TRACSIS PLC | 1 Annual Report & Accounts 2011 Contents Group Profile Board of Directors Chairman’s and Chief Executive Officer’s Report Chief Financial Officer’s Report Directors’ Report Directors’ Remuneration Report Corporate Governance Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Consolidated Financial Statements Company Balance Sheet Notes to the Company Balance Sheet Group Information 1 2 3 5 7 9 12 14 15 16 16 17 18 19 20 43 44 48 TRACSIS PLC | 1 Group Profile Tracsis plc was founded in January 2004 to commercialise world class research and expertise developed in the field of transport scheduling. Tracsis is a developer, supplier and aggregator of resource optimisation, data capture and reporting technologies and consultancy to companies in the passenger transport industries. The Group works primarily in the field of passenger rail and bus within UK and overseas markets. The Group’s products and services comprise four principal revenue streams : resource optimisation software; passenger demand analysis and surveys; operational and performance planning consultancy; and remote condition monitoring and data logging technology. The Group has developed a range of products that assist in the development of optimised crew schedules for all types of on-board labour, primarily automated resource scheduling software for worldwide transport markets. Tracsis is led by a team of experienced commercial and technical professionals who are recognised as specialists in their field. The Group’s core product suite, developed in conjunction with applied research from the University of Leeds, is used to automate and optimise the process by which labour schedules and rosters are created, allowing for this activity to be done with greater speed and with a higher degree of accuracy and efficiency than existing methods. Our software is recognised as the most advanced intelligent crew scheduling application available and is widely used by many large transport operators. Tracsis works with the majority of large UK passenger bus and rail operators including Arriva, First Group, Govia, National Express, Network Rail, Stagecoach, Serco, NED Railways and Virgin. Tracsis also works with major transportation consultancy businesses and infrastructure providers. 2 | Annual Report and Accounts 2011 Board of Directors Rodney Jones (59) Chairman John McArthur (36) Chief Executive Officer John has been the Chief Executive Officer of Tracsis since the formation of the company in January 2004. Prior to this he worked as an investment manager with Techtran Group Limited which specialises the commercial potential of intellectual property developed at the University of Leeds. John also worked for several years with Axiomlab Group plc, a technology venture capital company, having started his career with Arthur Andersen & Co. He holds a first class degree in Management Science from the University of Strathclyde in Glasgow. in developing John Nelson (64) Non-Executive Director John is currently Chairman of First Class Partnerships, a strategic consultancy business which services the rail industry in the UK and internationally. Prior to this, John was the Chief Executive of Network South East and also headed up the Eastern Region of British Rail. John is a Non-Executive Director of Hull Trains. In addition, John was, for 9 years until 2007, a Non-Executive Director of Laing Rail Limited (who operate the Chiltern Railways franchise) and was also a Non-Executive Director of South Eastern Trains. companies Rod has held a number of senior management roles in several different including technology Inc., European Vice President at Cincom Systems International Director of Western Data Systems Inc. and President of NASDAQ listed Ross Systems Inc. He is currently Chief Executive Officer of Proactis Holdings plc, an AIM quoted provider of spend control software. Dr Raymond Kwan (54) Chief Technical Officer Raymond is the Chief Technical Officer of Tracsis. He has a PhD in computer science and has dedicated his career to researching complex scheduling problems within the transport industry. Prior to the incorporation of Tracsis, Raymond worked as a senior lecturer within the School of Computing at the University of Leeds, where he continues his research on a part time basis. Raymond has written a number of research papers published in journals covering driver scheduling. Max Cawthra (33) Chief Financial Officer Max joined Tracsis in September 2010 as Financial Controller and was promoted to the Board in August 2011, as a replacement for Darren Bamforth who had acted as Finance Director on a part time basis. Max is a Chartered Accountant, having trained with Ernst & Young in Leeds. Prior to joining Tracsis, Max spent seven years at Persimmon plc in a variety of roles. Charles Winward (41) Non-Executive Director Charles is an Investment Manager at IP Group plc, a company which holds shares in Tracsis through IP Group’s subsidiary Techtran Group Limited. Charles joined IP Group in April 2007 to manage investments in Top Technology Ventures Limited, IP Group plc’s venture capital fund management subsidiary. Top Technology Ventures Limited manages the IP Venture Fund which has also invested in Tracsis. Previously Charles was Vice President of Technology Infrastructure at JP Morgan Chase & Co, where he worked in a variety of roles in London, New York and Brussels, and an investment manager at Axiomlab Group plc. Charles has an MBA from the University of California at Berkeley and a Bachelors Degree in mechanical engineering from the University of Bristol. TRACSIS PLC | 3 Chairman’s and Chief Executive Officer’s Report Introduction Financial summary For the fourth successive year since IPO, the Group is pleased to report on a period of further sustained growth which has seen significant expansion of the business. Tracsis has developed several new product lines (TRACS- RS, TRACS In-Cab and TRACS Studio), made several key hires into the team, and completed the successful acquisition of MPEC Technology Limited. We believe the resulting Group now contains a good balance of consultancy, software and hardware offerings which have led to a further year of record sales and profitability and a growing footprint and reputation within our respective market. Looking ahead, the directors believe Tracsis now has the strength and depth of services, products and people to continue its growth in the face of the continuing recession and on-going economic pressures felt within the UK and abroad. The directors also believe the business is well positioned within the passenger transport markets given its strong balance sheet; good cash flow from blue chip clients; and that it remains debt free. The board remain excited about Tracsis’s prospects as a growing public company and has confidence the Group will continue to grow in line with expectations and report further successes in the coming year. Business overview for companies Tracsis is a provider, developer and aggregator of resource optimisation software, consultancy services and transport in hardware industries. Its primary market is within the UK rail and bus market although the past 12 months have seen increasing demand and enquiries from overseas operators based in Northern Europe, Australia and New Zealand which we believe will be key markets in years to come. the passenger Tracsis’ market offering can be broadly categorised into four revenue streams; 1. Resource optimisation software of people and rostering and performance (scheduling, vehicles management); 2. Operational and performance planning consultancy and modelling/simulation; 3. Passenger demand analysis and surveying; and 4. Condition monitoring and data logging hardware for critical transport infrastructure. that provide These products and services have a common theme in assisting transport operators run a more efficient and productive service. This is achieved by the optimisation of resource allocation (people and vehicles) coupled with tools to strategic decision making when planning future transport services. Given the increasing importance of passenger transport markets within the UK and abroad, the directors believe that this will remain a key growth area for its products and services. for a significant enhancement The Group achieved revenue of £4.08m for the year, up 54.3% on our 2010 revenue of £2.65m and delivered an adjusted EBITDA* of £1.24m which was some 77% higher than the previous year (2010: £701,000). We believe this is a tremendous result given the backdrop of continuing market uncertainty and recessionary pressures. costs excluding intangible Administrative asset amortisation and exceptional items increased from £1.97m to £2.41m, due to continued investment in the Group’s overhead base and in anticipation of future growth and demand for the Company market offering. After taking into account intangible asset amortisation and exceptional acquisition costs, total administrative costs amounted to £2.51m (2010: £2.07m). * Earnings before finance exceptional items and share-based payment charges income, tax, depreciation, amortisation, As of 31 July 2011, the Group had cash balances of £4.69m (2010: £2.55m) and remains debt free. The key changes in cash the Group’s cash position against 2010 were generally three fold – the purchase of new office premises in Derby, the acquisition of MPEC Technology Limited, and the successful share placing in June 2011. Throughout the past year the Group’s operating cash generation has remained good with a very tight control of both costs and debtors. Trading Progress and Prospects the Group’s core software offerings Trading within remained buoyant throughout the past year and the Group maintained all on-going software licences whilst successfully winning new long term business both in the UK and abroad. Overall, the demand for software products remained higher than expected (as it did in 2010) and the Group continues to see significant pressure on transport operators to take action on improving efficiency to whilst maintaining or customers. We believe these factors have combined in the Group’s favour and look set to continue for at least the short to mid-term. improving service delivery The Group’s consultancy services traded slightly ahead of expectation although the passenger transport markets continue to feel the pinch of the recession at large. Although the Group witnessed some projects stalling or being deferred, we believe there is evidence the rail industry is gearing up for a high level of re-franchising activity as announced by the Transport Minister, Phillip Hammond in August 2011. We expect this activity to take place from December 2011 and it could continue for several years to come with some 6 rail franchises due for re-tendering in the coming 3 years. This activity should bolster all aspects of the Tracsis offering and we anticipate further growth within the consultancy and service offerings in the coming year as a consequence, although there is no guarantee at this stage. 4 | Annual Report and Accounts 2011 Chairman’s and Chief Executive Officer’s Report continued Re-location to Derby In May 2011 the Group purchased new offices in the centre of Derby and moved the entire Loughborough operation to this location. We believe this was a strategically important step in the evolution of the group as the directors believe Derby is regarded as a ‘Rail Capital’, given the high concentration of rail related businesses located there. We also believe this move has assisted with the recruitment and retention of key personnel and has raised the profile of Tracsis with its target customers and potential acquisition targets. Share placing Earlier in the year the Company completed a successful fundraise of £1.95m as part of a share placing of 4,333,333 shares at a price of 45p per share. The Company raised these funds to strengthen our balance sheet in light of the pending acquisition of MPEC Technology Limited and also to replenish cash reserves to enable Tracsis to react to new opportunities as these arise in the future. The share placing also allowed for Tracsis to broaden the institutional shareholder base which was a key strategic goal of the Board as we continue to grow. The successful share placing is an endorsement of Tracsis within investor circles and the board is pleased to welcome several new institutions as shareholders. Acquisition of MPEC Technology Limited financial year the end of our Towards the Group announced the acquisition of MPEC Technology Limited (“MPEC”). MPEC are a specialist provider of intelligent data logging equipment that is used to monitor the condition of infrastructure assets on the railway such as level crossings, railway points and point heaters. The technology allows for these assets to be monitored in real- time so that maintenance regimes can be more predictive and preventative rather than the historic ‘fail and replace’ regimes. MPEC aims to improve efficiency through better planned maintenance programmes and improve on the overall performance of the rail network endeavouring to reduce the number of services being unnecessarily delayed due to broken or faulty equipment. The directors believe that there are good synergies with the hardware MPEC provide and the software currently being developed and marketed by Tracsis. One instance of this is through combining the data gathered by MPEC’s in-field monitors with Tracsis’s performance reporting systems to enhance these products and improve the decision making capabilities for clients. Along with these functional benefits, the directors are confident that cross selling opportunities could be created with UK Train Operating Companies who have expressed an interest in monitoring various aspects of rolling stock vehicles in real- time. At present MPEC work exclusively within the UK rail sector where there is a defined and growing market for the technology but the directors believe there may be large untapped opportunities overseas. As can be seen in the traded extremely well since accounts, MPEC have acquisition and we expect this trend to continue. Outlook Tracsis has performed very well in the past year and achieved record sales during a period of continued economic uncertainty. The Group has grown its core team, made several new client wins, moved offices and completed its fourth acquisition whilst at the same time managing to deliver results ahead of expectations. Looking ahead, we believe the Group remains well placed to continue its goal of becoming a leading provider of operational planning software, hardware and consultancy services to the transport markets. As always, our thanks go out to customers, shareholders and staff who continue to support us. Rod Jones, Chairman John McArthur, Chief Executive Officer 7 November 2011 TRACSIS PLC | 5 Chief Financial Officer’s Report Results for the year The Group has had a successful year with revenues increasing to £4,083,000 from £2,647,000. This was achieved due to a combination of organic growth, with the Group’s existing business increasing revenues by 14% to in excess of £3,000,000 for the first time, and also the impact of acquisitions, with MPEC Technology Limited (MPEC) contributing revenues of £1,068,000. Adjusted EBITDA (earnings before finance income, tax, depreciation, amortisation, exceptional items and share-based payment charges) was £1,242,000 (2010: £701,000). The statutory operating profit was £1,098,000 (2010: £573,000). This increased levels of profitability represents both organic growth and the contribution of MPEC. Acquisitions On 1 June 2011, the Group acquired MPEC. This resulted in a cash outflow of £1,936,000, but the group acquired cash of £1,014,000, to give a net cash outflow of £922,000 in respect of this acquisition. There is deferred contingent consideration of up to £1,000,000 payable depending on the financial performance of MPEC over the next two years. The Group issued 200,000 shares with a market value of £100,000 in conjunction with this acquisition. The Group has capitalised £1,279,000 of intangible customer related assets, representing the value of customer relationships acquired as part of this acquisition, £684,000 relating to intangible technology assets acquired and £271,000 of goodwill. The group settled contingent consideration in respect of previous acquisitions during the year, with £117,000 paid in respect of Peeping Limited and £5,000 paid in respect of Safety Information Systems Limited. The surplus on the latter of £45,000 was credited back to the Income Statement in accordance with IFRS 3. Cash flow The Group raised £1,950,000 as part of a Share Placing, being 4,333,333 shares at a price of 45p per share. Costs of £10,000 were incurred in conjunction with this placing. This partly enabled the Group to finish the year with cash resources of £4,690,000 (2010: £2,546,000), but the Group generated strong cash flows without this, generating £1,701,000 of cash from operations (2010: £214,000). The Group purchased a new office property in Derby, and total capital expenditure amounted to £453,000. After taking into account the settlement of deferred consideration, and also the MPEC acquisition, the Group still generated cash before taking into account the Placing. Treasury management The Group continues to manage its cash resources to maximise interest income whilst at the same time minimising any risk to these funds. Due to the low interest rate environment, the Group has struggled to achieve a good return on its cash deposits, but has sought to take advantage of the best deals on the market where possible, with the funds raised as part of the placing being invested in short term deposits at attractive rates. Earnings per share Basic earnings per share was 4.49p (2010: 2.50p). Diluted earnings per share (which takes into account the dilutive effect of share options not yet exercised was 4.48p (2010: 2.29p). Dividends The payment of dividends will be subject to availability of distributable reserves whilst maintaining an appropriate level of dividend cover and having regard to the need to retain sufficient funds to finance the development of the Group’s activities. In the short term it is the Directors’ intention to re-invest funds into the Group rather than fund the payment of dividends. Accordingly, the Directors do not recommend the payment of a dividend. 6 | Annual Report and Accounts 2011 Chief Financial Officer’s Report continued Key risks The board carefully considers the risks facing the Group and endeavour to minimise the impact of those risks. The key risks are as follows: • History of intellectual property and associated risk factors: The Group’s software is based on software which was developed at the University of Leeds along with other research projects. Whilst the University has assigned all its rights in respect of the Group’s software to Tracsis, there could be claims over certain copyright aspects of the software or other disputes with third parties regarding the intellectual property inherent within the Group’s software. In common with other software products, the Group’s software could be superseded by software developed by third parties and the possibility of disputes over intellectual property with third parties cannot be discounted. A significant part of the Group’s future also depends upon its intellectual property. inadequately protected or challenged, the Group’s future success could be adversely affected. intellectual property is If • Pilot deployment: Whilst the Directors anticipate that pilot programmes will be converted into full licences upon completion of the programme there can be no guarantee that all or any of these pilot programmes will successfully convert. • Competition: Although the Directors believe there to be very little direct competition within the market, there may be products and competitors that they are currently unaware of which could have a detrimental effect on the Group’s trading performance. • is currently separated Industry ownership: The industry in which the Group operates into private and national ownership. The private elements of this industry could be renationalised which may have an adverse effect on the Group. • Loss of key customers: One of the Group’s subsidiaries has a significant contract with a major customer. Loss of in significant amounts of lost revenue. this contract would result • Attraction and retention of key employees: The Group depends on the Directors and other key employees, and whilst it has entered into contractual arrangements with these individuals with the aim of securing the services of each of them, retention of these service cannot be guaranteed. Equally, the ability to attract new employees and in particular senior executives for the business with the appropriate expertise and skills cannot be guaranteed • Market acceptances and customer contracts: The Group currently has contracts in place with a number of Train Operating Companies and it cannot be guaranteed these contracts will continue or that new contracts will be won by the Group. As with many large corporations, they are unlikely to vary their standard terms and conditions. The Group, may, in such circumstances, enter into contracts on less favourable terms than it would normally be able to negotiate. Key performance indicators (KPIs) The Group’s main KPIs are: • Monthly review of sales revenue pipeline, contracts under negotiation and renewals of existing contracts and licences; • Monthly review of actual results against budget and the prior year; • Monitoring of cash balances and working capital requirements. Max Cawthra Chief Financial Officer 7 November 2011 Directors’ Report The directors present their report and the audited financial statements for the year ended 31 July 2011. Principal activity The principal activity of the group is the development, supply and aggregation of resource optimisation, data capture and reporting technologies and consultancy to companies in the passenger transport industries. The Group has contracts in place with major operators within the rail and bus industries, and infrastructure providers. Business review and future developments A review of the Group’s operations and future developments is covered in the Chairman’s and Chief Executive Officer’s Report and the Chief Financial Officer’s Report. This includes a summary of the Group’s strategy and the markets in which it operates. The Chief Financial Officer’s Report considers the key risks facing the Group and the key performance indicators which are used to monitor the business. Financial results Details of the Company’s financial results are set out in the Consolidated Income Statement, other primary statements and in the Notes to the Consolidated Financial Statements on pages 16 to 42. Dividends The payment of dividends will be subject to availability of distributable reserves whilst maintaining an appropriate level of dividend cover and having regard to the need to retain sufficient funds to finance the development of the Group’s activities. In the short term it is the Directors’ intention to re- invest funds into the Group rather than fund the payment of dividends. Accordingly, the Directors do not recommend the payment of a dividend. Directors The directors who serve on the Board and on Board Committees during the year are set out on page 2. In addition, Darren Bamforth resigned as a Director on 31 July 2011 and Max Cawthra was appointed. Under the Articles of Association of the Company, one third of the directors are subject to retirement by rotation at the forthcoming Annual General Meeting, notice of which accompanies this Report and Accounts. Accordingly Dr R Kwan and Mr CS Winward retire by rotation and, being eligible, offer themselves for re-election. In relation to the re-elections of each of the directors, the Board is satisfied that each of these directors continues to be effective and to demonstrate commitment to the Company. Information in respect of directors’ remuneration is given in the Directors’ Remuneration Report on pages 9 to 11. TRACSIS PLC | 7 Directors’ shareholdings Directors’ beneficial interests in the shares of the Company, including family interests, at 31 July 2011 were as follows: Number % of issued of shares 23,000 953,697 2,875,850 - - share capital 0.1% 3.97% 11.96% - - 796,650 3.31% Rod Jones John McArthur Dr Raymond Kwan1 Max Cawthra John Nelson Charles Winward2 1 – This represents the aggregate of 2,649,850 ordinary shares registered in the name of Dr Raymond Kwan and 226,000 ordinary shares registered in the name of his wife Dr Ann Kwan. 2 – This represents ordinary shares registered in the name of IP2IPO Nominees Limited for which Charles Winward has a beneficial interest. Mr Winward is also a limited partner in IP Venture Fund. None of the Directors had any interests in the share capital of subsidiaries. Further details of share options held by the directors are set out in the Directors’ Remuneration Report. On 31 August 2011, Max Cawthra purchased 4,000 ordinary shares of the Company. On 5 September 2011, John Nelson purchased 15,503 ordinary shares of the Company. Substantial shareholdings At 4 November 2011, being the latest practicable date prior to the publication of this document, the Company has been advised of the following shareholdings of 3% or more in the issued share capital of Tracsis plc: Techtran Group Limited1 The University of Leeds Dr Raymond Kwan Bank of New York (Nominees) Limited Partnership Investment Equity Fund Limited IP Venture Fund1 Robert Watson Rathbone Nominees Limited (VCT) John McArthur Rathbone Nominees Limited IP2IPO Nominees Limited1 Share Nominees Limited Number of shares 3,785,500 3,090,000 2,875,850 2,174,232 1,875,000 1,645,500 1,355,142 1,001,700 953,697 882,657 796,650 778,018 % of issued shares 15.75% 12.86% 11.96% 9.05% 7.80% 6.85% 5.64% 4.17% 3.97% 3.67% 3.31% 3.24% 1 – Techtran Group Limited and IP2IPO Nominees Limited are wholly owned subsidiaries of IP Group plc. IP Group plc is a limited partner in IP Venture Fund, which is managed by an IP Group plc company. 8 | Annual Report and Accounts 2011 Directors’ Report continued Payment of suppliers Auditors KPMG Audit Plc will be proposed for re-appointment by the shareholders at the forthcoming Annual General Meeting. Provision of information to auditors All of the current Directors have taken all steps that they ought to have taken to make themselves aware of any information needed by the Company’s auditors for the purposes of their audit and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware. By order of the Board Max Cawthra Company Secretary 7 November 2011 It is the Group’s policy to pay suppliers in accordance with the terms and conditions agreed in advance, providing all trading terms and conditions have been met. All payments are made in the ordinary course of business and the Group expects to pay all supplier debts as they become due. Trade payable days for the Group at 31 July 2011 were 20 days (2010: 24 days). Research and development During the year the Group incurred £191,000 (2010: £147,000) of expenditure on research activity, which has been charged to the Income Statement. Financial instruments Details of the Group’s exposure to financial risks are set out in Note 22 to the financial statements. Employment policy It is the policy of the Group to operate a fair employment policy. No employee or job applicant is less favourably treated than another on the grounds of their sex, sexual orientation, age, marital status, religion, race, nationality, ethnic or national origin, colour or disability and all appointments and promotions are determined solely on merit. The Directors encourage employees to be aware of all issues affecting the Group and place considerable emphasis on employees sharing in its success through its employee share option scheme. Environment The Group adheres to all environmental regulations and has, where possible, utilised environmental-sustaining policies such as recycling and waste reduction. Significant Contracts One of the Group’s subsidiaries, MPEC Technology Limited, has a significant Framework Agreement with a major railway infrastructure provider, from which it derives a significant amount of business. Charitable donations The Group made charitable donations to various charities amounting to £7,160 during the year. No political donations were made. TRACSIS PLC | 9 Directors’ Remuneration Report Unaudited information: Tracsis plc, as an AIM company, is not required to present a Directors Remuneration Report in accordance with the Combined Code. As part of the Company’s commitment to Corporate Governance, we present a voluntary report below. Remuneration committee The Remuneration Committee is described in the Report on Corporate Governance. The remuneration for each Executive Director is determined by the Remuneration Committee, which comprises Rodney Jones and the Non-Executive Directors. None of the committee members has any personal financial interest, other than as shareholders, in the matters to be decided. Service contracts It is the Group’s policy to enter into service contracts or letters of appointment with all Directors. Specific terms are: Executive Directors John McArthur Dr Raymond Kwan Max Cawthra (appointed 1 August 2011) Non-Executive Directors Rodney Jones John Nelson Charles Winward Date Commencement Unexpired of contract date term Notice period 21.11.07 21.11.07 20.09.10 21.11.07 21.11.07 21.11.07 01.01.04 Indefinite 6 months 01.01.04 Indefinite 3 months 20.09.10 Indefinite 3 months 21.11.07 Indefinite 3 months 21.11.07 Indefinite 3 months 21.11.07 Indefinite 3 months None of the service contracts or letters of appointment provide for any termination payments. Remuneration policy The remuneration packages for Directors and senior management have been structured so as to fairly compensate them for their contribution to the Group and to encourage them to remain within the Group. The basic components of these packages include: Basic salary and bonus arrangements Each Director receives an annual salary or Directors’ fee for his/her services. These salaries are reviewed annually by the Remuneration Committee and take into account the financial performance of the Group and market conditions. The Group operates a discretionary bonus scheme. The Remuneration Committee is entitled to decide whether any bonuses are payable, and if so, what amounts should be granted to Executive Directors. External appointments The committee recognises that its directors may be invited to become executive or non-executive directors of other companies or to become involved in charitable or public service organisations. As the Committee believes that this can broaden the knowledge and experience of the directors to the benefit of the Group, it is the Group’s policy to approve such appointments provided that there is no conflict of interest and the commitment is not excessive. The director concerned can retain the fees relating to any such appointment. Pensions and benefits in kind All staff, Executive Directors and senior management are entitled to participate in the stakeholder pension plan established by the Group. Benefits are provided to certain Executive Directors, including private health cover. The Group does not provide any company cars to any of its Directors or employees. The Group makes employer pension contributions to the pension schemes of J McArthur and R Kwan at a rate of 5% of basic salary, in line with the level of contributions for other members of staff. 10 | Annual Report and Accounts 2011 Directors’ Remuneration Report continued Audited information: Directors’ remuneration Directors’ remuneration for the year ended 31 July 2011 is set out below Executive Directors John McArthur Robert Watson 1 Dr Raymond Kwan Darren Bamforth 2 Non-Executive Directors Rodney Jones John Nelson Charles Winward Basic salary £000 Bonus £000 Benefits in kind £000 Total 2011 £000 110 43 37 12 202 16 12 12 40 50 - 7 - 57 - - - - 1 1 1 - 3 - - - - 161 44 45 12 262 16 12 12 40 Total 2010 £000 138 103 43 12 296 15 12 12 39 1 - Robert Watson resigned as a Director on 24 December 2010, but remains an employee. The above information represents amounts paid to him until the date of resignation of his directorships. 2 - Darren Bamforth resigned as a Director on 31 July 2011. Max Cawthra was appointed on 1 August 2011. Directors’ interests in shares options in the Executive Share Option Schemes At 1 August At Exercise Date from 2010 Granted 2011 31 July price pence which exercisable Expiry date Executive Directors John McArthur Dr Raymond Kwan1 Robert Watson 3 Darren Bamforth 4 Non-Executive Directors Rodney Jones John Nelson Charles Winward 140,000 75,000 130,000 - 262,551 175,034 87,517 - - - - - - - 140,000 75,000 130,000 - 262,551 175,034 87,517 52p 52p 52p - 40p 40p 40p See note 2 below See note 2 below See note 2 below - 28 Jan 2019 28 Jan 2019 28 Jan 2019 - 21 Nov 2008 21 Nov 2008 21 Nov 2008 21 Nov 2017 21 Nov 2017 21 Nov 2017 1 – Dr Raymond Kwan’s share options are registered in the name of his wife, Dr Ann Kwan. 2 – Exercisable in batches in 6 monthly intervals commencing 6 months from the date of grant (28 January 2009). All options will be fully exercisable 36 months after the date of grant. 3 – Robert Watson resigned as a Director on 24 December 2010, but remains as an employee. His share options remain exercisable. 4 – Darren Bamforth resigned as a Director on 31 July 2011. The aggregate amount of gains made by directors on the exercise of share options was £nil (2010: £nil). No directors exercised options during either the current or previous period. No directors received or were due to receive any shares under long term incentive schemes other than under the share options schemes set out above. TRACSIS PLC | 11 Directors’ Remuneration Report continued Performance graph The following graph shows the Company’s share price (rebased) compared with the performance of the FTSE AIM all-share index (rebased) for the period from admission to AIM to 31 July 2011. 160 140 120 100 80 60 40 20 0 7 0 - v o N 7 0 - c e D 8 0 - n a J 8 0 - b e F 8 0 - r a M 8 0 - r p A 8 0 - y a M 8 0 - n u J 8 0 - l u J 8 0 - g u A 8 0 - p e S 8 0 - t c O 8 0 - v o N 8 0 - c e D 9 0 - n a J 9 0 - b e F 9 0 - r a M 9 0 - r p A 9 0 - y a M 9 0 - n u J 9 0 - l u J 9 0 - g u A 9 0 - p e S 9 0 - t c O 9 0 - v o N 9 0 - c e D 0 1 - n a J 0 1 - b e F 0 1 - r a M 0 1 - r p A 0 1 - y a M 0 1 - n u J 0 1 - l u J 0 1 - g u A 0 1 - p e S 0 1 - t c O 0 1 - v o N 0 1 - c e D 1 1 - n a J 1 1 - b e F 1 1 - r a M 1 1 - r p A 1 1 - y a M 1 1 - n u J 1 1 - l u J Tracsis - rebased AIM All Share - rebased The committee has selected the above indices because they are most relevant for a company of Tracsis’s size and sector. On behalf of the Board Rod Jones Chair of the Remuneration Committee 7 November 2011 12 | Annual Report and Accounts 2011 Corporate Governance Tracsis plc was listed on AIM on 27 November 2007. The Group recognises the importance of, and is committed to, high standards of corporate governance. Tracsis plc, as an AIM Company, is not required to comply with the June 2010 UK Corporate Governance Code, although it has adopted the principles as set out below. The Board There are currently six Board members, comprising three Executive Directors and three Non-Executive Directors. The role of the Non-Executive Directors is to bring independent judgement to Board deliberations and decisions. The Chairman of the Board is Rodney Jones who oversees Board meetings and fields all concerns regarding the executive management of the Group and the performance of the Executive Directors. Mr Jones is responsible for the Group’s corporate governance. A biography of each Director appears on page 2. The Directors each have diverse backgrounds and a wide range of experience is available to the Group. The Board meets on a monthly basis to review the Group’s performance and to review and determine strategies for future growth. The Board has delegated specific responsibilities to its committees as set out below. Each of the Directors is subject to either an executive services agreement or a letter of appointment as set out on page 9. Tracsis plc’s Articles of Association require directors to retire from office and submit themselves for re-election on a one third rotation at each Annual General Meeting. Dr R Kwan and Mr CS Winward will be retiring at the Annual General Meeting and submitting themselves for re-election. Board meetings and attendance Board meetings were held on 12 occasions during the year. The table below shows attendance at the meetings whether in person or by telephone. The Company Secretary records attendance at all board meetings including where attendance is by telephone conference. Board Meetings (total 12) 10 12 - 12 11 10 11 Rodney Jones John McArthur Robert Watson Darren Bamforth Dr Raymond Kwan John Nelson Charles Winward Meeting attendance (continued) Nomination Remuneration Committee Committee Meetings Meetings (total 2) (total 1) Audit Committee Meetings (total 1) Rodney Jones John McArthur Robert Watson Darren Bamforth Dr Raymond Kwan John Nelson Charles Winward 1 - - - - 1 1 2 - - - - 2 2 1 - - - - 1 1 Board committees Nomination Committee and The Nomination Committee comprises Rodney Jones as Chairman Directors. the to make The committee’s primary recommendations to the Directors on all new appointments of Directors and senior management, interviewing nominees, to take up references and to consider related matters. Non-Executive responsibilities are Remuneration Committee the Non-Executive Directors. The Remuneration Committee comprises Rodney Jones as The Chairman and committee’s primary responsibilities are to review the performance of the Executive Directors and to determine the terms and conditions of service of senior management and any Executive Director appointed to the Board (including the remuneration of and grant of options to any such person under any share scheme adopted by the Group). Audit Committee The Audit Committee similarly comprises Rodney Jones as Chairman and the Non-Executive Directors. The audit committee’s primary responsibilities are to monitor the financial affairs of the Group, to ensure that the financial performance of the Group is properly measured and reported on, and to review reports from the Group’s auditors relating to the accounting and internal controls. Non audit services In accordance with its policy on non audit services provided by the Group’s auditors, the Audit Committee reviews and approves The Audit Committee refers to the Board for approval of any work comprising non audit services where the fees for such work represent more than 25% of the annual audit fee. the award of any such work. Corporate Governance continued Auditor independence and conflicts of interest continues to evaluate The Audit Committee the independence and objectivity of the external auditors and takes into consideration all United Kingdom professional and regulatory requirements. Consideration is given to all relationships between firm (including in respect of the provision of non audit services). The Audit Committee considers whether, taken as a whole, and having regard to the views, as appropriate, of the external auditors and management, those relationships appear to impair the auditors’ judgement or independence. The Audit Committee feels they do not. the Group and the audit Internal audit The Audit Committee agrees that there should be no internal audit function of the Group at this time considering the size of the Group and the close involvement of senior management over the Group’s accounting systems. However, the Committee will keep this matter under review in the event that circumstances warrant an internal function for the Group in the future. Control procedures The Board approves the annual budget each year. This process allows the Board to identify key performance targets and risks expected during the upcoming year. The Board also considers the agreed budget when reviewing trading updates and considering expenditures throughout the year. Progress against budget is monitored via monthly reporting of actual financial performance against budget and prior year actual results. The Group has clear authority limits deriving from the list of matters reserved for decision by the Board including capital expenditure approval procedures. TRACSIS PLC | 13 Relations with shareholders the Group’s performance and The Board recognises and understands that it has a fiduciary responsibility to the shareholders. The Chairman’s Statement and Chief Executive’s Statement include detailed analysis of future expectations. The Group’s website (www.tracsis.com) allows shareholders access to information, including contact details and the current share price. The Chief Executive is responsible for on-going dialogue and relationships with shareholders. The Annual General Meeting will be a platform for the Board to communicate with shareholders and the Board welcomes the attendance and participation of all shareholders. Going concern The Directors have a reasonable expectation that the Group has adequate resources to continue for the foreseeable future in operational existence and have therefore adopted the going concern basis in preparing the accounts. Independence of Non-Executive Directors The Directors consider all Non-Executive Directors to be independent. Mr CS Winward is an Investment Manager for IP Group plc, one of the Group’s major shareholders. Mr Winward declares any potential conflicts of interest, if any, at each Board Meeting, and ensures that he is removed from the decision making process if relevant. The Board benefits from Mr Winward’s vast experience and wise counsel, and as such, considers him to be a suitable non- executive Director. The Board considers Mr RD Jones and Mr JG Nelson to be independent. Board review process The Board does not formally appraise its performance each year, but considers the performance of Board members on an informal basis, to ensure that each director has the skills and experience required to perform their duties. The Board is satisfied that all Directors have the appropriate level of skills and experience. 14 | Annual Report and Accounts 2011 Statement of Directors’ Responsibilities in respect of the Annual Report and the Financial Statements The directors are responsible for preparing the Annual Report and the group and parent company financial statements law and in accordance with applicable regulations. Company law requires the directors to prepare group and parent company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable (UK Generally Accepted Accounting Practice). law Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. • • for the parent company financial statements, state whether applicable UK Accounting Standards 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 group and the parent company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. In preparing each of the Group and Parent Company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. • make judgements and estimates that are reasonable and prudent; • for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; TRACSIS PLC | 15 Independent Auditor’s Report to the Members of Tracsis plc We have audited the financial statements of Tracsis plc for the year ended 31 July 2011 set out on pages 16 to 47. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). 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 that they give a As explained more fully in the Directors' Responsibilities Statement set out on page 14, the directors are responsible for the preparation of the financial statements and for being satisfied 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. true and • • the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice in financial statements have been prepared the accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the 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 the explanations we require for our audit. received all information and Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB's website at: www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: • • the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 July 2011 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 EU; DJ Hutchinson (Senior Statutory Auditor) for and on behalf of KPMG Audit PLC, Statutory Auditor Chartered Accountants 1 The Embankment Neville Street Leeds LS1 4DW 7 November 2011 16 | Annual Report and Accounts 2011 Consolidated Income Statement for the year ended 31 July 2011 Revenue - continuing - acquisitions Total revenue Cost of sales Gross profit Notes 6 2011 £000 3,015 1,068 4,083 (472) 3,611 2010 £000 2,647 - 2,647 - - Administrative costs (2,513) (2,074) Adjusted EBITDA* Amortisation of intangible assets Depreciation Exceptional item: Contingent consideration surplus Exceptional item: Acquisition costs Share-based payment charges Operating profit - continuing - acquisitions Total operating profit Finance income Profit before tax Taxation Profit for the year 1,242 (115) (20) 45 (37) (17) 741 357 1,098 17 1,115 (208) 907 8 9 10 11 Earnings per ordinary share Basic Diluted * Earnings before finance income, tax, depreciation, amortisation, exceptional items and share-based payment charges. 4.49p 4.48p 12 12 Consolidated Statement of Comprehensive Income for the year ended 31 July 2011 Profit for the year Total comprehensive income attributable to equity holders of the parent 2011 £000 907 907 701 (78) (6) - (24) (20) 573 - 573 11 584 (98) 486 2.50p 2.29p 2010 £000 486 486 Consolidated Balance Sheet as at 31 July 2011 Company number: 05019106 Non-current assets Property, plant and equipment Intangible assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Non-current liabilities Deferred tax liabilities Current liabilities Trade and other payables Current tax liabilities Total liabilities Net assets Equity attributable to equity holders of the company Called up share capital Share premium reserve Merger reserve Share based payments reserve Retained earnings Total equity TRACSIS PLC | 17 Note 13 14 15 16 18 17 19 20 20 20 20 2011 £000 474 4,470 4,944 134 1,982 4,690 6,806 2010 £000 11 2,351 2,362 - 1,054 2,546 3,600 11,750 5,962 817 817 2,737 540 3,277 362 362 707 201 908 4,094 1,270 7,656 4,692 96 3,762 935 139 2,724 7,656 78 1,839 836 122 1,817 4,692 The financial statements on pages 16 to 42 were approved and authorised for issue by the Board of Directors on 7 November 2011 and were signed on its behalf by: John McArthur – Chief Executive Officer Max Cawthra – Chief Financial Officer 18 | Annual Report and Accounts 2011 Consolidated Statement of Changes in Equity Share Share Premium Share- based Merger Payments Retained Capital Reserve Reserve Reserve Earnings At 1 August 2009 Profit for the year Total comprehensive income Transactions with owners: Share based payment charges Shares issued as consideration for business combinations Expenses of share issue At 31 July 2010 At 1 August 2010 Profit for the year Total comprehensive income Transactions with owners: Share based payment charges Shares issued as consideration for business combinations Share Placing Expenses of share issues At 31 July 2011 £000 77 £000 1,839 £000 646 - - - 1 - 78 - - - - - 1,839 - - - 194 (4) 836 £000 £000 Total £000 102 1,331 3,995 - - 20 - - 486 486 - - - 486 486 20 195 (4) 122 1,817 4,692 78 1,839 836 122 1,817 4,692 - - - 1 17 - 96 - - - - 1,933 (10) 3,762 - - - 99 - - 935 - - 17 - - - 907 907 - - - - 907 907 17 100 1,950 (10) 139 2,724 7,656 Details of the nature of each component of equity are set out in Notes 19 and 20. TRACSIS PLC | 19 Consolidated Cash Flow Statement for the year ended 31 July 2011 Operating activities Profit for the year Finance income Depreciation Amortisation of intangible assets Contingent consideration surplus Income tax charge Share based payment charges Operating cash inflow before changes in working capital Movement in inventories Movement in trade and other receivables Movement in trade and other payables Cash generated from operations Finance income Income tax paid Net cash flow from operating activities Investing activities Purchase of plant and equipment Payment of deferred consideration Acquisition of subsidiaries Net cash flow used in investing activities Financing activities Expenses of share issues Proceeds from the Placing Net cash flow from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Notes 5 2011 £000 907 (17) 20 115 (45) 208 17 1,205 (15) (222) 894 1,862 17 (178) 1,701 (453) (122) (922) (1,497) (10) 1,950 1,940 2,144 2,546 4,690 2010 £000 486 (11) 6 78 - 98 20 677 - (155) (15) 507 11 (304) 214 (9) (152) (489) (650) (4) - (4) (440) 2,986 2,546 20 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements 1 Reporting entity Tracsis plc (the ‘Company’) is a company incorporated in the United Kingdom. The consolidated financial statements of the Company for the year ended 31 July 2011 comprise the Company and its subsidiaries (together referred to as the ‘Group’). 2 Basis of preparation (a) (b) (c) (d) Statement of compliance The Group consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the EU and applicable law. The Company has elected to prepare its parent company financial statements in accordance with UK accounting standards and applicable law (‘UK GAAP’). These parent company statements appear after the notes to the consolidated financial statements. Basis of measurement The Accounts have been prepared under the historical cost convention except for derivative financial instruments that are stated at their fair value. Functional and presentation currency These consolidated financial statements are presented in sterling, which is the Company’s functional currency. All financial information presented in sterling has been rounded to the nearest thousand. Use of estimates and judgements The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. 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 only affects that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Judgements made by management in the application of IFRSs that have a significant effect on the Group financial statements and estimates with a significant risk of material adjustment in future years are disclosed in Note 4. (e) Changes in accounting policies IFRS and IFRIC are issued by the International Accounting Standards Board (the IASB) and must be adopted into European Union law, referred to as endorsement, before they become mandatory under the IAS Regulation. The following IFRSs, IFRIC interpretations and amendments have been adopted in the financial statements for the first time in this financial period: (i) IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments This interpretation is effective for annual periods beginning on or after 1 July 2010. This has not had a material impact on the Group as it has not had any ‘debt for equity swaps’. (ii) IFRS 2 ‘Share-based Payment’ This was amended in June 2009 and is effective for annual periods beginning on or after 1 January 2010. The Group has adopted the amendments, which impact on the subsidiary companies but not the Group and has no impact on consolidation. (iii) IAS 32 ‘Financial Instruments: Presentation’ This was amended in 2009 relating to classification of rights issues. The changes were effective for annual periods beginning on or after 1 February 2010. This did not have an impact on the Group as it has not carried out a rights issue. TRACSIS PLC | 21 Notes to the Consolidated Financial Statements continued (iv) Amendments resulting from May 2010 Annual Improvements to IFRSs – the following amendments are effective from 1 July 2010, but had no significant impact on the Group: a. IFRS 3 ‘Business Combinations’ b. IAS 27 ‘Consolidated and Separate Financial Statements’ (v) Amendments resulting from April 2009 Annual Improvements to IFRSs – the following amendments are effective from 1 January 2010 but had no significant impact on the Group: a. IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ b. IFRS 8 ‘Operating Segments’ c. IAS 1 ‘Presentation of Financial Statements’ d. IAS 7 ‘Statement of Cash Flows’ e. IAS 17 ‘Leases’ f. IAS 36 ‘Impairment of Assets’ g. IAS 38 ‘Intangible Assets’ h. IAS 39 ‘Financial Instruments: recognition and Measurement’ At the date of approval of these financial statements, the following Standards and Interpretations were in issue and endorsed by the EU but not yet effective. None are expected to have a significant impact on the Group: (i) (ii) (iii) IAS 24 ‘Related Party Disclosures’ (revised 2011) – effective 1 January 2011 IAS 27 ‘Consolidated and Separate Financial Statements’ (revised 2011) ‘Separate Financial Statements’ – effective 1 January 2013 Amendments resulting from May 2010 Annual Improvements to IFRSs – the following amendments are not effective until annual periods on or after 1 January 2011 a. IFRS 7 ‘Financial Instruments: Disclosures’ b. IAS 1 ‘Presentation of financial Statements’ c. IAS 34 ‘Interim Financial Reporting’ d. IFRIC 13 (amendment) ‘Customer Loyalty Programmes’ e. IFRIC 14 (amendment) ‘The Limit on a Defined Benefit Asset’ (f) Going concern The Group is debt free and has substantial cash resources. The Board has prepared cash flow forecasts for the forthcoming year based upon assumptions for trading and the requirements for cash resources. Based upon this analysis, the Board has concluded that the Group has adequate working capital resources and that it is appropriate to use the going concern basis for the preparation of the consolidated financial statements. 22 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by Group entities, except as stated in note 2(e), which addresses changes in accounting policies. (a) Basis of consolidation The Group’s accounting policy with respect to business combinations is set out above. Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. The accounting policies of subsidiary companies have been changed where necessary to align them with the policies adopted by the Group. The Group entities included in these consolidated financial statements are those listed in note 25. All intra-group balance and transactions, including unrealised profits arising from intra-group transactions, are eliminated fully on consolidation. (b) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable (excluding value added tax and discounts given) derived from the provision of goods and services to customers during the period. The Group derives revenue from software licences, post contract customer support, sale of hardware and consultancy services. The Group recognises the revenue from the sale of software licences and specified upgrades upon shipment of the software product or upgrade, when there are no significant vendor obligations remaining, when the fee is fixed and determinable and when collectability is considered probable. Where appropriate the Group provides a reserve for estimated returns under the standard acceptance terms at the time the revenue is recognised. Payment terms are agreed separately with each customer. Revenue from post contract customer support and consultancy services is recognised on a straight-line basis over the term of the contract. Revenue received and not recognised in the income statement under this policy is classified as deferred income in the balance sheet. Revenue from hardware sales is recognised as the products are shipped to customers or services provided. Provision is made for any returns to customers, or credit notes to be issued. (c) Property, plant and equipment Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs. The corresponding liability is recognised within provisions. Items of property, plant and equipment are carried at depreciated cost. Depreciation is provided on all items of property, plant and equipment so as to write off the carrying value of items over their expected useful economic lives. It is applied at the following rates: Freehold buildings (excluding land) Computer equipment Office fixtures and fittings – – – 4% on cost 33 1/3% on cost 10% - 20% on cost (d) Intangible assets Goodwill Goodwill arising on acquisitions comprises the excess of the fair value of the consideration for investments in subsidiary undertakings over the fair value of the net identifiable assets acquired at the date of acquisition. Adjustments are made to fair values to bring the accounting policies of the acquired businesses into alignment with those of the Company. The costs of integrating and reorganising acquired businesses are charged to the post acquisition income statement. Goodwill arising on acquisitions of subsidiaries is included in intangible assets. TRACSIS PLC | 23 Notes to the Consolidated Financial Statements continued 3 Significant accounting policies (continued) (d) Intangible assets (continued) Goodwill (continued) Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the lowest level within the group at which the associated level of goodwill is monitored for management purposes and are not larger than the operating segments determined in accordance with IFRS 8 “Operating Segments”. Business Combinations From 1 August 2009 the Group has applied IFRS 3 Business Combinations (2008) in accounting for business combinations. The change in accounting policy has been applied prospectively and has had no material impact on earnings per share. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. For acquisitions on or after 1 August 2009, the Group measures goodwill at the acquisition date as: • • • the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. For acquisitions prior to 1 August 2009, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the recognised amounts (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of acquisition. Other intangible assets An intangible asset, which is an identifiable non-monetary asset without physical substance, is recognised to the extent that it is probable that the expected future economic benefits attributable to the asset will flow to the group and that its cost can be measured reliably. The asset is deemed to be identifiable when it is separable or when it arises from contractual or other legal rights. Intangible assets, primarily customer relationships and technology related assets, acquired as part of a business combination are capitalised separately from goodwill and are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using a straight line method over the estimated useful life of the assets of 20 years for customer related assets and 10 years for technology related assets. 24 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued (e) Impairment of non-current assets Where an indication of impairment is identified, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). If the recoverable amount (higher of fair value less cost to sell and value in use of an asset) is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. (f) Research and Development Costs Expenditure on internally developed products is capitalised as intangible assets if it can be demonstrated that: • • • • • • it is technically feasible to develop the product for it to be sold; adequate resources are available to complete the development; there is an intention to complete and sell the product; the Group is able to sell the product; sale of the product will generate future economic benefits; and expenditure on the project can be measured reliably. Capitalised development costs would be amortised over the periods the Group expected to benefit from selling the products developed. At present, the Group has not considered that its development expenditure meets the criteria for capitalisation. Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the income statement as incurred. (g) Financial instruments The Group classifies its financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement. Financial instruments are recognised on the balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group’s ordinary shares are classified as equity instruments, net of issue costs. Cash and cash equivalents (i) Cash and cash equivalents in the balance sheet are included at cost and comprise cash at bank, cash in hand and short term deposits with an original maturity of three months or less. Trade receivables (ii) Trade receivables do not carry interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. (iii) Trade payables are not interest bearing and are stated at their nominal value. Trade payables (iv) Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Equity instruments TRACSIS PLC | 25 Notes to the Consolidated Financial Statements continued 3 Significant accounting policies (continued) (h) Taxation The tax on the profit or loss for the year represents current and deferred tax. (i) (j) (k) (l) The tax currently payable is based on taxable profit for the period. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted at the balance sheet date. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying value in the financial statements. The principal temporary differences arise from depreciation on plant and equipment and share options granted by the Group to employees and directors. Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders, or in the case of interim dividends, when paid. Leases Rentals applicable where substantially all of the benefits and risks of ownership remain with the lessor are classified as operating leases and payments are charged to the income statement on a straight line basis over the period of the lease. Employee benefits Wages, salaries, social security contributions, paid annual leave, bonuses and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Group. Where the Group provides long term employee benefits, the cost is accrued to match the rendering of the services by the employees concerned. Share based payments The Group issues equity-settled share based payments to certain employees (including directors). Equity-settled share based payments are measure at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share based payments is expensed on a straight line basis over the vesting period, together with a corresponding increase in equity, based upon the Group’s estimate of the shares that will eventually vest. Fair value is measured using the Black-Scholes option pricing model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Where the terms and conditions of options are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled transaction is cancelled, it is treated as if it had vested on the date of the cancellation, and any expense not yet recognised for the transaction is recognised immediately. However, if a new transaction is substituted for the cancelled transaction, and designated as a replacement transaction on the date that it was granted, the cancelled and new transactions are treated as if they were a modification of the original transaction as described in the previous paragraph. 26 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 3 Significant accounting policies (continued) (m) Retirement benefits (n) (o) (p) (q) Contributions to defined contribution pension schemes are charged to the income statement in the year to which they relate. Exceptional items Items which are significant by virtue of their size or nature and/or which are considered non-recurring are classified as exceptional operating items. Such items, which include for example costs relating to acquisitions, amortisation of intangible assets and share based payment charges, are included within the appropriate consolidated income statement category but are highlighted separately. Exceptional operating items are excluded from the profit measures used by the board to monitor underlying performance. Finance income Finance income comprises interest income on funds invested. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. The Company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. Operating segments The Group has determined that, based on its internal reporting framework and management structure, that it has only one reportable segment. Such determination is necessarily judgemental in its nature and has been determined by management in preparing the financial statements. The level of disclosure of segmental and other information is determined by such assessment. Further details of the considerations made and the resulting disclosures are provided in note 6 to the financial statements. (r) Inventories Inventories are measured at the lower of cost and net realisable value. Provision is made for slow moving and obsolete inventories on a line by line basis. TRACSIS PLC | 27 Notes to the Consolidated Financial Statements continued 4 Critical Accounting Estimates and Judgements The Group’s accounting policies are set out in Note 3. The Directors consider that the key judgements and estimates made in the preparation of the consolidated financial statements are: Intangible fixed assets On acquisition, the Company calculates the fair value of the net assets acquired. The assessment of intangible assets acquired has been performed using a discounted cash flow model. Significant judgement has been applied in assessing the future revenues to be achieved from that acquisition, the growth rate of that revenue and the discount factor to be applied. Actual results may vary significantly from expectations in future years. Reviews of the Group’s intangible fixed assets have been carried out, using commercial judgements and a number of assumptions and estimates have been used to support the carrying value of these assets. The amortisation period chosen for each asset requires the exercise of management judgement. Revenue recognition Certain of the Group’s contracts for software licences, maintenance services and other consultancy projects have a term of more than one year. The Directors assess the fair value of the entire contract attributable to each of the different services and the timing of when revenues should be recognised and this assessment can differ from the legally contracted values. A level of judgement and estimate is required in assessing the level of potential customer returns for certain hardware products. Share-based payments The Group has equity settled share-based remuneration schemes for employees. The fair value of share options is estimated by using the Black-Scholes valuation model, on the date of grant based on certain assumptions. These assumptions include, among others, expected volatility, expected life of the options and number of options expected to vest. 28 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 5 Acquisition of subsidiaries (a) Acquisition in the current year: MPEC Technology Limited On 1 June 2011, the Group acquired 100% of the issued share capital of MPEC Technology Limited, for a combination of cash and share based consideration. The Company is a niche developer and supplier of data logging and remote monitoring technology to the rail industry and the acquisition will lead to significant synergies given the respective offerings within the transport sector. In the two month period to 31 July 2011 the company contributed revenue of £1,068,000 and operating profit of £357,000 to the Group’s results. If the acquisition had occurred on 1 August 2010, management estimates that consolidated revenue would have been £2,905,000 and consolidated profit for the year would have been £841,000. In determining these amounts, management has assumed that the fair value adjustments, determined provisionally that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 August 2010. The acquisition had the following effect on the Group’s assets and liabilities on the acquisition date: Pre-acquisition Fair value value on carrying amount adjustments acquisition Recognised Intangible assets: Customer relationships Intangible assets: Technology assets Tangible fixed assets Inventories Trade and other receivables Trade and other payables Income tax payable Deferred tax liability Net identified assets and liabilities Goodwill on acquisition Consideration paid in cash Net cash acquired Net cash flow Consideration paid: fair value of shares issued Deferred contingent consideration: - cash Total consideration £000 - - 30 119 706 (303) (267) (7) 278 £000 1,279 684 - - - - - (490) 1,473 £000 1,279 684 30 119 706 (303) (267) (497) 1,751 271 2,022 1,936 (1,014) 922 100 1,000 2,022 Pre-acquisition carrying amounts were determined based on applicable IFRSs, immediately prior to the acquisition. The values of assets and liabilities recognised on acquisition are the estimated fair values. The fair value adjustments are provisional and arise in accordance with the requirements of IFRSs to recognise intangible assets acquired. In determining the fair values of intangible assets the Group has used discounted cash flow forecasts. The fair value of shares issued was based on market value at the date of issue. The deferred contingent consideration is based on the maximum amount which could be payable under an earn out arrangement contained within the acquisition agreement. This contingent consideration is dependent upon certain earnings targets being met and will be dependent upon the absolute level of earnings achieved in a designated period post acquisition. The amount payable could vary between a minimum of £nil and a maximum of £1,000,000. The Group incurred acquisition related costs of £37,000 which have been included within administrative expenses. TRACSIS PLC | 29 Notes to the Consolidated Financial Statements continued 5 Acquisition of subsidiaries (continued) (b) Acquisition in the previous year: Safety Information Systems Limited On 4 December 2009, the Group acquired 100% of the issued share capital of Safety Information Systems Limited, for a combination of cash and share based consideration. The company provides software products and services to companies principally in the transport industry which the Directors consider complements the existing services and would provide economies of scale. In the eight month period to 31 July 2010 the company contributed revenue of £252,000 and operating profit of £193,000 to the Group’s results. If the acquisition had occurred on 1 August 2009, management estimated that consolidated revenue would have been £320,000 and consolidated profit for the year would have been £175,000. In determining these amounts, management assumed that the fair value adjustments, determined provisionally that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 August 2009. The acquisition had the following effect on the Group’s assets and liabilities on the acquisition date: Pre-acquisition Fair value value on carrying amount adjustments acquisition Recognised Intangible assets: Customer relationships Intangible assets: Technology assets Trade and other receivables Trade and other payables Income tax payable Deferred tax liability Net identified assets and liabilities Goodwill on acquisition Consideration paid in cash Net cash acquired Net cash flow Consideration paid: fair value of shares issued Deferred contingent consideration: - cash - fair value of shares to be issued Total consideration £000 £000 - - 170 (25) (23) - 122 272 230 - (42) - (129) 331 £000 272 230 170 (67) (23) (129) 453 136 589 791 (302) 489 50 45 5 589 Pre-acquisition carrying amounts were determined based on applicable IFRSs, immediately prior to the acquisition. The values of assets and liabilities recognised on acquisition are the estimated fair values. The fair value adjustments were provisional and arise in accordance with the requirements of IFRSs to recognise intangible assets acquired. In determining the fair values of intangible assets the Group used discounted cash flow forecasts. The fair value of shares issued was based on market value at the date of issue. The deferred contingent consideration was based on the maximum amount which could be payable under an earn out arrangement contained within the acquisition agreement. This contingent consideration was dependent upon certain earnings targets being met and was dependent upon the absolute level of earnings achieved in a designated period post acquisition. During 2011, the Group settled the deferred consideration liability for £5,000, with an adjustment to the Income Statement of £45,000 being recognised. The Group incurred acquisition related costs of £24,000 which were included within administrative expenses in 2010. 30 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 6 Segmental analysis The Group’s revenue and profit was derived from its principal activity which is the development, supply and aggregation of resource optimisation, data capture and reporting technologies and consultancy to companies in the passenger transport industries. In accordance with IFRS 8 ‘Operating Segments’, the Group has made the following considerations to arrive at the disclosure made in these financial statements. IFRS 8 requires consideration of the Chief Operating Decision Maker (“CODM”) within the Group. In line with the Group’s internal reporting framework and management structure, the key strategic and operating decisions are made by the Board of Directors, who review internal monthly management reports, budgets and forecast information as part of this. Accordingly, the Board of Directors are deemed to be the CODM. Operating segments have then been identified based on the internal reporting information and management structures within the Group. From such information it has been noted that the CODM reviews the business as a single operating segment, receiving internal information on that basis. The management structure and allocation of key resources, such as operational and administrative resources, are arranged on a centralised basis. Due to the small size and low complexity of the business, profitability is not analysed in further detail beyond the operating segment level and is not divided by revenue stream. The CODM reviews a split of revenue streams on a monthly basis and, as such, this additional information has been provided below. Revenue Software licences Post contract customer support Consultancy services, training and other revenue Hardware Total revenue 2011 £000 1,138 304 1,573 1,068 4,083 2010 £000 876 197 1,574 - 2,647 The principal activity of the Group is based mainly in the United Kingdom hence no geographical analysis is presented. This position will be monitored as the Group develops. Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items Information regarding the results of the reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Board of Directors. Segment profit is used to measure performance. There are no material inter-segment transactions, however, when they do occur, pricing between segments is determined on an arm’s length basis. Revenues disclosed below materially represent revenues to external customers. Revenues Total revenue for reportable segments Consolidated revenue Profit or loss Total profit or loss for reportable segments Unallocated amounts: Share based payment charge Other exceptional items (net) Depreciation Amortisation of intangible assets Interest receivable Consolidated profit before tax 2011 £000 4,083 4,083 1,242 (17) 8 (20) (115) 17 1,115 2010 £000 2,647 2,647 701 (20) (24) (6) (78) 11 584 Notes to the Consolidated Financial Statements continued TRACSIS PLC | 31 6 Segmental analysis (continued) Assets Total assets for reportable segments Unallocated assets – intangible assets Consolidated total assets Liabilities Total liabilities for reportable segments Unallocated liabilities – deferred tax Consolidated total liabilities 2011 £000 7,280 4,470 11,750 3,277 817 4,094 Major customers Transactions with the Group’s largest customer represent 33% of the Group’s total revenues (2010: 12.5%). 7 Employees and personnel costs Staff costs: Wages and salaries Social security contributions Contributions to defined contribution plans Equity-settled share based payment transactions Average number of employees (including directors) in the year 2011 £000 1,465 146 44 17 1,672 44 2010 £000 3,611 2,351 5,962 908 362 1,270 2010 £000 1,206 118 37 20 1,381 36 The directors’ remuneration and share options are detailed within the Directors’ Remuneration Report on pages 9 to 11. 8 Share based payments The Group has a share option scheme for all employees (including directors). Options are exercisable at a price agreed at the date of grant. The vesting period is usually between one and five years. The exercise of options is dependent upon eligible employees meeting performance criteria. The options may not be exercised before the occurrence of a takeover, sale or admission. The options are settled in equity once exercised. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. 32 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 8 Share based payments (continued) Details of the schemes are given below: Grant date 26/11/2007 28/01/2009 20/05/2010 01/08/2010 12/01/2011 01/06/2011 Employees Number Performance Exercise entitled of options conditions price (p) 3 11 3 1 2 1 525,102 None 785,000 Time served 130,000 Time served 10,000 87,500 Time served Time served 100,000 Time served 40 52 51.5 50.5 49.5 50.0 Earliest exercise date 26/11/2008 28/07/2009* 20/01/2011* 01/04/2011 12/07/2011 01/12/2011 Expiry date 26/11/2017 28/01/2019 20/05/2020 01/08/2020 12/01/2021 01/06/2021 * Vesting dates for these options are: 10% vest six months after grant date, 15% vest 12 months after grant date, 15% vest 18 months after grant date, 15% vest 24 months after grant date, 20% vest 30 months after grant date, 25% vest 36 months after grant date. The number and weighted average exercise price of share options are as follows: Outstanding at 1 August Granted Forfeited Exercised Outstanding at 31 July Exercisable at 31 July 2011 Weighted Average 2011 Exercise Number 1,580,102 197,500 (140,000) - 1,637,602 1,157,602 Price 48.3p 49.8p 51.8p - 47.8p 46.5p 2010 Number 1,430,102 150,000 - - 1,580,102 887,102 2010 Weighted Average Exercise Price 48.0p 51.4p - - 48.3p 44.9p The share options outstanding at the end of the year have a weighted average remaining contractual life of 7 years (2010: 9 years). Fair value assumptions of share based payment charges The estimate of the fair value of share based awards is calculated using the Black-Scholes option pricing model. The following assumptions were used: Options granted on Share price at date of grant Exercise price Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate 01/06/ 2011 50.0p 50.0p 3 12/01/ 2011 49.5p 49.5p 3 01/08/ 2010 50.5p 50.5p 3 20/05/ 2010 51.5p 51.5p 3 17/03/ 2010 50.5p 50.5p 3 15% 15% 15% 15% 15% 10 10 10 10 10 10 10 10 10 10 28/01/ 2009 52p 26/11/ 2007 40p 52p 3 15% 10 10 40p 1 40% 10 10 3.5% 0.5% 0.5% 0.5% 0.5% 0.5% 4.75% Expected dividends expressed as a dividend yield - - - - - - - The expected volatility is based on the historic volatility of the Company’s share price. Notes to the Consolidated Financial Statements continued TRACSIS PLC | 33 8 Share based payments (continued) Charge to the income statement Share based payment charges 9 Operating profit Operating profit is stated after charging: Depreciation of property, plant and equipment Operating lease rentals: Land and buildings Research and development expenditure expensed as incurred Auditors’ remuneration: Audit of these financial statements Amounts receivable by auditors and their associates in respect of: - Audit of financial statements of subsidiaries pursuant to legislation - Other services relating to taxation 10 Finance income Interest received on bank deposits 11 Taxation Recognised in the income statement Current tax expense Current year Adjustment in respect of prior periods Total current year Deferred tax Total tax in income statement 2011 £000 17 2011 £000 20 53 191 2011 £000 15 3 2 2011 £000 17 2011 £000 272 (22) 250 (42) 208 2010 £000 20 2010 £000 6 51 147 2010 £000 12 3 2 2010 £000 11 2010 £000 174 (38) 136 (38) 98 34 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 11 Taxation (continued) Reconciliation of the effective tax rate Profit before tax for the period Expected tax charge based on the standard rate of corporation tax in the UK of 27.33% (2010: 28.00%) Expenses not deductible for tax purposes Research and development enhancement Adjustment in respect of prior periods Marginal relief / effect of small company tax rates Other movements Total tax expense 2011 £000 1,115 305 11 (46) (22) (8) (32) 208 2011 % 100.0 27.3 1.0 (4.1) (2.0) (0.6) (2.9) 18.7 2010 £000 584 163 3 - (38) (7) (23) 98 2010 % 100.0 28.0 0.5 - (6.5) (1.2) (4.0) 16.8 The Budget on 23 March 2011 announced further reductions in the rate of corporation tax in the UK. The incremental rate reduction from 27% to 26% to apply from April 2011 was substantively enacted in March 2011. The reduction from 26% to 25% to apply from April 2012 was substantively enacted in July 2011. The deferred tax calculations therefore reflect the reduction in corporation tax rate to 25%. 12 Earnings per share Basic earnings per share The calculation of basic earnings per share at 31 July 2011 was based on the profit attributable to ordinary shareholders of £907,000 (2010: £486,000) and a weighted average number of ordinary shares in issue of 20,188,000 (2010: 19,459,000), calculated as follows: Weighted average number of ordinary shares In thousands of shares Issued ordinary shares at 1 August Effect of shares issued related to business combinations Effect of shares issued for cash Weighted average number of shares at 31 July 2011 19,502 33 653 20,188 2010 19,134 325 - 19,459 Diluted earnings per share The calculation of diluted earnings per share at 31 July 2011 was based on profit attributable to ordinary shareholders of £907,000 (2010: £486,000) and a weighted average number of ordinary shares in issue after adjustment for the effects of all dilutive potential ordinary shares of 20,245,000 (2010: 21,178,000): In addition, adjusted EBITDA* is shown below on the grounds that it is a common metric used by the market in monitoring similar businesses. Adjusted EBITDA* Basic adjusted EBITDA* per share 2011 £000 1,242 6.15p Diluted adjusted EBITDA* per share * Earnings before finance income, tax, depreciation, amortisation, exceptional items and share-based payment charges. 6.13p 2010 £000 701 3.6p 3.3p TRACSIS PLC | 35 Notes to the Consolidated Financial Statements continued 13 Property, plant and equipment Cost At 1 August 2009 Additions At 31 July 2010 Additions Arising on acquisition At 31 July 2011 Depreciation At 1 August 2009 Charge for the year At 31 July 2010 Arising on acquisition Charge for the year At 31 July 2011 Net book value At 1 August 2009 At 31 July 2010 At 31 July 2011 Freehold Office Land & Motor Computer fixtures Buildings Vehicles equipment & fittings £000 £000 £000 £000 Total £000 - - - 400 - 400 - - - - 6 6 - - 394 - - - - 21 21 - - - 6 1 7 - - 14 20 9 29 21 44 94 13 6 19 32 11 62 7 10 32 1 - 1 32 7 40 - - - 4 2 6 1 1 34 21 9 30 453 72 555 13 6 19 42 20 81 8 11 474 36 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 14 Intangible assets Customer related intangibles £000 Technology related intangibles £000 Goodwill £000 Cost At 1 August 2009 Fair value adjustments in respect of the acquisition of Peeping Limited Adjustment to deferred consideration in respect of the acquisition of Peeping Limited Acquisitions through business combinations At 31 July 2010 Acquisitions through business combinations At 31 July 2011 Amortisation and impairment At 1 August 2009 Charge for the year At 31 July 2010 Charge for the year At 31 July 2011 Carrying amounts At 1 August 2009 At 31 July 2010 At 31 July 2011 815 7 (108) 136 850 271 1,121 - - - - - 815 850 1,121 1,077 - - 272 1,349 1,279 2,628 - 63 63 80 143 1,077 1,286 2,485 - - - 230 230 684 914 - 15 15 35 50 - 215 864 Total £000 1,892 7 (108) 638 2,429 2,234 4,663 - 78 78 115 193 1,892 2,351 4,470 The following carrying values of intangible assets arising from the acquisitions of RWA Rail Limited in August 2008, Peeping Limited in July 2009, Safety Information Systems Limited in December 2009, and MPEC Technology Limited in June 2011 are analysed as follows: RWA Rail Limited Peeping Limited Safety Information Systems Limited MPEC Technology Limited Goodwill 2011 2010 £000 £000 671 43 136 271 1,121 671 43 136 - 850 Customer related intangibles 2011 2010 £000 £000 637 332 249 1,267 2,485 673 350 263 - 1,286 Technology related intangibles 2011 £000 - - 192 672 864 2010 £000 - - 215 - 215 The amortisation charge is recognised in the following line items in the income statement: Administrative expenses 2011 £000 115 2010 £000 78 Customer related intangibles and technology related intangibles are amortised over their useful life, which is the period during which they are expected to generate revenue. TRACSIS PLC | 37 Notes to the Consolidated Financial Statements continued 14 Intangible assets (continued) Goodwill acquired in a business combination is allocated to cash generating units (CGUs) and is tested for impairment on an annual basis, or more frequently if there are indications that the carrying value might be impaired, by comparing the carrying amount against the discounted cash flow projections of the CGU. CGUs are not larger than the operating segments of the Group. The carrying value of the goodwill has been determined based on value in use calculations, covering detailed budgets and three year forecasts, followed by an extrapolation of expected cash flows at growth rates given below. The growth rates reflect prudent long term growth rates for the services provided by the CGU. Gross and operating margins have been assumed to remain constant based on budget and past experience. Long term growth rate Discount rate 2011 1.0% 10% 2010 2.4% 12% The directors’ key assumptions relate to revenue growth and the discount rate, however, carrying value is not significantly sensitive to reasonably foreseeable changes in either assumption. No impairment charges in respect of goodwill arose during the year. 15 Inventories Raw materials & work in progress Finished goods 2011 £000 116 18 134 2010 £000 - - - The value of inventories expensed in the period in cost of sales was £472,000 (2010: £nil). The fair values of inventories are the same as their book values. Provision is made for slow moving and obsolete stock on a line by line basis. The value of any write downs in the period was not material. 16 Trade and other receivables Trade receivables Other receivables Amounts recoverable on contracts Prepayments 2011 £000 1,910 18 7 47 1,982 2010 £000 977 18 34 25 1,054 There is no concentration of credit risk with respect to trade receivables as the Group has a number of customers. Where one customer represents a significant proportion of overall revenue, the relationship consists of a large number of small contracts which are not considered to be interdependent. The directors do not consider that any of the amounts from the sale of goods to be irrecoverable, hence no provision has been made for bad or doubtful debts in either the current or preceding year. The fair values of trade and other receivables are the same as their book values. 38 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 16 Trade and other receivables (continued) Trade receivables that are past due are considered individually for impairment. The Group uses a monthly ageing profile as an indicator when considering impairment. The summarised ageing analysis of trade receivables past due but considered to be not impaired is as follows: Under 30 days overdue Between 30 and 60 days overdue Over 60 days overdue 2011 £000 475 126 17 618 2010 £000 370 84 8 462 The other classes within trade and other receivables do not contain impaired assets. The Group did not incur any material impairment losses on trade receivables in the period. 17 Trade and other payables Trade payables Other tax and social security Accruals and deferred income Contingent consideration 2011 £000 583 347 807 1,000 2,737 2010 £000 70 168 302 167 707 The Directors consider that the carrying amounts of trade payables approximates to their fair value. Deferred income relates to sales invoiced in advance of the completion of post contract customer support, and also instances where the Group has raised sales invoices in advance of installation and acceptance of certain software sales. Support will be recognised in the income statement over the remaining period of the contract, with other deferred income being recognised when the successful installation takes place. Contingent consideration of up to £1,000,000 is payable to the vendor of MPEC Technology Limited depending on the financial performance of the company over the two years following acquisition. £1,000,000 represents the maximum amount payable to the vendor of MPEC Technology Limited, and is management’s estimate of the potential liability. This will be subject to further review in the future as the performance of the acquired business evolves over time. Of the prior year figure of £167,000, a total of £122,000 was paid in cash to the vendors of Peeping Limited (£117,000) and Safety Information Systems Limited (£5,000), in accordance with agreed calculations, with the balance of £45,000 in respect of the acquisition of Safety Information Systems Limited being credited to the Income Statement in line with IFRS 3 (revised). Notes to the Consolidated Financial Statements continued TRACSIS PLC | 39 18 Deferred tax Non-current liability/(asset) At 31 July 2009 Credit to income statement Change in tax rates Acquisition of subsidiaries At 31 July 2010 Credit to income statement Change in tax rates Arising on acquisition Acquisition of subsidiaries At 31 July 2011 Accelerated Intangible capital Share assets allowances options £000 £000 £000 Total £000 301 (21) (15) 129 394 (19) (28) - 490 837 (1) 2 - - (29) (5) 1 - 1 (33) 7 - 7 - 15 (4) 2 - - (35) 271 (24) (14) 129 362 (16) (26) 7 490 817 Deferred tax is disclosed as a non-current liability in the Consolidated Balance Sheet. The closing deferred tax asset and liability has been calculated at 25% as at 31 July 2011 (2010: 27%). 40 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 19 Share capital Allotted, called up and fully paid: Ordinary shares of 0.4p each 2011 2011 2010 2010 Number £ Number £ 24,035,588 96,142 19,502,255 78,009 The following share transactions have taken place during the year ended 31 July 2011: On 1 June 2011, 200,000 ordinary shares of 0.4p each were issued at a price of 50.0p per share as consideration for the acquisition of MPEC Technology Limited. The total amount of this consideration was £100,000. On 6 June 2011, 4,333,333 ordinary shares of 0.4p each were issued at a price of 45.0p as part of a Share Placing. Total proceeds from this Share Placing amounted to £1,950,000. Costs of £10,000 were incurred in connection with this Placing. This is summarised as follows: At start of the year Share Placing Issued as consideration for business combinations At end of the year 20 Capital and reserves The following describes the nature and purpose of each reserve: 2011 Number 19,502,255 4,333,333 200,000 24,035,588 2010 Number 19,134,139 - 368,116 19,502,255 Description and purpose Amount subscribed for share capital at nominal value Amount subscribed for share capital in excess of nominal value Amounts arising from the premium of the fair value of shares issued over their nominal value, in respect of certain business combinations, as required by the Companies Act 2006 Amounts arising from the requirement to expense the fair value of share options in accordance with IFRS2 Share-based Payments Cumulative net profits recognised in the income statement Reserve Share capital Share premium Merger reserve Share based payments reserve Retained earnings 21 Operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: Within one year Between one and five years 2011 £’000 19 - 2010 £’000 16 44 The Group leases two office facilities under operating leases. During the year £53,000 was recognised as an expense in the income statement in respect of operating leases (2010: £51,000). TRACSIS PLC | 41 Notes to the Consolidated Financial Statements continued 22 Financial risk management The principal financial instruments comprise cash and short term deposits. The main purpose of these financial instruments is to provide finance for the Group’s operations. The Group has various other financial instruments, such as trade receivables and payables that arise directly from its operations. The Group has taken advantage of the exemption to exclude short term debtors and creditors from the disclosures given below. The fair values of the financial instruments are equal to their year end carrying values and represent the maximum exposure. Financial assets Cash and short term deposits 2011 Fixed Floating Rate £000 1,680 Rate £000 Total £000 3,010 4,690 2010 Fixed Floating Rate £000 1,315 Rate £000 1,231 Total £000 2,546 The Group had no financial liabilities or derivative contracts in either the current or previous year. It is policy that no trading in financial instruments should be undertaken. The surplus cash balances have been invested in deposit accounts. The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: • • • trade receivables; cash at bank; trade and other payables. The main risks arising from the financial instruments are interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Fair value or cash flow interest rate risk Currently the Group has surplus cash balances so does not have a borrowing requirement. Surplus cash is put on short term deposit where appropriate at either fixed or floating rates. The Board monitors the financial markets and the Group’s future cash requirements to ensure that this policy is exercised in the Group’s best interests. At 31 July 2011 the Group had fixed- rate deposits in place as follows: • • • £800,000 placed on a fixed 3 month term deposit at an interest rate of 1.35% £630,000 placed on a fixed 3 month term deposit at an interest rate of 1.20% £250,000 placed on a fixed 3 month term deposit at an interest rate of 1.50% Credit risk The Group monitors credit risk closely and considers that its current policies of credit checks meet its objectives of managing exposure to risk. The Group has no significant concentration of credit risk. Amounts shown in the balance sheet best represent the maximum credit risk exposure in the event that other parties fail to perform their obligations under financial instruments. Liquidity risk Liquidity risk is managed on a day to day basis. Facilities are agreed at appropriate levels having regard to the Group’s forecast operating cash flows and future capital expenditures. Capital disclosures The Group’s objectives when maintaining 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, and; to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. - The capital structure of the Group consists of cash and cash equivalents, and equity attributable to shareholders of the parent, comprising issued share capital, reserves and retained earnings as disclosed in the Consolidated Statement of Changes in Equity and Notes 12, 19 and 20. The Group sets the amount of capital it requires in proportion to risk. The Group manages its 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 or sell assets to reduce debt. 42 | Annual Report and Accounts 2011 Notes to the Consolidated Financial Statements continued 22 Financial risk management (continued) Sensitivity analysis In managing interest rates the Group aims to reduce the impact of short term fluctuations on the Group’s earnings. Over the long term, permanent changes in interest rates would have an impact on consolidated earnings. The Directors consider that a change of 100 basis points in interest rates at any period end would not have a material impact on cash flows. Market risks The Directors consider that the Group has no significant exposure to market risks with respect to its financial instruments. 23 Related party transactions The following transactions took place during the year with other related parties: Leeds Innovation Centre Limited1 Techtran Group Limited2 Atraxa Consulting Limited3 First Class Partnerships Limited4 Purchase of Amounts owed by Amounts owed to goods and services related parties related parties 2011 £000 45 1 28 4 2010 £000 2011 £000 2010 £000 2011 £000 2010 £000 34 3 52 - - - - - - - - - 4 - 2 - 3 - 6 - 1 – Leeds Innovation Centre Limited is a company which is connected to The University of Leeds. Tracsis plc rents its office accommodation, along with related office services, from this company. 2 – Techtran Group Limited is a significant shareholder in the Company and supplies staff on secondment, and office services to the Group. 3 – Atraxa Consulting Limited provided accountancy services to the Group during the year for a period of transition between Darren Bamforth and Max Cawthra. Darren Bamforth, is a director and shareholder of Atraxa Consulting Limited, and former director of Tracsis plc. 4 – First Class Partnerships Limited provided advice to the Group for the purchase of MPEC Technology Limited. One of the Group’s Directors, John Nelson, is the Chairman of this Company. Terms and conditions of transactions with related parties The purchases from related parties are made at normal market prices. Outstanding balances that relate to trading balances are unsecured, interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables. Compensation of key management personnel of the Group The Group considers the directors to be its key management personnel. Full details of their compensation are set out in the Directors’ Remuneration Report. 24 Employee benefits The Group makes contributions to defined contribution pension schemes for its employees. The pension cost charge for the year comprises contributions payable by the Group to the schemes and other personal pension plans and amounted to £44,000 (2010: £37,000). There were outstanding contributions at 31 July 2011 of £9,000 (2010: £2,000). 25 Group entities Below are the principal subsidiary undertakings which contribute to the Group results: Held by Tracsis plc R.W.A. Rail Limited Peeping Limited Safety Information Systems Limited MPEC Technology Limited Principal activity Country of incorporation Rail industry consultancy England and Wales Rail industry consultancy England and Wales Software and consultancy Rail industry hardware & Datalogging England and Wales England and Wales % ordinary share capital owned 100% 100% 100% 100% TRACSIS PLC | 43 Company Balance Sheet (presented under UK GAAP) as at 31 July 2011 Company number: 05019106 Fixed assets Tangible fixed assets Investments Current assets Deferred tax Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current (liabilities)/assets Total assets less current liabilities Net assets Capital and reserves Called up share capital Share premium reserve Merger reserve Share based payments reserve Retained earnings Shareholders’ funds Note 2011 £000 27 28 398 6,250 34 399 3,807 4,240 (4,300) (60) 2010 £000 3 3,259 33 548 2,375 2,956 (1,968) 988 6,588 4,250 6,588 4,250 96 3,762 935 139 1,656 6,588 78 1,839 836 122 1,375 4,250 29 30 31 32 32 32 32 34 The financial statements were approved and authorised for issue by the Board of Directors on 7 November 2011 and were signed on its behalf by: John McArthur – Chief Executive Officer Max Cawthra – Chief Financial Officer 44 | Annual Report and Accounts 2011 Notes to the Company Balance Sheet 26 Company accounting policies (UK GAAP) Basis of preparation As used in the financial statements and related notes, the term ‘Company’ refers to Tracsis plc. The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by the Act, the separate financial statements have been prepared in accordance with UK Generally Accepted Accounting Principles (‘UK GAAP’). These accounts have been prepared in accordance with applicable accounting standards and under the historical cost convention. A separate profit and loss account dealing with the results of the company only has not been presented, as permitted by section 408 of the Companies Act 2006. Under FRS 1 the Company is exempt from the requirement to present its own cash flow statement. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable (excluding value added tax and discounts given) derived from the provision of goods and services to customers during the period. The Company derives revenue from software licences, post contract customer support and consultancy services. The Company recognises the revenue from the sale of software licences and specified upgrades upon shipment of the software product or upgrade, when there are no significant vendor obligations remaining, when the fee is fixed and determinable and when collectability is considered probable. Where appropriate the Company provides a reserve for estimated returns under the standard acceptance terms at the time the revenue is recognised. Payment terms are agreed separately with each customer. Revenue from post contract customer support and consultancy services is recognised on a straight-line basis over the term of the contract. Revenue received and not recognised in the profit and loss account under this policy is classified as deferred income in the balance sheet. Revenue from other products and services is recognised as the products are shipped or services provided. Tangible fixed assets Tangible fixed assets are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs. Depreciation is provided on all items so as to write off the carrying value of items over their expected useful economic lives. It is applied at the following rates: Freehold buildings (excluding land) Computer equipment – – 4% on cost 33 1/3% on cost Investments Fixed asset investments are stated at cost less provision for impairment where appropriate. The directors consider annually whether a provision against the value of investments on an individual basis is required. Such provisions are charged in the profit and loss account in the year. Taxation The charge for taxation is based on the result for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred taxation is recognised, without discounting, in respect of all timing differences which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS19. Leases Rentals applicable where substantially all of the benefits and risks of ownership remain with the lessor are classified as operating leases and payments are charged to the profit and loss account on a straight line basis over the period of the lease. TRACSIS PLC | 45 Notes to the Company Balance Sheet continued 26 Company accounting policies (UK GAAP) (continued) FRS20 share based payments The Company has adopted FRS20 and the accounting policies followed are in all material regards the same as the Group’s policy under IFRS2 ‘Share based payments’. The policy is shown in the Group’s accounting policies on pages 22 to 26. 27 Tangible fixed assets Cost At 1 August 2010 Additions At 31 July 2011 Depreciation At 1 August 2010 Charge for the year At 31 July 2011 Net book value At 31 July 2010 At 31 July 2011 28 Investments Cost At 1 August 2010 Acquisitions Adjustment At 31 July 2011 Freehold Land & Computer Buildings equipment £000 £000 - 400 400 - 6 6 - 394 19 4 23 16 3 19 3 4 Total £000 19 404 423 16 9 25 3 398 Shares in subsidiary undertakings £000 3,259 3,036 (45) 6,250 The acquisitions in the period relate to 100% of the issued share capital of MPEC Technology Limited. The adjustment in the period relates to the settlement of contingent consideration from the acquisition of Safety Information Systems Limited, which was not paid in full. The credit was recognised against Investments in the Parent Company accounts under UK GAAP, whereas the credit was recognised in the Income Statement in the Group accounts to comply with IFRS 3. 46 | Annual Report and Accounts 2011 Notes to the Company Balance Sheet continued 28 Investments (continued) The companies in which Tracsis plc’s interest is more than 20% at the year end are as follows: Subsidiary undertaking Country of incorporation R.W.A. Rail Limited England and Wales Peeping Limited England and Wales Safety Information Systems Limited England and Wales MPEC Technology Limited England and Wales 29 Debtors Trade debtors Other debtors Prepayments 30 Creditors: amounts falling due within one year Trade creditors Other tax and social security Corporation tax Amounts owed to subsidiary undertakings Accruals and deferred income Contingent consideration 31 Share capital Allotted, called up and fully paid: Ordinary shares of 0.4p each Class and percentage Principal activity of shares held Holding Rail industry consultancy Rail industry ancillary services Ordinary 100% Ordinary 100% Software and consultancy Rail industry hardware & datalogging Ordinary 100% Ordinary 100% 2011 £000 362 13 24 399 2011 £000 9 86 82 2,792 331 1,000 4,300 Direct Direct Direct Direct 2010 £000 521 13 14 548 2010 £000 10 47 121 1,433 190 167 1,968 2011 2011 2010 2010 Number £ Number £ 24,035,588 96,142 19,502,255 78,009 The following share transactions have taken place during the year ended 31 July 2011: On 1 June 2011, 200,000 ordinary shares of 0.4p each were issued at a price of 50.0p per share as consideration for the acquisition of MPEC Technology Limited. The total amount of this consideration was £100,000. On 6 June 2011, 4,333,333 ordinary shares of 0.4p each were issued at a price of 45.0p as part of a Share Placing. Total proceeds from this Share Placing amounted to £1,950,000. Costs of £10,000 were incurred in connection with this Placing. TRACSIS PLC | 47 Notes to the Company Balance Sheet continued 32 Reserves Share premium account £000 1,839 Merger reserve £000 836 - 99 1,933 (10) - - - - - - 3,762 935 Share based payments reserve £000 122 - - - - 17 139 Profit and loss account £000 1,375 - - - 281 - 1,656 At 1 August 2010 Shares issued as consideration for business combinations Issue of new shares Expenses of share issue Profit for the period Share based payment charges At 31 July 2011 33 Operating leases Operating lease commitments The minimum annual lease payments to which the Company is committed under non-cancellable operating leases for the coming year are as follows: Land and buildings: On leases expiring: Within one year Between one and two years 34 Reconciliation of movement in shareholders’ funds Profit attributable to ordinary shareholders Other recognised gains: - Issue of new shares (net of issue costs) - Share based payments Opening shareholders’ funds Closing shareholders’ funds 2011 £’000 5 - 2011 £’000 281 2,040 17 2,338 4,250 6,588 2010 £’000 - 27 2010 £’000 312 191 20 523 3,727 4,250 48 | Annual Report and Accounts 2011 Group information Company Secretary and Registered Office Max Cawthra Leeds Innovation Centre 103 Clarendon Road Leeds LS2 9DF Auditor KPMG Audit Plc 1 The Embankment Neville Street Leeds LS1 4DW Telephone +44 (0) 845 125 9162 Fax +44 (0) 845 125 9163 Registered number 05019106 Website www.tracsis.com Principal bankers HSBC Bank plc 33 Park Row Leeds LS1 1LD Solicitors Rosenblatt Solicitors 9-13 St Andrew Street London EC4A 3AF Nominated Advisor and Stockbroker WH Ireland Limited 11 St. James’s Square Manchester M2 6WH Registrars Neville Registrars 18 Laurel Lane Halesowen West Midlands B63 3DA