidence that our product investment would lead to further growth in orders and revenue. I am pleased that this prediction has proven to be accurate as the Division has enjoyed an extremely positive Q1 2016 in terms of incoming contracts. I am delighted to report that the business has enjoyed a strong order book in the first quarter, with new business orders up by more than 70% on the same period of 2015. Pleasingly, this growth has come about as a result of increases in both the number of new contract wins and the value of those contracts. Client retention continues to improve and we are seeing strong demand for products and services from our existing clients.The FileFinder Anywhere suite continues to be developed, and we anticipate further product announcements within the next 12 months.Voyager SoftwareVoyager Software is a provider of technology products targeted at the entire recruitment landscape, from front office to back office and bureaus, and includes both recruitment management systems and pre-employment skills testing technology.In 2015, the Voyager Software division accounted for 51% (2014: 47%) of Group revenues. The Division’s revenues increased by 19% to £4.831m and its segmental operating profit before amortisation and depreciation increased by 19% to £0.956m (2014: £0.802m). Recurring revenues increased by 25% to £3.430m (2014: £2.743m). Depreciation and amortisation increased by 113% to £0.327m (2014: £0.153m), having been impacted by the change in the basis of calculation of amortisation of development costs as discussed in the financial review and as well as the continuing spend on development.The Division benefited from the full year impact of the ISV acquisition made in October 2014. Excluding ISV, underlying growth in revenue was 4%.2015 saw some major developments in the Division including:• launch of the cloud hosted version of Infinity available from multiple global regions with additional functionality for use in the temporary staffing sector• launch of the integration of ISV FastPath and Infinity to help recruitment businesses automate testing candidates, facilitating cross-selling opportunities • launch of version 6 of Evolve softwareProduct development is ongoing across the Division and a number of product announcements are expected in 2016. The Board is confident that both Divisions have strong futures.www.dillistonegroup.comStrategic ReportGovernanceFinancial Statements09Dillistone AR2015.indd 913/05/2016 17:27:14 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG CEO’s Review continued 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. 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. 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. Principal risks 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 Potential adverse impact Mitigation Economic risk 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. The Group is following a strategy designed to increase recurring revenues. Products are tested pre-launch and launch and implementation strategies developed to minimise risks. Additional unit testing is built in and commitment to focus on user experience. Development plan is regularly reviewed by management. 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. The cost and time frame for developing and releasing new product could be a bigger drain on resource than built into budgets and forecasts. 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. The Group continues to invest in new products and new features being added. 10 Dillistone AR2015.indd 10 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:14 23961.04 – 13 May 2016 5:25 PM – Proof 6RiskPotential adverse impactMitigationCompetitor activityThe 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. 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 saw the launch of a SaaS version of Infinity and 2016 has seen the launch of a standalone 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 are reviewed on a regular basis. The introduction of a SaaS product should result in a more competitive subscription model for Voyager.The Group continues to look into developing new products and additional features to more readily compete.Business continuity risks associated with information systems’ operational failure and data securityA failure of systems or failure of hosting facilities leading to loss of customer confidence in the Group being able to deliver their requirements.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.Each division is reliant on data centres. Work is ongoing to improve disaster recovery plans, including investing in the use of the cloud. 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 retentionCapability 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. Reliability on small group of people especially in parts of the business.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.Acquisition riskThe 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.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.Ability to finance acquisitions and expansionThe 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.Ongoing discussions with investors and potential investors to build a following in Dillistone. Every placing by the Group has been oversubscribed so Group has small fund available for future acquisitions.Management capacitySize 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.Investment in additional management in 2015. BrexitPotential economic uncertainty could lead to a reduction in orders.May impact where recruiting individuals with European languages requirement. It may increase the time and difficulty in recruiting skilled employees.Clients usually choose best in class and already buy from global firms.Already have to deal with visa requirements for some staff. www.dillistonegroup.comStrategic ReportGovernanceFinancial Statements11Dillistone AR2015.indd 1113/05/2016 17:27:14 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Financial Review “ Dillistone finished the year with cash funds of £1.595m and bank borrowings of £0.325m.” Julie Pomeroy Finance Director Adjusted profit before tax 2015 2013 £1.80m 2014 £1.82m 2015 £1.42m consideration. Finance cost includes £0.028m relating to the unwinding of the discount in respect of the contingent consideration. Recurring revenues covered 100% of administrative expenses before acquisition related costs (2014: 104%). Excluding depreciation and amortisation of our own internal development, the administrative costs are covered 116% (2014: 116%) by recurring revenues. There is a tax credit in 2015 of £0.140m (2014: charge £0.160m). The 2015 credit reflects the significant R&D tax credits available to both Dillistone Systems and Voyager Software, the change in deferred tax rate from 20% to 18%, as well as the reduction in corporation tax rates from 21.5% to 20.25% and the release of prior year provisions partially offset by the higher rates of corporation tax that are payable overseas. The acquisition related items tax credit reflects the reduction in deferred tax that arises as amortisation is charged in the profit and loss account. Profits for the year before acquisition related items fell 10% to £1.419m (2014: £1.584m) and profits for the year after acquisition related items increased 6% to £1.212m (2014: £1.145m). Basic earnings per share (EPS) increased to 6.20p (2014: 6.18p). Fully diluted EPS increased 1% to 6.00p (2014: 5.95p). Capital expenditure The Group invested £1.045m in property, plant and equipment and product development during the year (2014: £1.073m). This expenditure included £0.961m (2014: £0.814m) spent on development costs. Total revenues increased by 9% to £9.437m (2014: £8.625m), with pre-tax profits down 18% to £1.072m (2014: £1.305m). Recurring revenues increased by 11% to £6.606m (2014: £5.929m) while non- recurring revenues saw a 2% increase to £2.333m from £2.285m. Third party software product sales amounted to £0.498m in the period (2014: £0.411m). These results include ISV revenues for the full year. Underlying revenue growth excluding ISV was 3%. Cost of sales increased by 19% to £1.313m (2014: £1.108m), reflecting in part, the full year impact of ISV but also from the roll out of additional hosting services. Administrative costs, excluding acquisition related items, depreciation and amortisation, rose 14% to £5.839m (2014: £5.115m), again reflecting the full year of ISV costs. Excluding ISV, administrative costs rose 8%. As part of the implementation of FRS 101 in relation to its subsidiaries’ accounts, management also reviewed the useful economic life of certain of its development expenditure. Such expenditure is now written off over five years, with amortisation commencing in the month that costs are incurred. Previously, this was estimated to be three years, with amortisation commencing the year following the costs being incurred. This had only a minor impact for the Group but it did result in a higher amortisation charge in the Voyager Software division which was offset by a reduction in the charge in Dillistone Systems division. Depreciation and amortisation increased to £0.861m (2014: £0.582m). Part of this increase reflects the first full year amortisation charge of the FileFinder browser product for which costs were incurred in previous periods and also the continuing spend on development across both divisions. Acquisition related administrative costs totalled £0.316m (2014: £0.418m), and were in respect of the amortisation of intangibles arising on the Voyager, FCP and ISV acquisitions and movement in the estimation of contingent 12 Dillistone AR2015.indd 12 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:15 23961.04 – 13 May 2016 5:25 PM – Proof 62015£2.29m2014£2.40m2013£2.24m20157.26p20148.56p20137.99p20156.20p20146.18p20136.76pAdjusted EBITDA 2015Adjusted basic EPS 2015Basic EPS 2015Trade and other payablesAs 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 2015 but that are in respect of services to be delivered in 2016. 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 £0.620m (2014: £1.173m) in respect of contingent consideration. At the end of 2015, there are three tranches of contingent consideration payable in respect of ISV and these are dependent on the level of revenue achieved in periods up until 30 September 2017. CashThe Group finished the year with cash funds of £1.595m (2014: £1.929m) and bank borrowings of £0.325m (2014: £0.487m). This is after capital expenditure of £1.045m, the payment to the vendors of FCP and ISV of £0.666m and dividend payments of £0.793m.On behalf of the BoardJulie PomeroyFinance Director26 April 2016The Strategic Report is signed on behalf of the Board byJason StarrChief Executive26 April 2016www.dillistonegroup.comStrategic ReportGovernanceFinancial Statements13Dillistone AR2015.indd 1313/05/2016 17:27:15 23961.04 – 13 May 2016 5:25 PM – Proof 614Dillistone Group Plc | Annual Report & Accounts 2015stock code: DSGCase StudyHow Voyager Infinity and ISV FastPath support White Knight RecruitmentIn each annual report we highlight how one of our solutions is helping a client to generate real business efficiencies. Last year our case study was based around FileFinder, and so this year we look at how White Knight Recruitment is taking advantage of two of our products – Infinity and FastPath.How Voyager Infinity & ISV FastPath support White Knight Recruitment Voyager Software is a market-leading provider of technology to recruitment companies. Following the acquisition of ISV Software, an integration was launched in October 2015 between Voyager Infinity and ISV FastPath. The integration allows users to easily send tests to candidates, review results and submit scores to clients directly from Infinity.One of the earliest adopters of the integration is White Knight Recruitment and Mark Stevens, its Managing Director, shared his experience about their use of the integration between Infinity and ISV FastPath.The BackgroundWhite Knight Recruitment is a recruitment specialist based in South England, supplying admin and clerical staff to the NHS and public sectors. As an existing user of both Voyager Infinity and ISV FastPath they were delighted with the news of an integration between both applications.How impactful is being able to access ISV FastPath’s skills testing platform directly from inside Infinity?“The integration has saved us lots of time now that we don’t need to enter the same information twice. I especially like that the testing results feed seamlessly into Infinity allowing me to instantly see if the candidate is suitable for a particular job.” How easy is the product to use?“Sending out tests couldn’t be easier! A link is emailed directly to the candidate from within Infinity. When the test has been completed I get alerted in ‘My Infinity’ which prompts me to review the results.”What are the benefits of offering skills testing to your clients?“Skills testing is one of the things that sets us apart from our competitors. These skills tests allow us to screen the candidates before we submit them to our clients, this means our clients are only interviewing candidates of a certain calibre, therefore saving them time.”Would you recommend the integration between Infinity and ISV FastPath?“Yes, we would definitely recommend it. Since we’ve started using the integration it has saved our consultants lots of admin time, allowing them to focus on what they do best.” 15Dillistone AR2015.indd 1413/05/2016 17:27:16 23961.04 – 13 May 2016 5:25 PM – Proof 615Corporate GovernanceBoard of Directors16Corporate Governance Report18Report to the Shareholders on Directors’ Remuneration20Directors’ Report2315“After only 1 month of implementation [of ISV FastPath] our consultants have booked in more candidate registration interviews and have reduced registration time.”Holly Millen Commercial Director, Interpersonnelwww.dillistonegroup.comDillistone AR2015.indd 1513/05/2016 17:27:18 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Board of Directors Mike Love (67) Non-Executive Chairman Jason Starr (44) Chief Executive Mike Love has a PhD in theoretical physics and over 40 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 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 January 2015. 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. Rory Howard (48) Operations Director Alex James (43) Product Development Director Rory Howard has a BA (Honours) degree 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 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. 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 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. 16 Dillistone AR2015.indd 16 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:18 23961.04 – 13 May 2016 5:25 PM – Proof 6Audit CommitteeRemuneration CommitteeCommittee iconsAlistair Milne (40)Director of Support ServicesAlistair 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. 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.Julie Pomeroy (60)Finance DirectorJulie 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. 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.Giles Fearnley (61)Non-Executive DirectorA 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. Prism Rail operated four of the UK’s passenger rail franchises with a turnover of £500 million 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.www.dillistonegroup.com17Financial StatementsStrategic ReportGovernanceDillistone AR2015.indd 1713/05/2016 17:27:19 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Corporate Governance Report 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 comprises the Chairman and the Non-Executive Director and usually meets twice during the year. The Finance Director, Group Chief Executive Officer (CEO) and external Auditor 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 Auditor 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. 18 Dillistone AR2015.indd 18 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:19 23961.04 – 13 May 2016 5:25 PM – Proof 6Quality and integrity of personnelThe 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 monitoringThe Audit Committee considers and determines relevant action in respect of any control issues raised by the Auditor. 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 managementThe Board formally reviews the risk register at least annually and the consideration of risks and in particular the identification of new risks is an agenda item at each Board meeting.Relationship with Company AuditorThe Auditor ready access to the chairman of the Audit Committee and the Audit Committee meets at least annually with the Auditor without any member of the executive being present.RemunerationThe 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.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 the opportunity to interact with members of the Board.AuditorA resolution authorising the Directors to set the remuneration of the Auditor will be put to shareholders at the forthcoming AGM.www.dillistonegroup.com19Financial StatementsStrategic ReportGovernanceDillistone AR2015.indd 1913/05/2016 17:27:19 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Report to the Shareholders on Directors’ Remuneration 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 Director 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. No bonus is payable to the Executive Directors in respect of 2015 (2014: £22,000). 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. At the discretion of the Remuneration Committee, Executive Directors are either granted share options at the ruling mid-market price at the time of the grant or a pure cash bonus fixed as a percentage of salary. The awards are subject to meeting challenging EPS growth targets. Annual awards are made under this scheme. Where options are awarded, the value of the award is calculated using a Black Scholes model (see note 22 for further details). 20 Dillistone AR2015.indd 20 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:19 23961.04 – 13 May 2016 5:25 PM – Proof 6The 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:Salary*and fees £’000Annual bonus £’000 Pensionpayments** £’000 Benefits £’0002015 £’0002014 £’000Executive Directors J S Starr 96–28–124125R Howard 47–26–7372A D James 88–719695J P Pomeroy 85–10–9596A F Milne 84–128789Non-Executive Directors M D Love 33–––3333G R Fearnley 12–––1212445–723520522* Salary sacrifice payments have been excluded ** Includes salary sacrifice paymentsLong term incentive payments made in the period are not included in the above figures but are detailed below:LTIP award (not audited) – phantom optionsnumber of phantom options granted in year Total value of all phantom option LTIP awards carried at 31 December 2015*£’000total value of all phantom option ltIP awards carried at 31 December 2014*£’000J S Starr––11R Howard––9A F Milne––6––26LTIP award (not audited) – % of salary arrangementMaximum payout awarded in period £’000Paid in the year including Employers nI£’000Total value of salary based LTIP awards carried at 31 December 2015*£’000total value of all salary based ltIP awards carried at 31 December 2014*£’000J S Starr5323145R Howard30215–A F Milne–14––8358195*Awards accrued over the period that they relate to and the valuation takes into account the likelihood of performance conditions being met.www.dillistonegroup.com21Financial StatementsStrategic ReportGovernanceDillistone AR2015.indd 2113/05/2016 17:27:19 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Report to the Shareholders on Directors’ Remuneration continued LTIP Award (not audited) – share options A D James J P Pomeroy A F Milne number of options granted under ltIP scheme in year 66,359 66,071 63,188 195,618 Total number of options granted under LTIP scheme at 31 December 2015 66,359 66,071 63,188 195,618 total number of options granted under ltIP scheme at 31 December 2014 109,589 111,233 – 220,822 The options granted in the year were at a price of 108.5p and carry the same performance conditions as the LTIP cash bonus awards. Of the options held at 31 December 2014, 73,975 options were exercised in the year at a grant price of 73p and the balance lapsed. 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 F Milne J P Pomeroy Ordinary shares of 5 pence each at 31 December 2015 3,577,591 3,300,000 112,744 989,754 453,435 59,109 63,733 In addition, the following Directors had total share options including the options granted under the LTIP scheme above. A D James J P Pomeroy A F Milne Options over ordinary shares of 5 pence each at 31 December 2015 66,359 66,071 63,188 195,618 Ordinary shares of 5 pence each at 31 December 2014 3,564,959 3,300,000 101,494 703,254 453,435 59,109 39,682 Options over ordinary shares of 5 pence each at 31 December 2014 109,589 111,233 – 220,822 In the year Julie Pomeroy and Alex James exercised 37,263 and 36,712 options respectively at an exercise price of 73p. The mid-market share price at the date of exercise was 108.5p. Accordingly gains made by Julie Pomeroy and Alex James were £13,000 each. 22 Dillistone AR2015.indd 22 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:19 23961.04 – 13 May 2016 5:25 PM – Proof 6Directors’ ReportThe Directors present their report and financial statements for the year ended 31 December 2015.Results and dividendsThe consolidated statement of comprehensive income for the year is set out on page 27.An interim dividend of 1.35p per share was paid in June 2015. A final dividend of 2.75p per share will be paid, subject to shareholder approval, on 24 June 2016.DirectorsThe following Directors have held office since 1 January 2015:M D Love – Non-Executive Chairman J S Starr R Howard A D James J P PomeroyG R Fearnley – Non-Executive DirectorA Milne The interests of the Directors (including family interests) in the share capital of the Company are listed on page 22.Giles Fearnley and Julie Pomeroy are proposed for re-election at the forthcoming AGM. Julie Pomeroy has a service contract with a one year notice period. Mike Love has been a Non-Executive Director for nine years and therefore will offer himself for re-election annually.Financial risk managementDetails of the Group’s financial risk management is set out in the Strategic Report section.Principal shareholdersAs at the 23 April 2016 the Directors have been notified of the following shareholdings in excess of 3% of the Company’s issued share capital:Ordinary shares of 5 pence eachPercentageJ S Starr 3,577,59118.19%R Howard3,300,00016.78%Herald Investment Management1,767,4448.99%Unicorn Asset Management1,595,3018.11%J McLaughlin1,511,1227.68%S McLaughlin1,061,0005.39%M D Love989,7545.03%CFS Independent870,8894.43%Close Asset Management729,7993.71%R Howells650,0003.30%Directors’ and officers’ insuranceThe 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.www.dillistonegroup.com23Financial StatementsStrategic ReportGovernanceDillistone AR2015.indd 2313/05/2016 17:27:20 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Directors’ Report continued 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 14 June 2016 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 2015 and a resolution proposing their reappointment as Auditor 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 26 April 2016 24 Dillistone AR2015.indd 24 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:21 23961.04 – 13 May 2016 5:25 PM – Proof 6Independent Auditor’s Report26Consolidated Statement of Comprehensive Income27Consolidated Statement of Changes in Equity28Company Statement of Changes in Equity 29Consolidated and Company Statements of Financial Position30Consolidated Cash Flow Statement31Company Cash Flow Statement32Notes to the Financial Statements33Directors and Advisers IBCFinancial Statements25“The service from Voyager has been fantastic, each member of staff is always very accommodating. The trainer was always on hand to help throughout the project to help us set up Mid-Office. We got great response times on any issues. We plan to expand to double the staff within a year which will therefore double our back-office work load. Mid-Office will be the main support for this and will ensure our candidates are paid.”Louise Clarke Office Manager, Foundation Personnelwww.dillistonegroup.comDillistone AR2015.indd 2513/05/2016 17:27:22 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Independent Auditor’s Report To the Members of Dillistone Group Plc for the year ended 31 December 2015 We have audited the financial statements of Dillistone Group Plc for the year ended 31 December 2015 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 24, 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 2015 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. 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. Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London 26 April 2016 26 Dillistone AR2015.indd 26 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:23 23961.04 – 13 May 2016 5:25 PM – Proof 6Consolidated Statement of Comprehensive IncomeFor the year ended 31 December 2015note2015 £’000 2014 £’000 Revenue39,4378,625Cost of sales(1,313)(1,108)Gross profit8,1247,517Administrative expenses(7,016)(6,115)Profits from operating activities61,1081,402Adjusted operating profit before acquisition related items 21,4241,820Acquisition related items5(316)(418)Operating profit1,1081,402Financial income856Finance cost8(41)(103)Profit before tax1,0721,305Tax income/(expense)9140(160)Profit for the year 1,2121,145Other comprehensive income net of tax:Items that will be reclassified subsequently to profit and lossCurrency translation differences(27)(8)Total comprehensive income for the year net of tax1,1851,137Earnings per share – from continuing activitiesBasic106.20p6.18pDiluted106.00p5.95pThe notes on pages 33 to 59 are an integral part of these consolidated financial statements.www.dillistonegroup.com27Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 2713/05/2016 17:27:23 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Consolidated Statement of Changes in Equity For the year ended 31 December 2015 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 charge Dividends paid Total transactions with owners Balance at 31 December 2014 Comprehensive income Profit for the year ended 31 December 2015 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 Balance at 31 December 2015 Share capital £’000 914 Share premium £’000 498 Merger reserve £’000 365 Retained earnings £’000 3,076 Share option £’000 121 Foreign exchange £’000 136 total £’000 5,110 – – – 55 – – 55 969 – – – 14 – – 14 983 – – – 934 – – 934 1,432 – – – 199 – – 199 1,631 – – – – – – – 365 – – – – – – – 365 1,145 – 1,145 – 16 (723) (707) 3,514 1,212 – 1,212 – 75 (793) (718) 4,008 – – – – (3) – (3) 118 – – – – (47) – (47) 71 – 1,145 (8) (8) – – – – 128 (8) 1,137 989 13 (723) 279 6,526 – 1,212 (27) (27) – – – – 101 (27) 1,185 213 28 (793) (552) 7,159 The notes on pages 33 to 59 are an integral part of these consolidated financial statements. 28 Dillistone AR2015.indd 28 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:23 23961.04 – 13 May 2016 5:25 PM – Proof 6Company Statement of Changes in EquityFor the year ended 31 December 2015 Share capital £’000 Share premium £’000 Merger reserve £’000 Retained earnings £’000 Share option £’000 total £’000 Balance at 31 December 20139144983651,1741213,072Comprehensive incomeTotal comprehensive income for the year ended 31 December 2014– – – 896 – 896 Transactions with ownersIssue of share capital55934– – – 989 Share option charge– – – 16 (3) 13 Dividends paid– – – (723) – (723) Total transactions with owners55 934–(707)(3)279Balance at 31 December 20149691,4323651,3631184,247Comprehensive incomeTotal comprehensive income for the year ended 31 December 2015– – – 932 – 932 Transactions with ownersIssue of share capital14199–––213Share option charge– – – 75 (47) 28 Dividends paid– – – (793) – (793) Total transactions with owners14 199–(718)(47)(552)Balance at 31 December 20159831,6313651,577714,627The notes on pages 33 to 59 are an integral part of these consolidated financial statements.www.dillistonegroup.com29Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 2913/05/2016 17:27:23 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Consolidated and Company Statements of Financial Position As at 31 December 2015 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 2015 £’000 2014 £’000 Company 2015 £’000 2014 £’000 note 12 13 14 15 16 17 20 22 18 19 9 18 19 3,415 6,163 257 – 9,835 16 1,736 1,595 3,347 13,182 983 1,631 365 4,008 71 101 7,159 428 158 1,006 4,193 167 71 6,023 13,182 3,415 6,317 299 – 10,031 41 1,784 1,929 3,754 13,785 969 1,432 365 3,514 118 128 6,526 666 325 1,152 4,669 162 285 7,259 13,785 – – – 7,599 7,599 – 345 59 404 8,003 983 1,631 365 1,577 71 – 4,627 428 158 – 2,623 167 – 3,376 8,003 – – – 7,599 7,599 – 331 387 718 8,317 969 1,432 365 1,363 118 – 4,247 666 325 – 2,917 162 – 4,070 8,317 The notes on pages 33 to 59 are an integral part of these consolidated financial statements. The financial statements were approved by the Board of Directors and authorised for issue on 26 April 2016. They were signed on its behalf by J P Pomeroy Director Company Registration No. 4578125 30 Dillistone AR2015.indd 30 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:23 23961.04 – 13 May 2016 5:25 PM – Proof 6Consolidated Cash Flow StatementAs at 31 December 20152015 £’000 2015 £’000 2014 £’000 2014 £’000 Operating activitiesProfit before tax1,0721,305Less taxation paid(219)(122)Adjustment for: Financial income(5)(6) Financial cost41103 Depreciation and amortisation1,240868 Share option expense2813 Foreign exchange adjustments arising from operations(16)(3)Operating cash flows before movement in working capital2,1412,158Decrease/(increase) in receivables278(81)Decrease in inventories2537(Decrease)/increase in payables(307)4Net cash generated from operating activities2,1372,118Investing activitiesInterest received56Finance cost(13)(2)Purchases of property, plant and equipment(84)(259)Investment in development costs(961)(814)Acquisition of subsidiaries net of cash acquired –(718)Contingent and deferred consideration paid(666)(550)Net cash used in investing activities(1,719)(2,337)Financing activitiesNet proceeds from issue of share capital213989Bank loan received –500Bank loan repayments made(162)(13)Dividends paid(793)(723)Net cash (used in)/generated from financing activities(742)753Net (decrease)/increase in cash and cash equivalents(324)534Cash and cash equivalents at beginning of year1,9291,399Effect of foreign exchange rate changes(10)(4)Cash and cash equivalents at end of year1,5951,929The notes on pages 33 to 59 are an integral part of these consolidated financial statements.www.dillistonegroup.com31Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 3113/05/2016 17:27:23 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Company Cash Flow Statement Operating activities Profit before tax Less taxation paid Adjustment for: Financial cost Share option expense Operating cash flows before movements in working capital (Increase)/decrease in receivables Increase/(decrease) in payables Net cash generated from operating activities Investing activities Finance cost Investment in acquisitions Contingent and deferred 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 (used in)/from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2015 £’000 2015 £’000 2014 £’000 2014 £’000 932 – 41 28 1,001 (14) 106 (13) – (666) 213 – (162) (793) 896 – 103 13 1,012 36 123 1,093 1,171 (2) (1,063) (550) (679) (1,615) 989 500 (13) (723) (742) (328) 387 59 753 309 78 387 The notes on pages 33 to 59 are an integral part of these consolidated financial statements. 32 Dillistone AR2015.indd 32 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:24 23961.04 – 13 May 2016 5:25 PM – Proof 6Notes to the Financial StatementsFor the year ended 31 December 2015Dillistone 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 policies1.1 Basis of accountingThe consolidated financial statements have been prepared using the significant accounting policies and measurement bases summarised below: Significant estimatesIn 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 paymentsThe 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 assetsThere 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 notes 12 and 13.Business combinationsOn 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 considerationWhere 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 policiesIn 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 softwareAs 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 customers’ practical acceptance, thereby reducing the judgement required to ascertain the timing of licence revenue recognition.www.dillistonegroup.com33Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 3313/05/2016 17:27:24 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 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 life cycle of the asset which is subject to alteration as a result of product development and innovation. Amortisation rates are changed where economic lives are reassessed 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 7 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 2015. 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. 34 Dillistone AR2015.indd 34 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:24 23961.04 – 13 May 2016 5:25 PM – Proof 61. Accounting policies (continued)1.4 RevenueGeneralRevenue 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.Licensing (excluding SaaS)The Group licenses 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 servicesThe 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 revenuesThe 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. TokensThe 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 paymentsThe Company operates a share based payment scheme. It 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 share 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.www.dillistonegroup.com35Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 3513/05/2016 17:27:24 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 1. Accounting policies (continued) 1.6 Long term incentive plan – capped cash bonus The LTIP awards can be share based or cash based. The cash awards are 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 risk 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. 36 Dillistone AR2015.indd 36 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:24 23961.04 – 13 May 2016 5:25 PM – Proof 61. Accounting policies (continued)1.11 Intangible assetsInternal development costsCosts 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 costs 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 is amortised over its useful life. Previously, this was estimated to be three years, with amortisation commencing the year following the costs being incurred. Following a review across the Group, management now considers the useful economic life of such development expenditure to be five years, with amortisation commencing in the month of costs being incurred. Maintenance costs are expensed.Capitalised product development expenditure for the Company’s FileFinder version 10 and the browser version of FileFinder up to their launch are considered to be platform technology and are therefore amortised over their useful life of ten years or to 30 June 2021, whichever is the shorter period.Capitalised product development expenditure is subject to regular impairment reviews and is stated at cost less any accumulated impairment losses. Any impairment taken during the year is shown under administrative expenses on the statement of comprehensive income. Development costs that do not meet the requirements for capitalisation are written off to profit and loss as incurred.Purchased softwareSoftware acquired externally is capitalised when it is expected to have ongoing use within the business. Capitalised expenditure includes both the purchase price and any costs directly associated with bringing the software into use. Amortisation is charged over the useful economic life of the software, typically three to five years, beginning when it is capable of being used by the business.Acquired as part of a business combinationIn 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:Estimated lifeIntangible assets:BrandBrand and IP15 years15 yearsDeveloped technology6–11.25 yearsContractual customer relationships 1.25 yearsNon-contractual customer relationships10–10.25 yearswww.dillistonegroup.com37Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 3713/05/2016 17:27:24 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 1. Accounting policies (continued) 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. 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. 38 Dillistone AR2015.indd 38 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:24 23961.04 – 13 May 2016 5:25 PM – Proof 61. Accounting policies (continued)1.17 InventoriesInventories 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 equivalentsCash 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 EquityEquity 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.1.20 Foreign currency translationThe 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 taxesCurrent 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.www.dillistonegroup.com39Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 3913/05/2016 17:27:24 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 1. Accounting policies (continued) 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 The following relevant new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning on 1 January 2015, as adopted by the European Union, and have not been early adopted. These standards and interpretations are not expected to have any significant impact on the financial statements when applied. Standard Amendments to IAS 16 and IAS 38 Amendments to IAS 1 Amendments to IFRS 5 Amendments to IFRS 7 Key requirements Clarifies acceptable methods of depreciation and amortisation. Disclosure amendments Non-current assets held for sale and discontinued operations Disclosure amendments The following standards have been issued by the IASB but have not yet been adopted by the EU: Standard IFRS 9 IFRS 15 IFRS 16 Key requirements Financial Instruments Revenue from contracts with customers Leases 2. Reconciliation of adjusted operating profits to consolidated statement of comprehensive income Effective date as adopted by the EU 1 January 2016 1 January 2016 1 January 2016 1 January 2016 Effective date as adopted by the EU 1 January 2018 1 January 2018 1 January 2019 Revenue Cost of sales Gross profit Administrative expenses Results from operating activities Financial income Financial cost Profit before tax Tax income/(expense) Profit for the year Other comprehensive income net of tax: Currency translation differences Total comprehensive income for the year net of tax note Adjusted operating profits 2015 £’000 9,437 (1,313) 8,124 (6,700) 1,424 5 Acquisition related items 2015 £’000 – – – (316) (316) – (13) 1,416 3 1,419 (28) (344) 137 (207) Adjusted operating profits 2014 £’000 8,625 (1,108) 7,517 (5,697) 1,820 6 (2) 1,824 (240) 1,584 Acquisition related items 2014 £’000 – – – (418) (418) – (101) (519) 80 (439) 2015 £’000 9,437 (1,313) 8,124 (7,016) 1,108 5 (41) 1,072 140 1,212 2014 £’000 8,625 (1,108) 7,517 (6,115) 1,402 6 (103) 1,305 (160) 1,145 (27) – (27) (8) – (8) 1,392 (207) 1,185 1,576 (439) 1,137 Earnings per share – from continuing activities Basic Diluted 10 10 7.26p 7.02p * See accounts note 5 6.20p 6.00p 8.56p 8.23p 6.18p 5.95p 40 Dillistone AR2015.indd 40 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:25 23961.04 – 13 May 2016 5:25 PM – Proof 63. Segment reportingThe 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. Divisional segmentsFor the year ended 31 December 2015Dillistone£’000Voyager£’000Inter-divisional revenue£’000Central£’000Total£’000Segment revenue4,6204,831(14)–9,437Segment EBITDA1,425956(96)2,285Depreciation and amortisation expense(534)(327)–(861)Segment result891629(96)1,424Acquisition related amortisation––(379)(379)Acquisition related income––6363Operating profit/(loss)891629(412)1,108Financial income41–5Loan interest(13)(13)Acquisition related interest expenses(28)(28)Profit before tax1,072Income tax expense140Profit after tax1,212Additions of non-current assets556489–1,045For the year ended 31 December 2014Dillistone£’000Voyager£’000Inter-divisional revenue£’000Central£’000total£’000Segment revenue4,5574,068––8,625Segment EBITDA1,59780232,402Depreciation and amortisation expense(429)(153)–(582)Segment result1,16864931,820Acquisition related amortisation––(286)(286)Acquisition related charges––(132)(132)Operating profit/(loss)1,168649(415)1,402Financial income51–6Loan interest(2)(2)Acquisition related interest expenses(101)(101)Profit before tax1,305Income tax expense(160)Profit after tax1,145Additions of non-current assets720353–1,073www.dillistonegroup.com41Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 4113/05/2016 17:27:25 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 3. Segment reporting (continued) 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 2015 £’000 6,606 2,333 498 9,437 2014 £’000 5,929 2,285 411 8,625 Recurring income includes all support services, SaaS and hosting income. Non-recurring income includes sales of new licenses, and income derived from installing those licenses 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. 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 acquisitions Included within finance cost: Unwinding of discount on contingent consideration (note 8) 42 2015 £’000 7,642 1,381 414 9,437 2015 £’000 9,829 4 2 9,835 2014 £’000 6,859 1,198 568 8,625 2014 £’000 10,025 4 2 10,031 2015 £’000 2014 £’000 (63) 379 – 316 28 344 (9) 286 141 418 101 519 Dillistone AR2015.indd 42 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:25 23961.04 – 13 May 2016 5:25 PM – Proof 66. Profits from operating activities2015 £’000 2014 £’000 Profits from operating activities is stated after charging: Depreciation12694 Amortisation1,115773 Gain/(loss) on foreign exchange transactions53 Operating lease rentals293255 Money purchase pension contributions265179Fees receivable by the Group Auditor: Audit of financial statements4324Other services: Audit of accounts of subsidiary of the Company5050 Other services relating to taxation3061 All other services25457. EmployeesThe average number of employees was:2015 2014 Operations11196Management97Employee numbers120103Their aggregate remuneration comprised:2015 £’000 2014 £’000 Wages and salaries4,6564,089Social security costs496437Pension costs265179Share based payments 1512LTIP share based44(45)LTIP non share based15(40)5,4914,632The aggregate remuneration includes salary cost and Directors’ remuneration totalling £924,000 (2014: £792,000) that have been capitalised in intangible assets. Key management of the Group are the Directors and the divisional directors of Dillistone Systems and Voyager Software. Remuneration of key management was as follows:2015 £’000 2014 £’000 Wages and salaries and benefits681662Social security costs8874Pension costs8951Share based payments charged 110LTIP share based44(59)LTIP non share based15(40)918698Details of Directors’ emoluments, share options and pension entitlements are given in the Report to the Shareholders on Directors’ Remuneration on pages 20 to 22.www.dillistonegroup.com43Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 4313/05/2016 17:27:25 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 8. Financial income Interest receivable Finance cost on bank loan Unwinding of discount on contingent consideration 9. Tax (income)/expense Current tax Prior year adjustment – current tax Deferred tax Prior year adjustment – deferred tax Deferred tax re acquisition intangibles Tax (income)/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 (income)/expense Deferred tax provided in the financial statements is as follows: Accelerated intangible amortisation Provisions Acquisition intangibles 2015 £’000 5 (13) (28) (36) 2015 £’000 191 (185) (25) 16 (137) (140) 2014 £’000 6 (2) (101) (97) 2014 £’000 353 (153) 31 9 (80) 160 1,072 20.25% 217 1,305 21.5% 281 46 (7) (131) 14 (110) (169) (140) 84 – (99) 75 (37) (144) 160 2015 £’000 467 (10) 549 1,006 Group Movement £’000 (6) (3) (137) (146) 2014 £’000 473 (7) 686 1,152 Company 2015 £’000 – – – – 2014 £’000 – – – – The UK corporation tax rate in the year fell from 21% to 20% giving an effective rate for the year of 20.25%. Deferred tax is provided in relation to the UK at 18%. The tax credit is impacted by the higher rates of corporation tax payable in the US and Australia offset by the R&D tax credits available to both Dillistone Systems division and Voyager Software division and the reduction in the long term rate of corporation tax to 18% which has been used in the calculation of deferred tax. The release of prior year provisions relate in part to the agreement of the prior years’ tax positions of UK companies. The Group has gross tax losses and temporary timing differences of £492,000 (2014: £292,000) for which no deferred tax asset has been recognised. 44 Dillistone AR2015.indd 44 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:25 23961.04 – 13 May 2016 5:25 PM – Proof 610. Earnings per share2015 Using adjusted operating profit 2015 2014 using adjusted operatingprofit 2014 Profit attributable to ordinary shareholders£1,419,000£1,212,000£1,584,000£1,145,000Weighted average number of shares19,547,75419,547,75418,512,59418,512,594Basic earnings per share7.26 pence6.20 pence8.56 pence6.18 penceWeighted average number of shares after dilution20,209,33920,209,33919,243,35719,243,357Fully diluted earnings per share7.02 pence6.00 pence8.23 pence5.95 penceReconciliation of basic to diluted average number of shares2015 2014Weighted average number of shares (basic)19,547,75418,512,594Effect of dilutive potential ordinary shares – employee share plans661,585730,763Weighted average number of shares after dilution20,209,33919,243,35711. Profit for the financial yearAs 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 £932,000 (2014: £896,000).12. GoodwillGroupGoodwill £’000 CostAt 1 January 20142,745Additions670At 31 December 2014 3,415Additions–At 31 December 2015 3,415Carrying amountAt 31 December 20153,415At 31 December 20143,415The Group has reviewed the cash generating units (“CGU”) within the business. Previously each entity was treated as a CGU and this did not take fully into account the dependency of cash flows generated from specific assets. Accordingly the current view is that the CGUs are:• Dillistone Systems division• Voyager and FCP • ISVAt 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.www.dillistonegroup.com45Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 4513/05/2016 17:27:25 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 12. Goodwill (continued) 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% (2014: 12% to 19.4%). 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 in the range of 1.75% to 2% (2014: 2%) for all CGUs. The allocation of goodwill across the CGUs is as follows: Dillistone division Voyager and FCP consolidated ISV Opening £’000 494 2,251 670 3,415 Addition £’000 – – – – Impairment £’000 – – – – Closing £’000 494 2,251 670 3,415 Sensitivities To reduce the headroom in the impairment calculation to £nil for the Voyager and FCP consolidated goodwill would require a reduction of terminal growth rate to 0% and an increase in the discount rate to over 50%. Alternatively, cash flows would need to fall by over 60%. For ISV cash flows would need to fall by over 75% to reduce the headroom to £nil. No meaningful sensitivity for the Dillistone goodwill reduces the headroom to £nil. 13. Other intangible assets Group Cost At 1 January 2014 Additions through acquisition at fair value Additions At 31 December 2014 Additions At 31 December 2015 Amortisation At 1 January 2014 Charge for the year At 31 December 2014 Charge for the year At 31 December 2015 Carrying amount At 31 December 2015 At 31 December 2014 Development costs £’000 Purchased software £000 Acquisition intangibles £’000 3,815 – 814 4,629 936 5,565 1,255 487 1,742 736 2,478 3,087 2,887 – – – – 25 25 – – – – – 25 – 2,729 1,443 – 4,172 – 4,172 456 286 742 379 1,121 3,051 3,430 Total £’000 6,544 1,443 814 8,801 961 9,762 1,711 773 2,484 1,115 3,599 6,163 6,317 46 Dillistone AR2015.indd 46 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:26 23961.04 – 13 May 2016 5:25 PM – Proof 613. Other intangible assets (continued)Acquisition intangibles can be summarised as followsBrand£’000Developed technology£’000Brand and IP£’000Contractual and non-contractual relationship£’000Total£’000NBVAt 1 January 20151523356042,3393,430Additions–––––Amortisation(13)(53)(41)(272)(379)At 31 December 20151392825632,0673,051Intangible 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.14. Property, plant and equipmentGroupLand and buildings£’000Office and computer equipment£’000Fixtures and fittings£’000Motor vehicles£’000Total£’000CostAt 1 January 2014166603139–908Currency impact–22–4Additions185668–259Additions by acquisition–4127Disposals(166)–––(166)At 31 December 201418567515021,012Currency impact–11–2Additions1821–84Disposals–––(2)(2)At 31 December 2015 186758152–1,096DepreciationAt 1 January 2014165484132–781Currency impact–22–4Charge for the year7833194Eliminated on disposal(166)–––(166)At 31 December 201465691371713Currency impact–11–2Charge for year388251126Eliminated on disposal–––(2)(2)At 31 December 201544652143–839Carrying amountAt 31 December 20151421069–257At 31 December 2014179106131299www.dillistonegroup.com47Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 4713/05/2016 17:27:26 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 15. Non-current asset investments Company Cost At 1 January 2014 Additions At 31 December 2014 Additions At 31 December 2015 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 receivables Group receivables Other current assets Prepayments and accrued income 48 Investments in subsidiaries £’000 5,675 1,924 7,599 – 7,599 Principal activity Sale of computer software and related support services Sale of computer software and related support services Sale of computer software and related support services Provision of software services and related consultancy services Intermediate holding company Provision of software services and related consultancy services Dormant company Sale of computer software and related support services Sale of computer software and related support services Holding of ordinary shares 100% Registered England & Wales 100% (indirect) 100% Australia USA 100% England & Wales 100% 100% 100% 100% England & Wales England & Wales England & Wales England & Wales 100% (indirect) Australia Group 2015 £’000 16 Group 2015 £’000 1,512 – 37 187 1,736 2014 £’000 41 2014 £’000 1,531 – 47 206 1,784 Company 2015 £’000 – 2014 £’000 – Company 2015 £’000 – 333 – 12 345 2014 £’000 – 318 – 13 331 Dillistone AR2015.indd 48 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:26 23961.04 – 13 May 2016 5:25 PM – Proof 617. Trade and other receivables (continued)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:2015 £’000 2014 £’000 At start of year6390Movement in the year25(27)At the year end8863The ageing profile of trade receivables as at the year end is as follows: 2015 £’000 2014 £’000 CurrentPast due date:1,2841,317 31–60 days overdue8288 More than 60 days overdue146126Total1,5121,53118. Trade and other payablesGroupCompany2015 £’000 2014 £’000 2015 £’000 2014 £’000 Current liabilitiesTrade and other payables6655946442Group payables––2,2311,971Deferred income2,6702,711––Accruals 651857121397Contingent consideration2075072075074,1934,6692,6232,917Non-current liabilitiesContingent consideration413666413666Cash settled LTIP15–15–428666428666Contingent consideration is valued at fair value. The total amounts included are as follows: GroupCompany2015 £’000 2014 £’000 2015 £’000 2014 £’000 In current liabilities207507207507In non-current liabilities4136664136666201,1736201,173Further details of the contingent consideration are given in note 23.www.dillistonegroup.com49Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 4913/05/2016 17:27:26 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 19. Borrowings Borrowings at amortised cost Current bank borrowings Non current bank borrowings Total bank borrowings Group 2015 £’000 167 158 325 2014 £’000 162 325 487 Company 2015 £’000 167 158 325 2014 £’000 162 325 487 The Directors consider that the fair value of borrowings approximates to the carrying value. The borrowings consist of a bank loan repayable over three 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 three year period. An early repayment fee of 1% of the amount prepaid must be made if the option is exercised. Management have reviewed the term of the prepayment option and deemed it to be closely related to the underlying debt instrument and hence it 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 2015 £’000 2014 £’000 983 969 Share options totalling 280,475 were exercised by employees in the period at a weighted average exercise price of 75.95p. Shares issued and fully paid Beginning of the year Shares issued on placing Shares issued on exercise of options Shares issued and fully paid 21. Operating lease arrangements The Group leases offices under non-cancellable operating lease agreements. At 31 December 2015, the Group had future total commitments under non-cancellable operating leases as follows: Commitments payable: Within one year Between two and five years 50 2015 £’000 19,387,546 – 280,475 19,668,021 2014 £’000 18,275,120 1,052,632 59,794 19,387,546 2015 £’000 731 233 498 2014 £’000 709 256 453 Dillistone AR2015.indd 50 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:26 23961.04 – 13 May 2016 5:25 PM – Proof 622. Share optionsShare based paymentsThere 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 ten 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 and 14 July 2015.There were two grants of options in 2015. The weighted average share price of all grants in 2015 was 105.61p. 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 grantnumber grantedShare price on issue dateExercise priceExpected volatilityVesting periodleaver rate over vesting periodRisk-free rateExpected dividend yield3 Feb 201558,50090.50p90.50p30%3.3 years10%1.00%4.0%14 July 2015306,257108.50p108.50p30%3.3 years0%1.00%4.0%Expected volatility takes into account historic volatility of the share price and its current trend.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 grantnumber grantedShare price on issue dateExercise priceExpected volatilityVesting periodleaver rate over vesting periodRisk-free rateExpected dividend yield8 Dec 2014245,00097.00p97.00p30%3.3 years10%1.00%4.0%Details of the number of share options and the weighted average exercise price (“WAEP”) outstanding during the year are as follows:20152014No of options*WAEP*no of options*wAEP*Outstanding at beginning of year930,56180.41754,35574.74Granted during year364,757105.61245,00097.00Exercised during year(280,475)75.95(59,794)77.00Forfeited during year(182,347)76.33(9,000)78.94Outstanding at the end of the year832,49693.86930,56180.41Exercisable at the year end197,23967.49413,73972.95*Adjusted for the 2 for 1 bonus issue where appropriateIn the year Julie Pomeroy exercised 37,263 options and Alex James exercised 36,712 options which had been granted on 29 May 2012 at an exercise price of 73p. The remaining options totalling 146,847, relating to this grant lapsed in the period. The mid-market share price at the date of exercise was 108.5p. The Company’s mid-market share price on 31 December 2015 was 74.0p.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 £28,000 (2014: £13,000). www.dillistonegroup.com51Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 5113/05/2016 17:27:26 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 22. Share options (continued) Share options remaining in the schemes are as follows: Scheme type Unapproved EMI Unapproved EMI Unapproved EMI EMI Unapproved EMI EMI EMI Date of grant 03/05/2006 14/09/2007 14/01/2011 21/09/2011 21/09/2011 08/07/2013 25/11/2013 08/12/2014 08/12/2014 03/02/2015 14/07/2015 Exercise from 03/05/2009 14/09/2010 14/01/2014 21/09/2014 21/09/2014 08/07/2016 25/11/2016 08/12/2017 08/12/2017 03/02/2018 14/07/2018 lapse date 02/05/2016 13/09/2017 13/01/2021 20/09/2021 20/09/2021 07/07/2023 24/11/2023 07/12/2024 07/12/2024 02/02/2025 13/07/2025 Options remaining 26,739 27,000 30,000 95,500 18,000 17,000 20,000 10,000 223,500 58,500 306,257 832,496 Exercise price (p) 5.38 99.17 58.33 77.00 77.00 79.50 115.00 97.00 97.00 90.50 108.5 208,475 share options were exercised during the year at a weighted average exercise price of 75.9p and the weighted average share price at the date of exercise was 106.9p. The weighted average remaining contractual life of options at 31 December 2015 was 8.0 years (2014: 7.5 years). LTIP 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. Awards from 2013 onwards under the long term incentive plan take the form of a cash bonus of up to one-third annual salary or the grant of share options, with appropriate performance conditions in place. The phantom options granted in 2012 pursuant to the Company’s 2011 long term incentive plan (“LTIP”) matured in the period and had exercise conditions linked to share price growth and growth in earnings per share over a three year period. This is measured by taking the earnings per share in the 2014 statutory accounts compared to the earnings per share in the 2011 statutory accounts. The amount paid out in respect of this LTIP was £58,000 and this payment has been set against salaries & wages and social security. In 2015, there is a charge of £9,000 in respect of the LTIP schemes which are share based and require separate disclosure under IFRS 2. 23. Contingent consideration payable in respect of acquisitions As part of the acquisition of FCP, the Group agreed to pay the vendors contingent consideration over the period to 31 March 2015. During 2015, the final contingent consideration payment was made totalling of £460,000. In the 2015 accounts, the amount payable under the contingent consideration was increased by £4,000 and this has been charged to the profit and loss. This contingent consideration had been discounted at 3.48% and the discount charged to profit and loss in 2015 totalled £3,000. In September 2014 the Group acquired the entire share capital of ISV. As part of the acquisition, deferred consideration of £150,000 was paid in January 2015. In addition, the vendors are entitled to contingent consideration based on revenue over the period to 30 September 2017. The first payment was made in 2015 of £56,000. In the 2015 accounts, the amount payable under the contingent consideration was decreased by £67,000 and this has been credited to the profit and loss. This contingent consideration has been discounted at 3.48% and the discount charged to profit and loss in 2015 totalled £25,000. At the year end the Group had a liability for contingent consideration made up as follows: • 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. 52 Dillistone AR2015.indd 52 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:27 23961.04 – 13 May 2016 5:25 PM – Proof 624. Financial instrumentsThe 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 riskThe 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 2015 was: At 31 December 2015 GroupCompanyNon interest bearing financial assets £’000Floating rate financial assets£’000Non interest bearing financial assets£’000Floating rate financial assets£’000Trade and other receivables (current assets)1,512–333–Cash and cash equivalents–1,595–59Total1,5121,59533359The interest rate profile of the Group’s financial assets at 31 December 2014 was: At 31 December 2014GroupCompanynon interest bearing financial assets £’000Floating rate financial assets£’000non interest bearing financial assets£’000Floating rate financial assets£’000Trade and other receivables (current assets)1,531–318–Cash and cash equivalents–1,929–387Total1,5311,929318387www.dillistonegroup.com53Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 5313/05/2016 17:27:27 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 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. At 31 December 2015 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Bank borrowings Contingent consideration (current liabilities) Contingent consideration (non-current liabilities) At 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) Group Company Non interest bearing financial assets £’000 3,986 15 – 207 413 4,621 Floating rate financial assets £’000 – – 325 – – 325 Non interest bearing financial assets £’000 2,416 15 – 207 413 3,051 Group Company non interest bearing financial assets £’000 4,162 – – 507 666 5,335 Floating rate financial assets £’000 – – 487 – – 487 non interest bearing financial assets £’000 2,410 – – 507 666 3,583 Floating rate financial assets £’000 – – 325 – – 325 Floating rate financial assets £’000 – – 487 – – 487 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 ageing 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. 54 Dillistone AR2015.indd 54 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:27 23961.04 – 13 May 2016 5:25 PM – Proof 624. Financial instruments (continued)The Group’s maximum exposure to credit risk at the reporting date is represented by the carrying value of financial assets, as follows:GroupCompany2015 £’000 2014 £’000 2015 £’000 2014 £’000 Trade and other receivables (current assets)1,5121,531333318Cash and cash equivalents1,5951,92959387Total3,1073,460392705(iii) Liquidity riskLiquidity 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 2015, 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:Group31 December 2015 Carrying amount£’000< 1 year £’0001–2 years£’0002–5 years£’000Trade and other payables (current liabilities)4,1934,193––Trade and other payables (non-current liabilities)428–41315Bank borrowings325167158–4,9464,3605711531 December 2014Carrying amount£’000< 1 year £’0001–2 years£’0002–5 years£’000Trade and other payables (current liabilities)4,6694,669––Trade and other payables (non-current liabilities)666–245421Bank borrowings4871621671585,8224,831412579www.dillistonegroup.com55Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 5513/05/2016 17:27:27 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 24. Financial instruments (continued) Company 31 December 2015 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Bank borrowings 31 December 2014 Trade and other payables (current liabilities) Trade and other payables (non-current liabilities) Bank borrowings Carrying amount £’000 2,623 428 325 3,376 Carrying amount £’000 2,917 666 487 4,070 < 1 year £’000 2,623 – 167 2,790 1–2 years £’000 – 413 158 571 < 1 year £’000 2,917 – 162 3,079 1–2 years £’000 – 245 167 412 2–5 years £’000 – 15 – 15 2–5 years £’000 – 421 158 579 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. At the year end, the Group had assets totalling £1,004,000 and liabilities totalling £640,000 denominated in Euros (2014: assets totalling £551,000 and liabilities totalling £356,000), assets totalling £1,501,000 and liabilities totalling £992,000 denominated in US Dollars (2014: assets totalling £1,537,000 and liabilities totalling £1,181,000) and assets totalling £376,000 and liabilities totalling £324,000 denominated in Australian Dollars (2014: assets totalling £370,000 and liabilities totalling £319,000). If each of the exchange rates strengthened by 5%, the impact on the income statement would as follows: Euros US Dollars Australian Dollars Group 2015 £’000 7 7 1 15 2014 £’000 5 14 4 23 At the year end, the Company had liabilities totalling £156,000 denominated in Euros (2014: liabilities totalling £99,000), assets totalling £234,000 denominated in US Dollars (2014: assets totalling £124,000) and assets totalling £78,000 denominated in Australian Dollars (2014: assets totalling £61,000). 56 Dillistone AR2015.indd 56 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:27 23961.04 – 13 May 2016 5:25 PM – Proof 624. Financial instruments (continued)Capital risk managementThe 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.note2015 £’000 2014 £’000 Total borrowings19325487Less cash or cash equivalents(1,595)(1,929)Net cash(1,270)(1,442)Total equity6,9926,526Total capital gearing ratio0%0%Summary of financial assets and liabilities by categoryThe 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:GroupCompany2015 £’000 2014 £’000 2015 £’000 2014 £’000 Loans and receivablesCash and cash equivalents1,5951,92959 387 Trade and other receivables1,512 1,531 333 318 3,1073,460392 705 Financial liabilities held at amortised costTrade and other payables4,0014,1622,4312,410Borrowings325487325487Financial liabilities held at fair valueContingent consideration6201,1736201,1734,946 5,8223,376 4,070www.dillistonegroup.com57Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 5713/05/2016 17:27:27 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Notes to the Financial Statements continued For the year ended 31 December 2015 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 2015 and 31 December 2014: Contingent consideration 2015 £’000 Level 3 620 2014 £’000 level 3 1,173 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 acquisition of ISV Software (see note 23) and is estimated using a present value technique. The contingent consideration of £620,000 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 2015 is 3.48% and is based on an after tax estimate 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 administrative expenses At the year end 2015 £’000 (1,173) – 516 (26) 63 (620) 2014 £’000 (918) (713) 550 (101) 9 (1,173) 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”. 58 Dillistone AR2015.indd 58 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:27 23961.04 – 13 May 2016 5:25 PM – Proof 627. Related party transactionsGroupThe Directors received dividends paid by the Company of £335,000 (2014: £313,000).In the year Julie Pomeroy and Alex James exercised 37,263 and 36,712 options respectively at an exercise price of 73p. The mid-market share price at the date of exercise was 108.5p. To fund the exercise of the share options, Julie Pomeroy sold 25,844 shares at 106p and Alex James sold 25,462 shares at 106p.During the year, Mike Love bought 100,000 shares at 106.5p and 126,500 shares at a price of 79p per share. In addition, Jason Starr and Julie Pomeroy also each bought 12,632 shares at a price of 79.16p.CompanyThe 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 £102,000 (2014: £96,000) and a dividend of £nil from its subsidiary company Dillistone Systems (US) Inc (2014: £111,000). At the year end Dillistone Systems (US) Inc owed £234,000 (2014: owed £122,000) to the Company.During the current year Dillistone Systems Limited paid a dividend of £1,000,000 (2014: £1,000,000) to Dillistone Group Plc and a management charge of £204,000 (2014: £237,000). At the year end Dillistone Systems Limited was owed £836,000 (2014: £1,294,000).The Company received a management charge during the year from Dillistone Systems (Australia) Pty Limited of £34,000 (2014: £34,000) and at the year end was owed £78,000 (2014: owed by the Company £62,000).Voyager Software paid a management charge of £144,000 (2014: £144,000) and owed the Company £201,000 at the year end (2014: £115,000). Woodcote Software owed the Company £13,000 at the year end (2014: £13,000).FCP Internet Limited paid a management charge of £84,000 and was owed by the Company £724,000 at the year end (2014: owed by the Company £365,000).A management charge of £60,000 was received from ISV Software and at the year end the Company owed ISV £314,000 (2014: £200,000). Management charges payable by Group members to Dillistone Group Plc relate to management support provided directly to them.28. DividendsThe dividends paid in 2015 and 2014 were £793,000 (4.05p per share) and £723,000 (3.90p per share). A final dividend in respect of the year ended 31 December 2015 of 2.75p per share will be paid on 24 June 2016. These financial statements do not reflect this dividend. www.dillistonegroup.com59Strategic ReportGovernanceFinancial StatementsDillistone AR2015.indd 5913/05/2016 17:27:27 Dillistone Group Plc | Annual Report & Accounts 2015 stock code: DSG Shareholder Notes 60 Dillistone AR2015.indd 60 23961.04 – 13 May 2016 5:25 PM – Proof 6 13/05/2016 17:27:27 23961.04 – 13 May 2016 5:25 PM – Proof 6Directors and AdvisersDirectorsM D Love – Non-Executive ChairmanG R Fearnley – Non-Executive DirectorJ S Starr – Chief Executive R Howard – Operations DirectorA D James – Product Development DirectorJ P Pomeroy – Group Finance DirectorA F Milne – Director of Support ServicesSecretaryJ P PomeroyCompany number4578125Registered office50 Leman StLondonE1 8HQIndependent AuditorGrant Thornton UK LLPGrant Thornton HouseMelton StreetEuston SquareLondon NW1 2EPPrincipal bankersHSBC Bank PlcBasingstoke Commercial Centre8 London Street Basingstoke RG21 7NU SolicitorsAshfords LLPTower WharfCheese Lane Bristol BS2 0JJ Nominated adviserWH Ireland Limited24 Martin LaneLondonEC4R 0DRBrokerWH Ireland Limited24 Martin LaneLondonEC4R 0DRRegistrarsCapita Registrars The Registry34 Beckenham RoadBeckenhamKent BR3 4TUwww.dillistonegroup.comIBCDillistone AR2015.indd 613/05/2016 17:27:04 23961.04 – 13 May 2016 5:25 PM – Proof 650 Leman Street London E1 8HQ T: +44 (0)20 7749 6100www.dillistonegroup.comDillistone Group Plc Annual Report and Accounts for the year ended 31 December 2015Dillistone AR2015.indd 113/05/2016 17:27:00