Wonderful Times Group
Annual Report 2016

Plain-text annual report

A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 1 6 Watchstone Group plc Annual Report and Financial Statements for the year ended 31 December 2016 In this year’s Report Business Review Key Summary Chairman’s Report Group Chief Executive’s Update Strategic Report Governance Board of Directors Directors’ Remuneration Report Corporate Governance Report Directors’ Report Audit Committee Report Independent Auditor’s Report Financial Statements Financial Statements Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Financial Statements Company Balance Sheet and Notes 1 2 3 8 17 18 22 24 27 29 30 30 31 32 33 35 36 82 Officers and Professional Advisers 100 Watchstone Group plc Annual Report and Financial Statements 20161 Key Summary Financial: ■ Underlying* business revenues increase to £60.7m (2015: £54.9m) ■ Total revenues rise to £63.8m (2015: £58.8m) ■ Underlying EBITDA** loss of £9.8m (2015: loss of £15.1m) ■ Group operating loss of £20.9m (2015: £177.6m) ■ Total loss after tax £69.1m (2015: profit of £274.9m) including £50.1m impairment of escrow receivable ■ Group net assets (excluding contingent liabilities) of £68.5m (2015: £137.1m) representing approximately 147 pence per share. Group reported net assets no longer includes the escrow receivable following impairment ■ Group cash including term deposits at 31 December 2016 of £81.2m (2015: £103.2m) * Underlying includes Hubio, ingenie, Healthcare Services, BAS and Central ** EBITDA is Earnings Before Interest Tax Depreciation Amortisation and Impairments. A reconciliation of statutory measures to alternative measures can be found in note 5. Operational: ■ Group complexity reduced with disposal or closure of a number of loss making, cash consumptive businesses ■ Growth and profitability delivered in our largest businesses, ptHealth and ingenie ■ Reshaping of Hubio completed including substantial reduction of cash requirements and the launch of our new UBI proposition based on ingenie’s leading IP ■ Plan to prepare all remaining businesses for potential divestment and establish new way of working with the substantially reduced central team/Board by the end of 2017 Watchstone Group plc Annual Report and Financial Statements 20162 Chairman’s Report 2016 was another busy year for Watchstone as we continued to work through operational and organisational change while dealing with a multitude of legacy legal and taxation matters. Although timing is beyond our control for most of our legacy matters, it is disappointing we have not yet definitively resolved a number of these issues facing the Group. We continue to seek to do this as soon as practical whilst always ensuring that we focus on the interests of our shareholders. Throughout the year, we disposed of or closed a number of businesses which were loss making, consumed cash and presented no opportunity for additional shareholder value. The executive team was active across our businesses and we exited our property services interests, disposed of Quintica, closed and sold the assets of Road Angel Group and closed Maine Finance. At the same time, revenues of our underlying businesses increased and losses were significantly cut. It is pleasing to note that both ptHealth and ingenie are now profitable and growing well with strong opportunities for profit improvement from organic growth and margin enhancement. The challenge of shaping Hubio has been met and is explained in the Group Chief Executive’s Update. Under the leadership of Indro Mukerjee, who joined Watchstone as Group Chief Executive Officer in September 2015, we are now well placed to move to a much simpler and significantly reduced cost group structure by the end of 2017. All remaining businesses will be prepared for divestment. In readiness for possible disposal, each business will have its own dedicated management team to enable them to operate without the levels of Group management involvement that have been required so far. Watchstone’s companies will be shaped to operate more autonomously, with Watchstone taking a more strategic role rather than seeking to operate the businesses. Any potential divestment or any alternative strategic option will be determined with a view to maximising shareholder value. As a result, Watchstone will be run by a much smaller team and Board from the start of 2018 and Indro and I are working together to shape the makeup of that structure. The main responsibility of the streamlined Watchstone will be to manage the divestment process (for those businesses remaining) and bring the legacy issues to their conclusion with a view to enabling the maximum amount of cash to be returned to shareholders at the earliest possible opportunity. Following the planning and delivery of this strategic reshaping, Indro has informed the Board of his intention to leave the Group on completion of the planning and delivery of this strategic reshaping and will resign from the Board, both as of 31 December 2017. It was always part of our plan to have a CEO who could navigate the legacy issues as well as provide a strong and stable platform for Watchstone and its businesses to generate value for shareholders and I know that Indro will continue that work until his departure. I would, once again, like to take this opportunity to thank all our colleagues for their commitment and hard work. I would also like to thank our investors who have been patient and maintained support for the Company as the intense work to deliver the best possible value from our assets has continued. The Board remains confident that we will go on to reward that support. Richard Rose Non-executive Chairman Watchstone Group plc Annual Report and Financial Statements 20163 Group Chief Executive’s Update After some 20 months with the Group, I can confidently say that, with the rather broad set of things to do, there has never been a dull moment. My starting point has been well documented and the following three elements have been at the heart of my work from the beginning: setting a strategic direction for our businesses; working to reduce the Group’s cash losses; and promoting uncompromising standards of governance. Working with high calibre Board colleagues, the governance aspects of what we do as a company and how we do it have been developed to high standards. While realising that shareholders should be able to take this for granted, it should be noted that it took significant work and determination to get to this point. Given the scale of the cash losses, it was an obvious priority to focus on addressing those quickly after I started. Over the course of 2016, some £14m of losses were eradicated through a combination of cost savings and cessation of entire activities. For our businesses, the focus of 2016 was about rationalising what was a diverse starting point and working in the businesses on practical actions to get the best out of them. In order to be able to communicate performance clearly to shareholders, the income statement, including the comparatives, splits the Group between underlying and non-underlying activities with the latter category including business activities which do not form part of the Group’s future focus. Today, the Group’s underlying businesses are Healthcare Services (ptHealth including InnoCare), ingenie, Hubio and BAS. With increased sales focus and tight cash management, we were able to show underlying sales growth of approximately 11% and to reduce the underlying EBITDA loss to (£9.8m) in 2016 vs. (£15.1m) in 2015. The full year benefits of the restructuring during 2016 are not fully reflected in the 2016 numbers and so our EBITDA losses for 2017 will be significantly lower once again. At all times, I have done my best to consider the inevitably broad range of shareholder (both institutional and private) opinions and the feedback from our owners has helped to shape our actions. We have placed a significant emphasis on cash management and this was always the main reason for the cessation of certain activities in the Group. With the exception of parts of Hubio, our businesses now no longer consume cash on an ongoing basis. Within Hubio, the enterprise and Canadian iter8 insurance software businesses became cash neutral within 2016 and only the telematics side of the business consumed cash while its real business prospects were being fully and now conclusively evaluated in what is a fast-changing market. Business Review: Now, taking each of the operating businesses in turn: 1. Healthcare Services Our Healthcare Services activities consist of our ptHealth clinics business as well as InnoCare, which was launched in Spring 2016 to sell software and services to independent clinics in Canada. With significant effort and focus, Healthcare performed well in 2016, with revenue increasing by 12% and EBITDA turning profitable. During 2016, ptHealth clinics treated a record number of patients and through strong operational improvement and selective clinic divestments, all clinics are now profitable. ptHealth clinic revenue increased some 7% (even with fewer clinics) and EBITDA increased by 21% compared with FY2015, reflecting operational improvements. ptHealth is on target to continue the positive momentum in both top line revenue, patient treatments and assessments and clinic capacity utilisation during 2017. InnoCare comprises: ■ InnoCare SaaS, a market leading services and software package designed as a complete solution to clinics has increased its revenue by 101% when comparing Q1 2016 before InnoCare launch to Q1 2017; and ■ InnoCare Charting, a digital charting platform to help clinicians be more efficient and thereby treat more patients has led to considerable media attention in Canada, bringing first of its kind solutions to the marketplace. InnoCare has been developing momentum, including growth in network revenue up 17% over the prior period. From September 2016, investment in sales and business development has resulted in a substantial growth in its sales pipeline. Watchstone Group plc Annual Report and Financial Statements 20164 Group Chief Executive’s Update (continued) As commented in the pre-close trading update released on 19 January 2017, the required investment in InnoCare’s products and associated marketing will impact the overall Healthcare Services’ earnings for the immediate future. However, we still expect it to be profitable and cash generative in 2017. Healthcare Services in 2016 at a glance ■ In 2016, ptHealth treated an average of 3,000 patients a day ■ Of the 2,958 patients surveyed 96% said they would recommend us ■ Over 1,200 Practitioners use InnoCare software. Software sales were up 33% in 2016 ■ In 2016, our central call centre took a record 71,093 calls, made 52,156 new patient appointments and cared for 71,543 new patients ■ 1,250 people a day visit our ptHealth/InnoCare websites ■ Recent Q1 2017 PR for InnoCare has led to an 11% growth in sales pipeline for InnoCare products 2. Hubio Hubio was launched at the start of 2016 to operationally pull together three previously disparate insurance software businesses and to evaluate opportunities for value creation. Hubio has been the business area which most polarised shareholder opinion and I owed it to all shareholders to pay particular attention to this business and so have been its CEO since creation. Through working in this business and meeting customers, prospects and peers, the following elements became clear: ■ Our telematics business was not able to profitably challenge larger and established players who had acquired market share; ■ The telematics market was already moving rapidly to mobile solutions and we could not find a business case for the previously developed mapping technology; and ■ There was no compelling market for ‘end to end‘ Usage Based Insurance (UBI) solutions. This meant we could only find limited synergies between the telematics and enterprise software parts of Hubio and therefore the overall Hubio cost base was significantly out of line with its opportunities and so strong measures had to be taken. So, 2016 became about reshaping the Hubio organisation to improve efficiency and to establish the best way to develop value. Naturally, I was deeply involved with both the restructuring and with new business initiatives, meeting with customers and industry commentators as well as guiding our employees. With these actions, in addition to those taken since the end of 2016, (including the closure of our Dundee operation and the downsizing of our US telematics team), Hubio’s cash needs were reduced from over £11.0m in 2015 to under £5.5m on an annualised basis by the end of 2016. With the full impact of last year’s savings and the recently announced closure of Dundee and the further downsizing of our US telematics group, overall Hubio cash needs will be substantially lower in 2017. With these changes, today we have the following businesses under the Hubio brand: ■ Hubio Enterprise: This is our insurance claims and policy software business which is now operating profitably with well proven, award winning technology; a significantly increased sales pipeline; increased market recognition; and a clear strategy. ■ Hubio Exchange: This is our technology solutions business in Canada which has been downsized and completely reoriented back to its niche iter8 insurance platform. It recently announced its Guidewire partnership and has developed its well-proven technology to be SaaS ready. ■ Hubio Fleet: We launched this Fleet focused business using our telematics platform in September 2016. Since then we have developed an active book of 2,500 active subscriptions and a growing pipeline of opportunities. Through a lot of rapid learning since launch and following the decision to streamline our own software development resources, we have decided to work with an external technology partner to improve our Fleet solution which will be taken to market through the commercial team we have built. This improved solution has been recently launched and our objective is to rapidly increase the size of our active subscriber base. Watchstone Group plc Annual Report and Financial Statements 20165 ■ Hubio Telematics: I have already shared my disappointment with the development of the UBI activities in communications with shareholders. Whilst it is clear the US UBI market is growing, it is also evident that it is difficult to profitably break into this market without significant cash investment with an uncertain ROI. Given that we started with two legacy platforms, with the Hubio one not offering event scoring, we decided that our updated UBI proposition should be based on our successful ingenie platform. Engagement with US and European customers and prospects will now be managed within the ingenie team, but going to market under the recognised name “Hubio Telematics”. 3. ingenie There was a successful focus on ingenie business development in 2016 resulting in a 17% increase in new business sales and 22% increase of in force policies, compared with 2015. ingenie is now profitable and generating cash. Customer engagement and retention were both increased through ever improving use of social media which is one of the important differentiators for this business. The ingenie business was split into two parts during 2016 to best focus on developing clear value propositions for its essential elements of the broker business as well as technology and services development. The ingenie broker business, which deals direct with UK based consumers, is profitable and is expected to increase revenue further during 2017 through organic growth and with newly developed products, which will be announced to the market when released. These will create new product brands, stronger social content and target demographic awareness and revenue and Gross Written Premium (GWP) growth for our insurance propositions. As our products develop, we will establish broader and additional underwriting partnerships to address our new market propositions. The ingenie technology division will be branded Hubio Telematics and manage relationships with UBI business customers and prospects, offering the transformational impact of ingenie’s exceptional driver engagement along with its powerful algorithms to help insurers and their customers. Beyond the ANWB contract and relationship which has been successfully growing, Hubio Telematics will also target engagements in the US and other European countries with any partners that can deliver fast growing programs and cash generative, profitable business for us. Our ingenie business has strong technological and marketing capabilities in both its broker and technology divisions and operates within a space which is growing. We have a strong sense of the expansion actions necessary to grow revenue and make the operational improvement to improve the bottom line. ingenie in 2016 at a glance ■ GWP increased by 22% ■ Exceptional consumer engagement achieved by the combination of technology and psychology: – 99% ingenie drivers activate their feedback account – ingenie drivers engage 9x per month via feedback app – ingenie drivers have 40% fewer crashes than the national average – 90% drivers proven to improve after ingenie coaching ■ Facebook and Twitter followers exceed 50,000 ■ Social traffic to ingenie.com has increased by 58% over previous year ■ Traffic to ingenie Young Drivers Guide has doubled over the course of 2016 ■ Hubio Telematics systems have managed over 150,000 policies over the last 5 years ■ Collects over 2.5 million miles of driver trip data every day Watchstone Group plc Annual Report and Financial Statements 20166 Group Chief Executive’s Update (continued) 4. BAS In 2016, BAS launched a new division targeting larger corporate opportunities in addition to its traditional base of SME customers. The first major corporate customer was won (providing energy procurement services for Suffolk County Council) and a further pipeline has been developed with an expectation for additional wins during 2017. Total new business sales were a record and up approximately 30% vs. 2015 resulting in the revenue growth seen in the accounts section of this report. In addition to launching the new corporate division, 2016 also saw major efforts in improving the IT and operational processes of the business and restructuring some of the South African sales teams. Despite the strong revenue growth in 2016 the business continues to operate in a competitive and mature market. Update on legacy matters It is well recognised that we have continued to deal with a substantial number of legacy matters. Whilst we successfully resolved a number of historic matters in the year (and since year end), in September 2016, Slater & Gordon (“S&G”) notified us of a purported claim in respect of its acquisition of our Professional Service Division which completed in May 2015. In November 2016, S&G obtained an opinion from an independent barrister in respect of the warranty escrow that based solely on the information presented to him (and on the assumption that no further evidence would be provided) that the purported claim has on balance a prospect of success and that, if successful, such claim would be likely to have a value of £53.0m (“Opinion”). Accordingly, £50.1m (including interest) is retained in the warranty escrow account until the purported claim is resolved (“Warranty Escrow”). Whilst Watchstone’s view as to the lack of merits of the purported claim has not changed, on the basis of the Opinion, we consider it appropriate that a provision for impairment be established in respect of the Warranty Escrow and have determined that the appropriate amount should be to fully impair the Warranty Escrow. This reflects the inherent uncertainty in valuation of the purported claim and is in no way a reflection of the Group’s view on ultimate resolution, which is uncertain in both time and quantum (if any). As yet no proceedings have been brought and the Group will defend such claim robustly if commenced. We remain in active dialogue with S&G on a number of other matters including the performance of the noise induced hearing loss (“NIHL”) cases to which deferred consideration is due when, and if, such cases are profitable. To date, no deferred consideration has been paid. The SFO investigation which was launched in August 2015 into historic matters remains on-going and we continue to co-operate fully with it. It remains the only regulatory enquiry to which the Company is subject. We will continue our efforts to resolve these matters and will do so with a priority and focus on protecting shareholder interests. 2017 Outlook and strategic plans Changing the company name to Watchstone in November 2015 was much more than a cosmetic event. Since then, we have developed clear plans for our underlying operating businesses with strong financial controls. We are continuing to work on addressing our legacy corporate matters with clarity and determination. At the same time, and realising that all the underlying businesses are going through improvement paths, I am always mindful of the best way to deliver best possible shareholder value. Our actions and improvements means the businesses have entered 2017 in a stronger position than they did in 2016. I believe that we will best serve our shareholders by realising the value of our operating businesses (through sale, merger/ demerger or IPO) at the optimal time; by managing legacy matters in the most efficient manner; and then to return the maximum cash to shareholders at the earliest opportunity subject always to the need to ensure the interests of creditors are adequately safeguarded (including in respect of any contingent liabilities). As such, I have recommended, and the Board has agreed, a plan of action which will result in completing the phase I started in September 2015 and moving Watchstone into its next phase by the end of 2017. Any businesses held beyond 2017 will be cash generative and will not need constant operational management by Watchstone, as has been the case so far. This will mean that any retained businesses will have their own complete management teams, clear business plans with milestones as well as systems and controls which will allow Watchstone to manage them as a shareholder rather than as an operator. This will enable a smaller Board/central team to divest of such companies more easily and quickly when the time is right. Watchstone Group plc Annual Report and Financial Statements 20167 Over the remainder of 2017, work will be done to either sell the operating businesses or develop them to a state where they can be managed as described above. There will also be work to re-shape the Board and further reduce the central team. The completion of this work by the end of this year will be a significant milestone for the Group. On a personal level, this will signify the end of my work with the Group. I have informed my colleagues of my intention to stand down as Group CEO and resign from the Board, both as of 31 December 2017. Since becoming Group Chief Executive Officer, it has been my intention to get the Group’s businesses into the best possible position, while dealing with an array of legacy issues and challenges. I believe that the Board’s work to date and the plan for the rest of this year will give shareholders a much better platform for the future than they had in 2015. Shareholders will receive a further update on this plan on 27 June 2017 in our AGM statement. The AGM itself will be held in London on that day and notice will be sent to shareholders in due course. There is a much still to be done and I would like to thank our employees for their commitment and our shareholders for their support. Indro Mukerjee Group Chief Executive Officer Watchstone Group plc Annual Report and Financial Statements 20168 Strategic Report 1. Business Review 1.1 About Watchstone Watchstone Group plc is a company focused on managing the Group’s operating, cash and other corporate assets in order to achieve the maximum shareholder value possible, whilst ensuring good governance. The Group has technology at its core and our businesses offer leading technology solutions and other services primarily to the insurance, automotive and healthcare sectors. While we have a diverse portfolio, our operating businesses are unified by a set of shared commercial principles: ■ We seek to anticipate change and we have the agility to exploit the dynamism of customer behaviour; ■ We invest in the people and technologies that will drive innovation and success in our markets; ■ We promote in-depth sector knowledge and experience as the starting point of value creation; and ■ We strive for efficiency across our businesses through the optimal allocation of resources and good governance. The individual businesses and segments in which they operate are set out below: Hubio ■ provides integrated solutions to help organisations in the insurance and automotive sectors increase efficiency, reduce claims, build customer engagement and enable usage-based personalisation. ■ through the innovative use of telematics and enterprise technologies, Hubio is bringing new levels of data- driven insights to the insurance and automotive industries, while challenging and redefining established business models. Healthcare Services ■ ptHealth is a national healthcare company that owns and operates physical rehabilitation clinics across Canada. From large cities to small communities, ptHealth takes pride in delivering quality services in a compassionate and patient-centered atmosphere that is focused on providing recovery solutions for its patients. ■ InnoCare is a proprietary clinic management software platform and call centre and customer service operation based in Canada. InnoCare uses its established industry expertise to enable clinic owners to transform their patient’s experience and operate more efficient and productive practices in the growing North American healthcare market. ingenie ■ is an insurance broker focused on helping young drivers get on the road safely and affordably. Using telematics technology, ingenie gives its community feedback, bespoke advice via its Driver Behaviour Unit and discounts to help them improve their driving skills and stay safe. BAS ■ is one of the UK’s leading energy brokerages providing a range of energy services to UK companies – including procurement, energy audit, monitoring and targeting and data sampling. 1.2 Overview of 2016 On 1 January 2016, the Group had £103.2m of cash, having successfully concluded the reduction of capital and capital return in December 2015. During the year, the Group resolved the future of a number of businesses that were loss making and not considered to be part of the Group’s future: ■ In January, BE Insulated (UK) Limited (“BEI”) and Carbon Reduction Company (UK) Limited (“CRC”) were sold, which concluded the closure of the Property Services division, following an earlier restructuring during 2015. Full details of the disposal are shown in 1.5.2 below; ■ In March, Quintica Holdings Limited (“Quintica”) was sold in its entirety, details set out in 1.5.1 below; ■ We ceased the distribution of personal life assurance in Maine Finance in June and small business life insurance in August and we are now managing any ongoing commission clawback matters, minimising any cash outflows; and ■ In September, we closed the consumer B2C elements of Road Angel Group (“RAG”) and sold its remaining assets. In January 2016, we launched Hubio, rebranding a number of our insurance technology businesses. In Q3 2016, we executed a substantial restructure of the Hubio businesses resulting in a reduction in the expense base of £3.0m. Watchstone Group plc Annual Report and Financial Statements 20169 InnoCare launched in Q2 2016 and has since been developing momentum, including growth in the network to 167 clinics from 152 clinics. From September 2016, investment in sales and business development has resulted in a substantial growth in its sales pipeline. InnoCare Charting, a market leading software tool to help clinicians be more efficient and so treat more patients was launched in November 2016. We have built upon this platform during the year with capitalised and other spend of £2.0m, and delivered incremental revenues of £0.6m. ingenie’s focus has been to create two distinct business lines and maximise the potential for profitable growth: ■ an insurance broker, working with a panel of insurers, with expert marketing skills to attract the new drivers and utilising technology to reduce driver risk and therefore the likelihood of claims; and ■ ingenie service organisation providing a B2B operational and technology platform service to organisations with either their own distribution and customer base. One external customer, ANWB, was successfully secured and implemented during the year, demonstrating the applicability and replicability of the model. At the corporate level continued progress has been made in addressing the historical issues, liabilities and assets. Certain potential assets and liabilities are not recognised in the Financial Statements due to their uncertainty. Amounts will be recognised in line with applicable standards if and when appropriate certainty is evident: ■ Contingent assets include recoveries on customer contractual matters, vendor warranties relating to taxation on company purchases treated as share based remuneration and litigation in progress; and ■ Contingent liabilities include potential fines that may be levied should the SFO investigation lead to an adverse outcome and potential damages should the purported class action litigation succeed. These are disclosed but no liability is recognised. Escrow amounts related to the sale of the Professional Services Division (“PSD”) On 29 May 2015, the Group disposed of the PSD to Slater and Gordon UK (1) Limited for a total consideration of £644.9m, of which £55.0m was retained in escrow. Of the £55.0m held in escrow, £5.0m related to a completion mechanism, of which £3.8m was received during 2016. The remaining £50.1m (including interest) remains in a joint escrow account pending resolution of S&G’s purported warranty claim. For the reasons stated in the Group Chief Executive’s Update, and notwithstanding that the Group’s view as to the lack of merits of the purported warranty claim has not changed, on the basis of the Opinion, we have established an impairment provision for £50.1m (being the full amount of the Warranty Escrow including interest) and reflected it as a net off the balance resulting in a £nil carrying amount as at 31 December 2016. Conduct of taxation matters Whilst the Group will continue to manage its liability to HMRC in respect of historic matters, a prudent approach continues to be taken to such matters. During the year settlement took place in relation to £2.5m, resulting in a deemed payment and release of provisions. In 2017, we expect there to be further settlement of the majority of remaining matters. Litigation Litigation relating to Navseeker Inc./Evogi settled during the year and resulted in cash payments of £2.3m to shareholders and a net provision release of £1.6m. In addition, litigation relating to Loft Space Insulation was settled after the year end resulting in a net provision release of £0.3m. Property During the year, as the remaining PSD operations moved out and the other Group businesses operating out of our Fareham building were either closed or sold, we relocated the remaining Finance staff to other offices and commenced a marketing exercise to dispose of the property. We expect to conclude a sale of this property this year. 1.3 Overview of Financial Statements The Financial Statements are presented on pages 30 to 99. An overview of the main factors which have influenced the Financial Statements are: ■ Disposal and closure of loss making businesses has resulted in the reclassification of these businesses from underlying into non-underlying. Classification as non- underlying results include the income and expenses of businesses not forming part of the long term plans for the group and as such are being wound down or disposed of. Businesses meeting this criterion which also meet the definition of a discontinued operation under IFRS 5 have been further classified as discontinued operations within the non-underlying results. Watchstone Group plc Annual Report and Financial Statements 201610 Strategic Report (continued) ■ Resolution and settlement of historical issues has progressed such that provisions now stand at £28.2m a net reduction of £8.8m, being settlements utilisation of £7.0m and a net release of provision no longer required. This is evidence of both our approach to preparation of the Group’s financial statements and also our diligence in ensuring we minimise the ultimate cost of resolution. ■ Impairment of warranty escrow by £50.1m including accrued interest has resulted in a charge to discontinued operations and reduction in net asset value. In respect of Hubio, we have determined in line with accounting standards to expense all internal development expenditure until profitable product and service delivery is proven to be feasible and probable given the history of recent losses incurred. This is estimated to have resulted in approximately £2-2.5m of expenditure not capitalised. 1.4 Acquisitions and Investments The Group made no acquisitions during the year, nor made any significant investments other than in the ordinary course of business. 1.5 Disposals During the year, the Group disposed of or closed those businesses that were loss making and due to business model, scale or other reasons were unlikely to see a turnaround within the Group. Full details are given in note 36. 1.5.1 Quintica On 7 March 2016, the Group disposed of the entire issued share capital of Quintica, a reseller and integrator of software to the telecoms industries. Following a review of the business by the Board, it was concluded that Quintica was non core, as it did not fit with the Group’s current strategy and focus and due to its historical performance and associated cash funding requirements. For the year ended 31 December 2016 Quintica broke even to the point of sale (2015: £1.9m operating loss). Total consideration was approximately £1.38m; being £1.0m cash (£500,000 payable on completion and £500,000 due by 1 January 2017), plus the repayment of intra company debt of US$500,000 (approximately £380,000). When Quintica was acquired in September 2012, the consideration was largely satisfied in ordinary shares, giving rise to goodwill of £5.9m. The Group recognised an impairment of goodwill in the results to 31 December 2015, bringing the carrying value in line with the realisable value such that no significant profit or loss was recognised on the disposal in 2016. 1.5.2 Disposal of BEI and CRC and the closure of the property services division On 7 January 2016, the Group substantially concluded its exit for the businesses that comprised the Property Services Division by the disposal of BEI and CRC. The property services division has recorded an operating loss of £0.1m in 2016 (2015: loss of £7.3m). The business activities of the other entities in the property services division, Quindell Property Services and Brand Extension UK had been substantially reduced earlier in 2015 following disappointing business performance, with their remaining activities transferred into or fulfilled by BEI. BEI was predominantly a property insulation supply and installation business and CRC was a provider of property maintenance services. Since acquisition by the Group, the performance of both BEI and CRC had been below expectations due to the unforeseeable changes to the market and legislation and, as a result, were loss making. The businesses operated in markets where unexpected changes to Government legislation in the funding of green, solar and other initiatives have substantially impacted trading and, in the view of the Board, the likely ongoing performance and prospects of the businesses. The Group impaired the carrying value of goodwill in the first half 2015 interim results by £4.5m. Nominal consideration received in 2016 is £1 with net liabilities disposed of approximately £(0.3)m. 1.5.3 Disposal of the Professional Services Division As noted in section 1.2, we have fully impaired the Warranty Escrow to a carrying value of £nil. The £50.1m cash (including interest) is held in a joint escrow account as security against any potential warranty claims. The period for warranty claims extended for 18 months from completion to 29 November 2016 (7 years for tax claims) and warranty claims are subject to a de-minimis of £200,000 for each item (£100,000 in the case of tax claims) with an aggregate basket of £2.5m before any claim can be made under the warranties. The limit of total liability in respect of warranty claims is £100.0m. Warranties were qualified by extensive disclosure given during the due diligence and negotiation process. No warranties were given by the Group in respect of historic accounting policies. Watchstone Group plc Annual Report and Financial Statements 201611 1.9 Discontinued operations and assets available for sale The long leasehold property in Fareham that used to be the Group’s head office has been vacated and as at 31 December 2016 was being marketed for sale. The carrying value of this asset has been categorised as an asset held for sale of £1.3m. 1.10 Post balance sheet events On 31 March 2017, the Group disposed of its wholly owned subsidiary Metaskil Limited (“Metaskil”) to Paul Hunsdon, a statutory director of Metaskil, for a nominal consideration of £1. This did not result in any gain or loss being recognised in the Consolidated Income Statement of the Group. 2. Financial Review The Group classifies its continuing operating businesses as underlying with businesses sold or closed as either non-underlying or discontinued as appropriate. This review is prepared consistently with that classification and is intended to give a better guide to underlying business performance. Non-underlying includes exceptional items or other matters which might mask underlying trading performance. 2.1 KPIs and Alternative Performance Measures (“APM”) Throughout 2016, the Board used a number of measures to determine the performance of the Group. The principal KPIs are as set out in note 5 to the Financial Statements, which provides a breakdown of EBITDA and adjusted profit before tax, and note 13 to the Financial Statements and the Income Statement and are summarised in the following table: The disposal of the PSD contained an element of uncertain consideration in relation to future receipts arising on NIHL cases which were current at completion. Given the inherent uncertainties of this business line, the parties could not agree on an appropriate valuation at completion and so the agreement provides that the Group will receive 50% of the net after tax receipts (after allowing for administrative costs) collected on the NIHL cases outstanding at completion. Approximately 53,000 NIHL cases were active and transferred at completion. Such amounts are determined on a six monthly basis with the first measurement date on 31 December 2015. The process will continue until 30 June 2017 when a terminal value projection of expected receipts will be agreed. If no agreement is reached, the process will continue with payments every six months until the earlier of the date when a terminal value is agreed or 31 December 2018. To date, there have been no amounts receivable by the Group in relation to these cases and based on an assessment of the costs that S&G will need to incur to pursue them and their potential outcome, the fair value of the deferred consideration has been determined as £nil (2015: £nil). 1.7 Retained earnings The Company has negative retained earnings as at 31 December 2016 of £98.5m and after deducting unrealised profits of £1.6m, has negative distributable reserves of £100.1m. 1.8 Impairments of Goodwill and Intangible assets A detailed review of each business has resulted, following assessment of potential future profitability, of impairments to goodwill and other intangible assets arising on acquisition as follows: £m Net at 31 December 2016 before impairment Impairment – Hubio – BAS As at 31 December 2016 – Hubio – ingenie – Healthcare Services – BAS Total Goodwill 30.0 Other intangibles 6.4 Total 36.4 (3.1) (3.7) – 14.7 8.5 – 23.2 – (0.1) (3.1) (3.8) 1.2 1.9 3.2 – 6.3 1.2 16.6 11.7 – 29.5 Watchstone Group plc Annual Report and Financial Statements 201612 Strategic Report (continued) Underlying business KPI Revenue Gross profit margin EBITDA Group operating loss Loss before tax Basic earnings (pence per share) 2016 £000 60,703 47.6% (9,760) (11,985) (10,750) (24.3) 2015 £000 54,894 43.3% (15,091) (19,228) (19,519) (34.0) 2.2 Underlying business performance and adjusted results 2.2.1 Revenue Underlying revenue for 2016 was £60.7m (2015: £54.9m). The Hubio businesses delivered underlying revenues of £15.0m (2015: £14.4m). Telematics based UBI revenues consist of proceeds from the sale of on-board devices and service charges for their usage and associated data provision. ingenie’s revenues, which principally comprise broker commissions from UK insurers, rose to £13.6m in 2016 (2015: £12.5m). This increase reflects an increase in new driver customers from 33,757 to 39,606, and by renewals increasing from 10,307 to 14,603 customers. In addition, third party service revenues earned in 2016 from the provision of our technology and platform were £0.3m and in line with the contract life expectation are earned over a 5 year period. Healthcare Services’ (ptHealth including InnoCare), major source of revenues is from the provision of physiotherapy and similar services and showed an increase in the year to £28.1m in 2016 (2015: £25.1m). An underlying increase in customers served by ongoing clinics was offset by a loss of revenues from the exiting of loss making clinics. InnoCare, the software and service provider within ptHealth earned revenues of £0.7m. BAS saw revenue growth to £3.7m (2015: £2.8m). During the year it won its first significant Corporate division contract, delivering revenues of £0.3m from its October start date in 2016 which is approximately one fifth of the overall estimated contract length. 2.2.2 Underlying EBITDA and Operating result EBITDA on an underlying basis, was a loss of £9.8m, (2015: £15.1m) and is considered as follows: Central costs have been identified as underlying and non-underlying and treated accordingly. Underlying costs have further been split and allocated to the business units where a link to that business unit has been established, on an appropriate basis for the type of cost. For example, senior management time would be allocated based on an assessment of the time spent working with or on behalf of that business unit, and property costs would be allocated based on headcount occupying the space. Hubio reports a loss before central cost allocation of £4.6m against a loss of £6.3m in 2015, and once central costs are allocated this is a loss of £6.3m (2015: £8.3m). RAG has been moved from underlying within Hubio in 2015 to non-underlying in 2016. ingenie in the UK generated an underlying profit before central cost allocation of £1.4m (2015: £0.8m) which reflects the customer growth noted above alongside more cost effective marketing activities. Healthcare Services reported an underlying profit before allocation of central costs of £1.2m (2015: loss £0.0m). The movement in results reflecting a heightened focus on cost control and elimination of loss making clinics. The necessary investment required to develop and grow the InnoCare software and services has resulted in an earnings drag of £0.2m. BAS delivered a small loss before allocation of central costs of £0.3m (2015: £0.7m). Continued focus is given to securing good quality pipeline which will deliver secure future earnings while developing the new Corporate division. The gross pipeline of future revenue already secured is £5.7m (2015: £5.9m). Underlying central expenses totalled £7.5m in 2016 (2015: £8.9m), with £3.2m allocated to the business units (2015: £3.5m), and £4.4m attributable to head office and plc costs (2015: £5.4m). Some £4.3m was spent on Board and other staff costs (2015: £5.5m) with legal, financial and other professional adviser and consultancy costs totalling £2.3m (2015: £2.4m). Watchstone Group plc Annual Report and Financial Statements 201613 Group operating loss totalled £20.9m (2015: £177.6m) with £12.0m (2015: £19.2m) due to underlying business operations. 2.2.3 Non-underlying including exceptional Items Revenues from non-underlying businesses were £3.1m (2015: £3.9m), of which the significant contributors were RAG £2.1m (2015: £2.9m) and Maine Finance £0.9m (2015: 2.1m). Both businesses were loss making and were closed during the year and up to the point of closure their EBITDA losses were £0.4m to end October for RAG (2015: £0.8m) and £0.4m to end August for Maine Finance (2015: £0.2m). The Group has reported £2.0m of exceptional items (2015: £136.1m). Impairment of non-cash assets totalled £6.6m net of an inventory impairment reversal (2015: £113.6m), with impairments in Hubio of £3.1m and BAS £3.8m. Reorganisation costs in Hubio were £1.7m in the year (2015: £2.8m), with the costs of corporate restructuring at £0.4m in the current year (2015: £8.7m). Legal and regulatory costs were a net credit to the Income statement of £1.0m (2015 expense: £7.1m). 2.2.4 Loss before tax The Group has incurred a continuing loss before tax of £18.9m for the year ended 2016 (2015: £178.0m), of which some £10.7m (2015: loss of £19.6m) derive from the underlying business activities. Overall, the Group made a loss before tax of £68.8m (2015: profit £261.8m). 2.2.5 Cashflow During the year the Company commenced placement of term deposits on rolling six month basis with a major UK bank. This increases the income arising on these deposits whilst the rolling maturities ensures that we have regular deposits maturing should we require access to the cash. Accounting standards require these deposits to be classified as Term Deposits. The Group has experienced net cash outflows of £22.0m for the year (2015: cash inflows £53.7m) resulting in a closing balance of cash and term deposits of £81.2m (2015: £103.2m). A summary of flows by business is shown below: Business Underlying business cash flows: Hubio ingenie Healthcare Services BAS Central Total underlying* Non underlying operating cash out flows excluding discontinued operations Other non-underlying excluding discontinued operations Total non-underlying excluding discontinued operations Cash flow Opening cash (excluding cash held for sale) Closing cash and term deposits 2016 £m (6.1) 1.8 0.8 0.2 (9.5) (12.8) (10.4) 1.2 (9.2) (22.0) 103.2 81.2 * Includes cash used in operations of £18.9m, plus Corporation Tax refund received of £7.0m, less investing activities of £2.7m (excluding term deposits and non-underlying investing activities), plus financing activities of £0.6m, plus exchange gain of £0.6m, less cash held for sale of £(0.6m). Watchstone Group plc Annual Report and Financial Statements 201614 Strategic Report (continued) Balance sheet movement summary As at 31 December 2015 Underlying EBITDA Discontinued and non-underlying EBITDA Exceptional items Other income statement Other balance sheet and reserves movements including foreign exchange Central Hubio Healthcare Services ingenie £m 111.3 (7.5) (3.1) (43.8) (0.6) (7.2) £m 2.4 (4.6) – (0.6) (3.4) 3.5 £m 7.2 1.2 0.1 – (0.7) – £m 17.9 1.4 – (0.1) (0.4) (0.6) BAS £m 3.0 (0.3) – (4.0) (0.2) – Discontinued and Non-underlying £m (4.7) – (1.0) (0.7) (2.1) 4.9 Group Total £m 137.1 (9.8) (4.0) (49.2) (7.4) 0.6 As at 31 December 2016 49.1 (2.7) 7.8 18.2 (1.5) (3.6) 68.5 Intercompany balances have been eliminated within the above analysis. 2.2.6 Balance Sheet The net assets shown in the statement of financial position at 31 December 2016 were £68.5m (2015: £137.1m) following the impairment of the Warranty Escrow detailed in 1.2 and 1.5.3 above. A summary analysis of the principal components and how they moved during the year is set out above. The closing net assets can be analysed by their proximity to cash as follows: As at 31 December Cash and term deposits Escrow balances Other net current liabilities/assets Creditors, loans and provisions over one year Non-cash assets Net assets 2016 £m 81.2 – (41.2) (7.3) 35.8 68.5 2015 £m 103.2 53.8 (57.8) (5.5) 43.4 137.1 2.2.7 Earnings per share The underlying basic and diluted EPS, as defined in note 13 to the Financial Statements, was a loss of 24.3 pence per share (2015: loss of 34.0 pence per share). 2.3 Going Concern The Group has significantly reduced its working capital requirements through the disposal of a number of non-core, loss making businesses. The Group holds significant cash reserves and no material debt. The Group has concluded that its cash reserves together with ongoing operating cash flows will be sufficient to fund the ongoing operations of the Group’s businesses together with any future development needs of those businesses and the settlement of legacy matters. On this basis, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors have not identified any material uncertainties that would cast significant doubt on the ability of the Group to continue as a going concern. As such, the Directors continue to adopt the going concern basis of accounting in the preparation of the financial statements. 2.4 Internal financial discipline We have defined the financial disciplines under which we will operate at the Group and operating company level. We have summarised below the key areas upon which we focus: ■ Ethics. Relationships and transactions will be conducted to high ethical standards. Customers, staff and suppliers should be treated fairly and transactions will be concluded on an arms-length basis. Regulators are communicated with on an open and prompt basis; ■ Safeguarding of assets. We will ensure that the assets of the Group are appropriately protected and managed and that maximisation of shareholder value is at the heart of all transactions involving corporate assets; ■ Cash and profit management. The Group and operating businesses are managed such that both profits and cash are given equal focus, recognising that some operating businesses may require investment to generate increased future profit and cash. Revenues and profit growth will be balanced by a requirement for there to be appropriate realisation of profits into cash. Dividend policy will be established such that cash profit generation forms the basis of a future sustainable dividend flow to our shareholders; Watchstone Group plc Annual Report and Financial Statements 201615 ■ Establishment of Investment Disciplines. 3. Capital management Operating businesses are challenged to deliver profitable growth and the timescales for each will depend on their relative maturity and market positioning. Appropriate investment will be made by the Group in order to maximise shareholder value from these assets; ■ Authorisation and accountability. Matters reserved for Board approval and the control environment are proportionate to the size of the Group. Operating and project expenditure will typically be authorised via the business planning process culminating in an approved budget in advance of the year commencing. Outside of the cycle additional expenditure can be approved subject to the appropriate justification and business case being established if appropriate. Individuals will have authority to approve expenditure to certain limits, determined by type of expenditure. Accountability for expenditure is ensured via the regular process of business performance reporting and review; ■ Financial Planning, Reporting and Monitoring. The Group will run a business cycle as summarised below: Mid year Strategic review and target setting for the Group and its operating businesses. Q3 Q4 Operating businesses perform detailed business planning and budget setting for the subsequent 3 years. Group review and challenge of operating businesses plans. Board review and approval by year end. Monthly Reporting of financial results and KPIs. Quarterly Re-forecast of full year expected outturn and review with Group. In addition to the internal financial discipline, the Group will make trading statements (as appropriate) and report full and half yearly financial results externally. 2.5 Interim Financial Statements for the period ending 30 June 2017 We intend to prepare a set of interim Financial Statements for the 6 months ending 30 June 2017 which will be subject to review by the Auditor. The Group’s objective is to maintain a balance sheet structure that is efficient in terms of providing long term returns to shareholders and which safeguards the Group’s financial position through economic cycles. There is little or no external debt finance in the business and the Group maintains sufficient liquid funds to be able to fund the growth aspirations of its operating businesses. 4. Principal risks and uncertainties The Group is exposed to a number of risks and uncertainties which could have a material impact on its long term performance. The Directors have identified those which they regard as being the principal risks and these are set out below. 4.1 Strategic risk The take up rate of telematics by consumers globally and in local markets over the next three to five years, influenced by factors such as end-user perceptions, rate of adoption of new technologies, regulatory drivers and the economic climate could put at risk the Group’s ability to meet its strategic objectives in the areas of telematics and connected car solutions. The Group may fail to execute its ongoing strategic plans in relation to connected car, healthcare or insurance. The Group may fail to execute its ongoing strategic plan in relation to connected car and the expected benefits of those plans. 4.2 Technological change The markets for the Group’s services can be affected by technological changes, resulting in the introduction of new products, evolving industry standards and changes to consumer behaviour and expectations. The Group regularly monitors trends in technological advancement to anticipate and plan for future changes and maintains close relationships with businesses and organisations which it believes will keep it to the forefront of product and service development on a sustained basis. 4.3 Key personnel and resources The success of the Group depends to a large extent upon its executive management team and its ability to recruit and retain high calibre individuals at all relevant levels within the organisation. The Group will continue to seek to mitigate this resource risk by providing appropriate training, competitive reward and compensation packages, incentive schemes and succession planning. Watchstone Group plc Annual Report and Financial Statements 201616 Strategic Report (continued) 4.4 Regulatory and reputational risks 4.6 Management of growth The investigation commenced by the SFO may affect the Group’s reputation and brand and attract negative media coverage. Failure to protect the Group’s reputation and brand in the face of regulatory, legal or operational challenges could lead to a loss of trust and confidence and a decline in our existing and future customer base. In addition, regulatory investigations could also affect our ability to recruit and retain talented employees. It is also possible that regulators will seek to levy fines on the Group or Courts will award damages against the Group. Reputational issues may also affect the attractiveness of the Company’s shares to new and existing investors. As a data controller, the Group is also subject to risks related to matters such as data processing and security, and data and service integrity. In the event of a breach, these risks may give rise to reputational, financial or other sanctions against some or all of the Group. Law or regulation of data use and protection may change. The Group considers these risks seriously and designs, maintains and reviews its policies and processes so as to mitigate or avoid these risks. The pricing of products and services, the activities of major industry organisations, and the Group’s ability to operate and contract in the manner that it has done so in the past, may be affected by the actions of regulatory bodies both in the UK and internationally. Such action could affect the Group’s profitability either directly or indirectly. The Group continually monitors and assesses the likelihood, potential impact and opportunity provided by regulatory change, and adapts its plans and activities accordingly. 4.5 Liquidity risk The Group expects to manage liquidity within its cash capacity. The Group actively forecasts, manages and reports its working capital requirements, including conducting sensitivity analyses on a regular basis to ensure that it has sufficient funds for its operations. In addition, it will manage the timing and value of any future investments in light of forecast cashflow requirements. The Group will operate focused on its insurance related technology, healthcare and associated markets. Growth management will be controlled through the planning cycle and include scenario planning to ensure that the businesses are resilient when expanding in key markets and geographical locations. 4.7 Market conditions Market conditions, including general economic conditions and their effect on exchange rates, interest rates and inflation rates, may impact the ultimate value of the Group regardless of its operating performance. The Group also faces competition from other organisations, some of which may have greater resources than the Group, or be more established in a territory or product area. The Group’s strategy is to target a balance of markets, offering a range of tailored or specialised products and services. 4.8 Foreign exchange The international nature of some of the Group’s operations mean that it is exposed to volatility in exchange rates. This is in respect of foreign currency denominated transactions and the translation of income statements and net assets of foreign subsidiaries. The Group has its most significant presence in North America, and therefore its most significant foreign currency exposure is in relation to US$ and CDN$. In addition, BAS has operations in South Africa, with commensurate Rand exposure to its cost base. Foreign currency exposure is mitigated where possible by matching the purchasing and sales of revenue and cost transactions. The Company has not sought to mitigate its exposure to the translation of net assets. Mark P Williams Group Finance Director By order of the Board Watchstone Group plc Annual Report and Financial Statements 201617 Board of Directors Richard Rose (61) David Currie (47) Non-Executive Chairman Richard is Non-Executive Chairman of Crawshaw plc, Anpario plc and Blue Inc Limited. Previously, he has held a number of positions in organisations such as AO World plc where he was Non-Executive Chairman from 2008 to 2016, Booker plc (‘Booker’) where he was Non-Executive Chairman (previously an Executive Director and Chairman of Blueheath Holdings plc immediately prior to its reverse acquisition by Booker in 2007), AC Electrical Wholesale, where he was Chairman from 2003 to 2006 and Whittard of Chelsea plc, where he was Chief Executive Officer and then Executive Chairman from 2004 to 2006. Indro Mukerjee (56) Group Chief Executive Officer Indro joined the Group as Group Chief Executive Officer in September 2015. He has previous Board level leadership experience in corporate multinational, new venture and private equity backed fast moving technology and industrial companies. Prior to joining the Group, Indro launched FlexEnable Limited, a leader in flexible electronics technology for wearables and sensors, which was created from the transformation of Plastic Logic where he was CEO. His earlier career included being CEO of C-MAC MicroTechnology, a private equity backed LBO from which three market-leading businesses were created and sold; several executive board positions with Philips Semiconductors BV, including Executive VP Global Marketing & Sales and CEO of Automotive business unit; Commercial Director of VideoLogic during IPO and senior management positions within Hitachi’s European semiconductor division. Indro is a member of the Board of Sector Skills Council for UK Science, Engineering and Manufacturing Technologies and is the founding Chairman of the UK Electronics Skills Foundation. Indro has a degree in Engineering Science from Oxford University, is a graduate of the Wharton Advanced Management Program and speaks several European languages. Mark Williams (52) Group Finance Director Mark Williams is a Fellow of the Institute of Chartered Accountants and has 30 years of finance experience. Mark has had a varied career to date, having qualified with what is now Deloitte. His experience ranges from a technology driven entrepreneurial start up through to divisions of major international FTSE businesses and through several business cycles. He has operated at Board level for the past 15 years, including roles at AXA, Cofunds, Guardian Royal Exchange, Legal & General, Old Mutual and Skandia. Non-executive Director David has worked within the financial sector for over 20 years, and was appointed to the Board in July 2014. In April 2013 David established Codex Capital Partners and for the prior 10 years David headed Investec Bank plc’s Investment Banking division. As part of Investec’s UK management and investment committee, he oversaw more than 100 clients in both the public and private markets and worked on a wide variety of transactions across many sectors. The Rt. Hon. Lord Howard of Lympne, CH, QC (75) Senior Non-executive Director Lord Howard is the former leader of the Conservative Party, a distinguished lawyer and served as a Member of Parliament for 27 years. He filled many government posts, including Home Secretary, Secretary of State for Employment and Secretary of State for the Environment, as well as Shadow Foreign Secretary and Shadow Chancellor. After his retirement from the House of Commons at the 2010 General Election, Lord Howard was created a Life Peer. He was created a Companion of Honour in the Queen’s Birthday Honours List, 2011. Lord Howard is the Non-executive Chairman of Entree Gold Inc. and the Non-executive Chairman of Soma Oil & Gas Holdings Limited. Tony Illsley (60) Non-executive Director Tony has held a variety of senior business positions including Chief Executive of Telewest Communications PLC, President of Pepsi Cola Asia Pacific and Senior Independent Non- Executive Director of easyJet PLC. He is currently a Non-Executive Director of Camelot Global Services Limited and Camelot UK Lotteries Limited. David Young (55) Non-executive Director David qualified as an accountant with Arthur Andersen before joining Morgan Grenfell as an Investment Banker specialising in Mergers & Acquisitions. In 1994, he joined listed insurance broker Bradstock Group PLC, initially as Finance Director before becoming Chief Operating Officer and, ultimately, Chief Executive. On leaving, David joined Barchester Group, a strategic and advisory business aimed at technology businesses. David has held numerous Non-executive positions and audit committee chairs with insurance and financial services businesses. He is currently a Non-executive Director of Premium Credit Limited, the British Gas Insurance Group, Key Retirement Group and is a consultant to Independent Audit Limited. Watchstone Group plc Annual Report and Financial Statements 201618 Directors’ Remuneration Report The Board recognises the importance of shareholder transparency and compliance with corporate governance principles. The Company has prepared this report in order to enable a better understanding of Directors’ remuneration. The information included in this report is unaudited. The information in this report relates to the remuneration arrangements that applied during the year ended 31 December 2016 and the remuneration policy that applies in 2017. Remuneration Committee Tony Illsley was appointed chairman of the Committee in June 2015. The additional members are David Young and Lord Howard all of whom are independent. Richard Rose, the Non-executive Chairman is invited to attend all meetings of the Committee and is actively involved in consultation with major shareholders on key matters of remuneration. The Committee meets at least twice each year and has delegated responsibility for making recommendations to the Board regarding the remuneration and other benefits of the executive Directors and senior executives and the Non-executive Chairman. The remuneration of the Non-executive Directors is determined by the Board. Senior executives of the Company may be invited to attend meetings. The Group General Counsel & Company Secretary acts as secretary to the Committee (save where a conflict exists). No Director or other executive is involved in any decisions about his/her own specific remuneration. Remuneration policy The Board’s policy is designed to promote the long-term success of the Company by rewarding senior executives with competitive but responsible salary and benefit packages combined with a significant proportion of executive remuneration dependent on performance, both short-term and long-term. The Board’s intention is to combine appropriate levels of fixed pay with incentive schemes that provide executives with the ability to earn above median levels for true out- performance. In determining the remuneration policy the Committee was conscious of both the unusual and challenging circumstances of the Company and the Board’s strategy to simplify and focus the Company on delivering shareholder value (as detailed in the Chairman’s Report and Group Chief Executive’s Update). Accordingly, the Committee believes that the MIRP (as detailed below) focuses the executive Directors on enhancing value and returning that value to shareholders and ensures alignment between the executive Directors, Board strategy and shareholder interests. The remuneration packages for executive Directors comprises the following main elements: ■ basic annual salary – Basic salaries are reviewed by the committee annually to take effect on 1 January. In setting basic salaries the Committee assesses individual responsibilities, experience and performance and considers external market data; ■ annual bonus payments in respect of the performance of the individual, achievement of performance criteria and the individual’s contribution to that performance and the Group calculated as a percentage of salary; and ■ a cash-based incentive and retention scheme (“MIRP”), focused on delivering growth in the value of the Company’s operating businesses going forward without penalising or rewarding management in respect of historic matters. Watchstone Group plc Annual Report and Financial Statements 201619 Remuneration of the executive Directors in 2016 Given the scale, complexity and history of the Group, recruitment and retention of key management was considered, and remains, of critical importance. In addition, the Board and key management are required to accept an unusual level of risk in respect of the historical circumstances of the Company particularly given the investigations commenced in 2015 by the FRC, the FCA (both now terminated) and the SFO (ongoing). Accordingly, the Remuneration Committee believe it appropriate that pay and incentive packages should reflect these factors such that the Group was able to offer above average remuneration to recruit and retain the best people. Indro Mukerjee (Group Chief Executive Officer) Indro Mukerjee has a base salary of £475,000 per annum (2015: £475,000 per annum) (this has not been increased for 2017) and an entitlement to an annual discretionary bonus of up to 175% of salary. In addition, Mr. Mukerjee is entitled to a maximum of £47,000 per annum in cash in respect of pension contributions or other purposes and typical executive benefits including life assurance and health and medical insurance. His notice period on his rolling service contract is 3 months. Mark Williams (Group Finance Director) Mark Williams has a base salary of £250,000 per annum (2015: £250,000 per annum) (this has not been increased for 2017) and an entitlement to an annual discretionary bonus of up to 150% of salary. In addition, Mr. Williams is entitled to typical executive benefits including a pension contribution of 10% of base salary, life assurance and health and medical insurance. His notice period on his rolling service contract is 6 months. Annual bonuses of the executive management team In deciding on the annual cash bonuses awarded to the executive management team for 2016, the Remuneration Committee took into account the work of the team in respect of, inter alia, the: ■ growth, profits and reduction of losses in the Group’s operating businesses; ■ disposal and restructuring of non-core assets; and ■ resolution, careful management and mitigation of complex legacy matters both at the plc level and within our operating companies. The executive Directors received 75% of their respective maximum bonus for the year ended 31 December 2016. For details of the annual bonuses paid to the Directors, please see the table below and the associated notes. For 2017, annual discretionary bonuses for the executive management team will be closely aligned to the interests of the Company and its shareholders. Executive management will be rewarded based on the achievement of outcomes consistent with the optimisation of shareholder value in this Company. The discretionary bonus plan will reward, inter alia, a combination of: ■ realisation of value of the Group’s businesses; ■ resolution, careful management and mitigation of legacy matters both at the plc level and within our operating companies; ■ optimisation of returns from contingent assets; and ■ the elimination of losses. All of the above will be required to be delivered within a constrained set of cash management targets. Award of the maximum discretionary bonuses will only be given on optimal achievement of these targets. The maximum potential bonus payments for the executive Directors are as detailed above. Watchstone Group plc Annual Report and Financial Statements 201620 Directors’ Remuneration Report (continued) Management Incentive and Retention Plan The MIRP is a cash-based incentive and retention scheme that will only be triggered upon value-crystallising events (including, inter alia, a takeover of the Group or disposals of individual divisions) in excess of base values. A market price of 250 pence per share (being approximately a 18.5% premium to the closing share price on 18 March 2016) for the Group as a whole (including all its assets and liabilities) was used to ascribe a base value to each division (“Hurdle”). The Hurdle will be adjusted, inter alia, for cash invested by the Group and dividends or other proceeds paid to the Group by the respective divisions. The benefits paid pursuant to the MIRP (if any) will specifically exclude the impact of, or adjustment for the Company’s cash balances, the cash held in the Warranty Escrow and the deferred consideration payable pursuant to the disposal of the PSD; and any cash paid to resolve liabilities relating to events which occurred prior to the appointment of the new Board of the Company on 29 May 2015. Indro Mukerjee, Mark Williams and Stefan Borson are entitled to a share of up to a total in aggregate of 9.5% of any growth in value of each division of the Group above the Hurdle (as adjusted for cash invested or generated from 1 January 2016). Non-executive Directors The Non-executive Directors do not have service contracts, nor do they participate in any share option plan, MIRP, long term incentive plan or pension scheme. The services of each Non-executive Director are provided under a letter of engagement which can be terminated by either party giving notice (one months’ notice for each Non-executive Director except David Currie (3 months)). Fees payable under the terms of their appointments for those Directors who served during the year are shown in the table below. Watchstone Group plc Annual Report and Financial Statements 201621 Directors’ emoluments The remuneration of the Directors, including the highest paid Director who was Indro Mukerjee, was as follows (see note 10): Salary and fees £000 Bonus £000 Contributions to personal pension schemes £000 522 258 780 185 50 75 75 75 1,240 Bonus £000 269 369 – – 638 – – – – – – – – – Salary and fees £000 166 147 149 171 633 108 50 49 50 45 7 44 44 44 1,074 638 623 331 954 – – – – – 954 Contributions to personal pension schemes £000 – 14 – 36 50 – – – – – – – – – 50 – 17 17 – – – – – 17 Compensation for loss of office £000 – – – 575 575 – – – – – – – – – Total 2016 £000 1,145 606 1,751 185 50 75 75 75 2,211 Total 2015 £000 435 530 149 782 1,896 108 50 49 50 45 7 44 44 44 2016 Executive I Mukerjee(1) M Williams(2) Non-executive R Rose(2) D Currie A Illsley(2) M Howard(2) D Young(2) Total 2015 Executive I Mukerjee(1) M Williams(2) R Fielding(4) L Moorse(4) Non-executive R Rose(2) D Currie R Bright(4) R Burrow(4) R Cooling(4) S Scott(3) A Illsley(2) M Howard(2) D Young(2) Total Notes 575 2,337 1. Appointed 7 September 2015. As part of the negotiations relating to his appointment, in light of the regulatory uncertainty at the time of the appointment and to compensate for cash bonuses forfeited in respect of previous posts, the Remuneration Committee agreed to pay a total payment of £500,000 in cash (“Deferred Compensation Payment”) to Mr Mukerjee. The Deferred Compensation Payment accrued on a daily basis for one year from 7 September 2015 and was not be subject to any exercise of discretion by the Remuneration Committee. £161,417 of the Deferred Compensation Payment was accrued and paid in respect of the period up to 31 December 2015. The remaining £338,582 of the Deferred Compensation Payment was accrued and paid in respect of the year ended 31 December 2016 and offset Mr. Mukerjee’s annual discretionary bonus such that his aggregate cash bonus of £623,438. 2. Appointed 29 May 2015. M Williams bonus includes £50,000 retention payment paid in December 2016 and his annual cash bonus of £281,250. 3. Resigned 18 November 2014. Also provided services to the Group (see note 37) 4. Resigned 29 May 2015. This report was approved by the Board on 27 April 2017 and signed on its behalf by: Tony Illsley Chairman of the Remuneration Committee Watchstone Group plc Annual Report and Financial Statements 201622 Corporate Governance Report The Group is supportive of the principles embodied in the UK Corporate Governance Code that was issued by the Financial Reporting Council in 2010 and most recently updated in 2014. This report describes how the principles of corporate governance are applied to the Group. The Board The Group has appointed Non-executive Directors to bring an independent view to the Board and to provide a balance to the executive Directors. During the year, the Board of Directors comprised two executive Directors and five independent Non-executive Directors. The Board meets monthly throughout the year (save in August and December), and meets at various times between these dates to discuss matters and agree actions on an ongoing basis. In preparation of each regular meeting, the Board receives a Board pack with the information necessary for it to discharge its duties. The Board has responsibility for formulating, reviewing and approving the Group’s strategy, its financial plans, regulatory announcements, major items of expenditure, investments, acquisitions and disposals and the Directors’ report and Annual and Interim Financial statements. Each Director has access to the advice and services of the Group General Counsel & Company Secretary and is able to take professional advice at the Group’s expense. The Group maintains appropriate insurance cover in respect of legal actions against Directors as well as against material loss or claims against the Group and reviews the adequacy of cover regularly. The Group has also entered an agreement with each of its Directors whereby the Director is indemnified against certain liabilities to third parties which might be incurred in the course of carrying out his duties as a Director. These arrangements constitute a qualifying third party indemnity provision for the purposes of the Companies Act 2006. Board committees The Board has established four committees: Audit, Remuneration, Nomination and Disclosure. The Group Company Secretary is secretary to each committee but does not act where discussion relates to him or where there is another conflict. Audit committee The Audit Committee is chaired by David Young and consists of David Young, Tony Illsley and Lord Howard. It meets at least twice a year with attendance from the external Auditors and internal personnel as required. The committee is responsible for: ■ ensuring that the appropriate financial reporting procedures are properly maintained and reported on; ■ meeting the Auditors and reviewing their reports relating to the Group’s accounts and internal control systems; ■ reviewing and monitoring the independence of the external Auditor and the objectives and effectiveness of the audit process; and ■ reviewing arrangements by which staff may in confidence raise concerns about possible improprieties in matters of financial reporting or otherwise and receiving and dealing with matters reported under these arrangements. Remuneration committee The Remuneration Committee is chaired by Tony Illsley and consists of Tony Illsley, David Young and Lord Howard. It meets at least twice a year and is responsible for reviewing the performance of the executive Directors and other senior executives and for determining appropriate levels of remuneration. The Committee’s report is set out on pages 18 to 21. Watchstone Group plc Annual Report and Financial Statements 201623 Nomination committee Internal control and risk management The Group operates a system of internal control and intends to develop and review that system in accordance with guidance published by the FRC. The internal control system is designed to manage rather than eliminate the risk of failure to achieve business objectives. The Board is responsible for the system of internal control and for reviewing its effectiveness. It can only provide reasonable, but not absolute, assurance against material misstatement or loss. Internal financial control monitoring procedures undertaken by the Board and executive team include the preparation and review of annual forecasts, review of monthly financial reports and KPIs, monitoring of performance, and the prior approval of all significant transactions. The Company has established a policy and share dealing code relating to dealing in the Company’s shares by Directors, employees and connected persons. Going concern The Board of Directors’ consideration of the adequacy of the Group’s resources to enable it to continue in operational existence for the foreseeable future is set out on page 14. The Nomination Committee consists of Richard Rose, Lord Howard and Tony Illsley and is chaired by Richard Rose. It meets at least once a year and reviews the size, structure and composition of the Board and makes recommendations on changes, as appropriate. It also gives consideration to succession planning in the light of developments in the business. Disclosure committee The Disclosure Committee consists of Mark Williams, David Young and David Currie and is chaired by Mark Williams. The role of the Disclosure Committee is to assist and inform the Board in making decisions concerning the identification of information that requires announcement pursuant to the AIM Rules for Companies and other relevant rules. The Disclosure Committee meets as necessary to consider all relevant matters. It will in particular meet in advance of the release of all trading statements and other announcements of price sensitive information to ensure that they are true, accurate and complete and to consider if they are fair, balanced and understandable. Shareholder relations The Company meets with institutional shareholders and analysts as appropriate and uses its website to encourage communication with private, existing and prospective shareholders. The Company also maintains regular contact with private investors via meetings, email correspondence and via investor forums. The Company welcomes feedback from investors about its published reports and website. Please address your feedback to our investor relations team by e-mail to investor.relations@watchstonegroup.com or in writing to Watchstone Group plc, 21 Tower Street, London WC2H 9NS. Watchstone Group plc Annual Report and Financial Statements 201624 Directors’ Report The Directors present their report and the audited Financial Statements for the year ended 31 December 2016. Directors The Directors who held office at 31 December 2016 and up to the date of this report are set out on page 17 along with their biographies. There were no changes to the Board during the year or up to the date of this report. The remuneration of the Directors including their respective shareholdings in the Company is set out in the Directors’ Remuneration Report on pages 18-21. As at 31 December 2016, the following Directors held shares in the Company: Richard Rose (100,000); Indro Mukerjee (50,550); Mark Williams (50,550); Lord Howard (12,608); and David Currie (1,950). Shareholder Beachpoint Capital Management LP Sand Grove Capital Management LLP M&G Investments Polygon Global Partners LLP Shares 6,435,425 3,471,638 2,916,666 2,356,709 BlueMountain Capital Management, LLC 2,319,940 Percentage (%) 13.98 7.54 6.34 5.12 5.04 Dividends The Directors do not recommend the payment of a final dividend (2015: nil). Committees of the Board The Board has established Audit, Nominations, Remuneration and Disclosure Committees. Details of these Committees, including membership and their activities during 2015 are contained in the Corporate Governance section of this Annual Report and in the Remuneration Report. Corporate governance Directors’ and Officers’ liability insurance and indemnification of Directors The Group’s report on Corporate Governance is on pages 22-23 and forms part of this Directors’ Report. The Company maintains Directors’ and Officers’ liability insurance which gives appropriate cover for any legal action brought against its Directors. The Company has also granted indemnities to each of its Directors to the extent permitted by law. Qualifying third party indemnity provisions (as defined in Section 324 of the Companies Act 2006) have been adopted by the Board. These indemnities remain in force in relation to certain losses and liabilities which the Directors may incur to third parties in the course of acting as Directors of the Company. Share capital The Company has only ordinary shares of 10 pence nominal value in issue. Note 13 to the consolidated Financial Statements summarises the rights of the ordinary shares. Substantial shareholdings As at 26 April 2017, the Company had been advised under the Disclosure and Transparency Regime, or had ascertained from its own analysis, that the following held interests of 3% or more of the voting rights of its issued share capital: Companies Act 2006 disclosures In accordance with Section 992 of the Companies Act 2006, the Directors disclose the following information: ■ The Company’s capital structure and voting rights are summarised in note 28, and there are no restrictions on voting rights nor any agreement between holders of securities that result in restrictions on the transfer of securities or on voting rights; ■ There exist no securities carrying special rights with regard to the control of the Company; ■ Details of the substantial shareholders and their shareholdings in the Company are listed above; ■ The rules concerning the appointment and replacement of Directors, amendment to the Articles of Association and powers to issue or buy back the Company’s shares are contained in the Articles of Association of the Company and the Companies Act 2006; ■ There exist no agreements to which the Company is party that may affect its control following a takeover bid; and ■ There exist no agreements between the Company and its Directors providing for compensation for loss of office that may occur because of a takeover bid. Watchstone Group plc Annual Report and Financial Statements 201625 Articles of Association The Company’s Articles of Association set out the rights of shareholders including voting rights, distribution rights, attendance at general meetings, powers of Directors, proceedings of Directors as well as borrowing limits and other governance controls. A copy of the Articles of Association can be requested from the Group Company Secretary. Transactions in which one or more of the Directors had a material interest in and to which the Company, or its subsidiaries, was a party during the financial year are described in note 37, Related Parties. Other than as described in that note, there were no contractual relationships between the Directors and companies with which they are connected and the Watchstone Group plc Group of companies during the year. Conflicts of interest Employees During the year no Director held any beneficial interest in any contract significant to the Company’s business, other than a contract of employment. The Company has procedures set out in the Articles of Association for managing conflicts of interest. Should a Director become aware that they, or their connected parties, have an interest in an existing or proposed transaction with the Group, they are required to notify the Board as soon as reasonably practicable. Going concern The Group holds significant cash reserves and no material bank debt. The Group has concluded that its cash reserves and short term investments in term deposits will be sufficient to fund the ongoing operations of the Group’s businesses, together with any future development needs of those businesses, and the settlement of legacy matters. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors have not identified any material uncertainties that would cast significant doubt on the ability of the Group to continue as a going concern. As such, the Directors continue to adopt the Going Concern basis of accounting in the preparation of the Financial Statements. Financial instruments At the end of the year, the Group does not generally have complex financial instruments. The financial instruments comprise borrowings (primarily the non-voting Series ‘A’ preference shares issued by ptHealth), cash and liquid resources and various items such as trade debtors and trade creditors that arise from its operations. The main purpose of these financial instruments is to manage the Group’s operations. Further information in relation to the financial risk management objectives of the Group, the financial risk factors noted and a detailed analysis of the Group’s exposure to interest risk, liquidity risk, capital risk and credit risk is included in Note 33 to these Financial Statements. The Group has a policy of offering equal opportunities to employees at all levels in respect of the conditions of work. Throughout the Group it is the Board’s intention to provide possible employment opportunities and training for disabled people and to care for employees who become disabled having regard to aptitude and abilities. Regular consultation and meetings, formal or otherwise, are held with all levels of employees to discuss problems and opportunities. Information on matters of concern to employees is presented in the in-house letters and publications. Statement of Directors responsibilities in respect of the Annual Report, Strategic Report, the Directors’ Report and the Financial Statements The Directors are responsible for preparing the Annual Report and the Group and Parent Company Financial Statements in accordance with applicable law and 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 on the same basis. Under Company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. 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; ■ make judgements and estimates that are reasonable and prudent; Watchstone Group plc Annual Report and Financial Statements 201626 Directors’ Report (continued) ■ state whether they have been prepared in accordance with IFRSs as adopted by the EU; and ■ prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group and the 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. 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. Disclosure of information to the Auditor In the case of each of the persons who are Directors of the Company at the date when this report is approved: (a) so far as each Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware; and (b) each of the Directors has taken all steps that they ought to have taken as a Director to make themselves aware of any relevant audit information (as defined) and to establish that the company’s Auditor is aware of that information. This information is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. In accordance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG LLP as auditor of the company is to be proposed at the forthcoming Annual General Meeting. Annual General Meeting (“AGM”) The 2017 AGM will be held at 10.30am on 27 June 2017 at Vauxhall & Lambeth Suite – 2nd floor, Park Plaza County Hall, 1 Addington St, Lambeth, London SE1 7RY. The Chairmen of the Board and of each of its Committees will be in attendance at the AGM to answer questions from shareholders. The Company will be making use of the electronic voting facility provided by its registrars, Capita Asset Services. The facility includes CREST voting for members holding their shares in uncertificated form. For further information, please refer to the section on on- line services and electronic voting set out in the notes to the Notice of Meeting. The Notice of Meeting and an explanation of the resolutions to be put to the meeting are set out in the Notice of Meeting accompanying this Annual Report. The Board fully supports all the resolutions and encourages shareholders to vote in favour of each of them. By order of the Board Stefan Borson Group General Counsel & Company Secretary Watchstone Group plc Annual Report and Financial Statements 201627 Audit Committee Report The Audit Committee is chaired by David Young and consists of David Young, Lord Howard and Tony Illsley. It meets at least twice a year with attendance from the external Auditors and internal personnel as required. The Committee is responsible for: ■ ensuring that the appropriate financial reporting procedures are properly maintained and reported on; ■ meeting the Auditors and reviewing their reports relating to the Group’s accounts and internal control systems; ■ reviewing and monitoring the independence of the external Auditor and the objectives and effectiveness of the audit process; and ■ reviewing arrangements by which staff may in confidence raise concerns about possible improprieties in matters of financial reporting or otherwise and receiving and dealing with matters reported under these arrangements. Summary of meetings during the year The focus of the Committee has again been on the integrity of the Group’s financial accounting and ensuring that shareholders can have confidence in the Group’s accounting systems and policies and, as a result, in its reported results. The very substantial amount of work undertaken in 2015 reduced somewhat in 2016, reflecting the simplification of the Group through the sale or closure of some businesses and the resolution of some legacy issues. There were two formal meetings of the Committee and a number of briefing discussions with individual committee members. The settlement of past issues, continues to require discussion and openness between the financial management team and the Auditors and a more consultative process than is usual. 2016 Audit and Financial Reporting The Committee reviewed with both management and the external Auditor the appropriateness of the half-year and annual financial statements concentrating on, amongst other matters: ■ the application of materiality to the reduced level of ongoing business given the still significant legacy assets and potential liabilities; ■ the quality and acceptability of accounting policies and practices; ■ the appropriateness and clarity of the disclosures and compliance with financial reporting standards; ■ material areas in which significant judgements have been applied or where there has been discussion with the Auditor; and ■ whether the annual report and accounts, taken as a whole, present the results for the year in a fair and balanced way and provide the information necessary for shareholders to assess the Company’s financial position, performance, business model and strategy. As a Committee it supports the Auditors in displaying the necessary professional scepticism their role requires and meets with the auditors without the executive being present. Management, encouraged by the Committee, have made considerable progress in reducing the number of subsidiaries in the Group which trade by transferring business to other Group companies and striking them off or otherwise making companies dormant. At 31 December 2014, the Group comprised 148 companies; by 31 December 2016, this had been reduced to 59 after disposals of 76 and strike off of 13 and will reduce further in the current year. The Committee paid particular consideration to the scope of the audit and the risks with the greatest impact on the audit. It reviewed and considered the significant issues in relation to the Financial Statements and how these have been addressed, including: ■ Revenue recognition, particularly on those contracts containing multiple elements Revenue recognition is a complex area and particularly so when customer contracts involve technology with a variety of ongoing performance obligations and/or when contracts include multiple elements. The Committee reviewed the treatment of significant contracts in force during the year. Watchstone Group plc Annual Report and Financial Statements 201628 Audit Committee Report (continued) ■ Valuation of PSD escrow account and deferred Relationship with the Auditor consideration The sale of the Professional Services Division was concluded during 2015. The disposal proceeds contain a number of estimates of amounts which are material to the Balance Sheet, in particular of the Warranty Escrow and deferred consideration potentially receivable in respect of NIHL cases. The Committee has reviewed the estimates and, in particular, the full impairment of the Warranty Escrow, considering whether it was possible to place a valuation or probability of success with any certainty on the purported claim. ■ Exceptional and adjusted items The accounts and strategic report make a number of references to exceptional costs and other adjusting items. The Committee has reviewed the presentation of these items in the light of applicable accounting standards and guidance issued by the European Securities and Markets Authority and the FRC. ■ Valuation of goodwill, intangible assets and assets held for sale The Consolidated Statement of Financial Position includes goodwill arising on acquisitions as well as other intangible assets such as software development costs as well as an asset held for sale. Goodwill and other intangible assets arising on all acquisitions was reviewed in the light of developments in their businesses in 2016. ■ Estimates of provisions required at the year end The Group has significant provisions for tax related matters, legal and regulatory investigations and disputes, onerous contracts and reorganisation costs as shown in note 26. The level of net provisions has reduced during the year as issues have been settled. Nevertheless provisions can involve significant judgement and therefore we have reviewed the assumptions made by management of the accuracy and valuation of tax related assets and liabilities and of the likelihood of other costs expected to be incurred, in particular as a result of the investigations and actions referred to in note 26. Shareholders approved the re-appointment of KPMG at the 2016 AGM at which the Committee Chairman explained that the Board remained satisfied as to KPMG’s independence and objectivity and the quality of the 2015 audit. The Committee believes that the independence of the Auditor is one of the primary safeguards for shareholders. The Committee reviewed audit independence and the scope of non-audit services and independence safeguards with KPMG. As part of this review, the Committee has received and reviewed written confirmation that, in KPMG’s professional judgement, KPMG is independent within the meaning of all UK regulatory and professional requirements and the objectivity of the audit engagement partner and audit staff is not impaired. During 2016, KPMG and financial management, including the Committee Chairman took part in a full audit planning day with the aim of ensuring the most effective and efficient audit. The Committee is satisfied that there has been appropriate focus and challenge on the primary areas of audit risk and assess the quality of the audit process to be good and therefore has recommended to the Board the reappointment of KPMG as Auditor. Risk management and internal control The Committee has reviewed with the Group Finance Director the structure of the financial management team which is appropriate for the size and strategy of the Group going forward, taking into account the need still to manage legacy issues. During the year, the main finance function was moved from Fareham which allowed the Fareham lease to be offered for sale. The Committee discussed with the Group Finance Director his plans to mitigate potential loss of finance expertise whilst ensuring that staff were appropriately treated. The Committee received a report into the overstatement of reported earnings per share in the initial press release of the Group’s interim results. I apologise on behalf of the Board for this error, the root cause of which was an immaturity in the Group’s reporting systems. Changes have been made both to systems and review processes as a result. Watchstone Group plc Annual Report and Financial Statements 201629 Independent Auditor’s Report to the members of Watchstone Group plc We have audited the Financial Statements of Watchstone Group plc for the year ended 31 December 2016 set out on pages 30 to 99. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the Parent Company Financial Statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 25, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the Financial Statements A description of the scope of an audit of Financial Statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on Financial Statements In our opinion: ■ the financial statements give a true and fair view of the state of the Group’s and of the Parent company’s affairs as at 31 December 2016 and of the Group’s loss for the year then ended; ■ the group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; ■ the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and ■ the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year is consistent with the Financial Statements. Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors’ report: ■ we have not identified material misstatements in those reports; and ■ in our opinion, those reports have been prepared in accordance with the Companies Act 2006. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: ■ adequate accounting records have not been kept by the Parent Company or returns adequate for our audit have not been received from branches not visited by us; or ■ the Parent Company Financial Statements are not in agreement with the accounting records and returns; or ■ certain disclosures of directors’ remuneration specified by law are not made; or ■ we have not received all the information and explanations we require for our audit. Tudor Aw (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square, London E14 5GL 27 April 2017 Watchstone Group plc Annual Report and Financial Statements 201630 Financial Statements Consolidated Income Statement for the year ended 31 December 2016 Note Revenue Cost of sales Gross profit Administrative expenses Other income Share of results of associates Group operating loss Finance income Finance expense Loss before taxation Taxation Loss after taxation for the year from continuing operations Provision against escrow receivable Net gain on disposal of discontinued operations Loss for the year from discontinued operations, net of taxation (Loss)/profit after taxation for the year Attributable to: Equity holders of the parent Non-controlling interests (Loss)/earnings per share (pence): Basic Diluted Loss per share from continuing activities (pence): Basic Diluted 8 9 11 11 12 36 36 36 13 13 13 13 2016 2016 Underlying Non- underlying £000 60,703 (31,805) 28,898 (40,883) – – £000 3,053 (1,902) 1,151 (10,093) – – 2016 Total £000 63,756 (33,707) 30,049 (50,976) – – 2015 2015 Underlying Non- underlying 2015 Total £000 58,784 (33,398) 25,386 £000 3,890 (2,293) 1,597 (161,989) (205,109) 1,971 – 1,971 103 £000 54,894 (31,105) 23,789 (43,120) – 103 (11,985) (8,942) (20,927) (19,228) (158,421) (177,649) 1,504 (269) (10,750) (464) (11,214) 831 – (8,111) 204 (7,907) 2,335 (269) (18,861) (260) (19,121) 1,217 (1,508) 19 (67) 1,236 (1,575) (19,519) (158,469) (177,988) 3,666 9,524 13,190 (15,853) (148,945) (164,798) – – – (50,120) (50,120) 323 323 (152) (152) – – – – – 494,317 494,317 (54,580) (54,580) (11,214) (57,856) (69,070) (15,853) 290,792 274,939 (11,206) (57,856) (69,062) (15,358) 290,792 275,434 (8) – (8) (495) – (495) (11,214) (57,856) (69,070) (15,853) 290,792 274,939 (24.3) (24.3) (34.0) (34.0) (150.0) (150.0) (41.5) (41.5) 609.0 609.0 (363.3) (363.3) Non-underlying results have been presented separately to give a better guide to underlying business performance (see notes 1 and 8). Where items have become non-underlying in 2016 the comparable amounts in 2015 have been revised to also be classified on the same basis. This does not impact the total 2015 results. Watchstone Group plc Annual Report and Financial Statements 2016 Consolidated Statement of Comprehensive Income for the year ended 31 December 2016 (Loss)/profit after taxation Items that may be reclassified in the Consolidated Income Statement Exchange differences on translation of foreign operations Total comprehensive (loss)/income for the year Attributable to: Equity holders of the parent Non-controlling interest 31 2016 £000 2015 £000 (69,070) 274,939 50 (69,020) (1,674) 273,265 (69,012) (8) (69,020) 273,760 (495) 273,265 Watchstone Group plc Annual Report and Financial Statements 201632 Financial Statements (continued) Consolidated Statement of Financial Position as at 31 December 2016 Non-current assets Goodwill Other intangible assets Property, plant and equipment Interests in associates Current assets Inventories Trade and other receivables Corporation tax assets Term deposits Cash Assets of disposal group classified as held for sale Total current assets Total assets Current liabilities Cumulative redeemable preference shares Other secured and unsecured loans Trade and other payables Obligations under finance leases Provisions Liabilities of disposal group classified as held for sale Total current liabilities Non-current liabilities Cumulative redeemable preference shares Obligations under finance leases Provisions Deferred tax liabilities Total liabilities Net assets Equity Share capital Other reserves Retained earnings Equity attributable to equity holders of the parent Non-controlling interests Total equity Note 15 14 16 17 19 20 21 22 36 24 24 23 25 26 24 25 26 27 28 29 29 2016 £000 23,221 6,259 6,293 – 35,773 941 10,228 355 37,500 43,714 92,738 1,300 94,038 129,811 – (163) (25,895) (102) (27,816) (53,976) – (53,976) (6,131) – (425) (741) (7,297) (61,273) 68,538 4,604 143,179 (80,218) 67,565 973 68,538 2015 £000 28,377 7,539 7,440 86 43,442 871 66,169 8,165 – 103,200 178,405 3,382 181,787 225,229 (427) (154) (41,667) (144) (36,704) (79,096) (3,534) (82,630) (4,816) (64) (306) (304) (5,490) (88,120) 137,109 4,596 146,626 (14,722) 136,500 609 137,109 The Financial Statements of Watchstone Group plc, registered number 05542221, on pages 30 to 81 were approved and authorised for issue by the Directors on 27 April 2017 and signed on its behalf by: Mark P Williams Director Richard Rose Director Watchstone Group plc Annual Report and Financial Statements 2016 33 Equity attributable to equity holders of the parent £000 136,500 (69,062) 50 Retained earnings £000 (14,722) (69,062) – Non- controlling interests £000 609 (8) – Total equity £000 137,109 (69,070) 50 (69,062) (69,012) (8) (69,020) – 50 50 – 441 – 50 50 – – – – – – 8 441 – – – – (3,772) 3,772 – (206) (206) 206 8 441 – – – 449 (166) (166) – (166) (3,331) (166) (3,497) 3,566 77 166 372 Consolidated Statement of Changes in Equity Share premium account Share capital £000 4,596 £000 127,251 Reverse acquisition and merger reserve Other equity reserves Foreign currency translation reserve Total other reserves £000 (3,312) £000 26,647 £000 £000 (3,960) 146,626 for the year ended 31 December 2016 At 1 January 2016 Loss for the year Other comprehensive income Total comprehensive income Issue of share capital (notes 28, 29) Share-based payments (note 28) Other reserves movements, including transfer of realised profits to retained earnings (note 29) Acquisition of non- controlling interests without a change in control Exchange differences on non-controlling interests Total transactions with owners, recognised directly in equity – – – 8 – – – – 8 – – – – – – – – – – – – – – – – – – – – – – 441 (3,772) – – At 31 December 2016 4,604 127,251 (3,312) 23,316 (4,076) 143,179 (80,218) 67,565 973 68,538 Watchstone Group plc Annual Report and Financial Statements 201634 Financial Statements (continued) Consolidated Statement of Changes in Equity (continued) for the year ended 31 December 2015 Share capital £000 Reverse acquisition and merger reserve Share premium account Shares to be issued Other equity reserves Foreign currency translation reserve Total other reserves Retained earnings £000 £000 £000 £000 £000 £000 £000 At 1 January 2015 65,467 447,533 160,795 30,744 31,036 (2,401) 667,707 (472,743) – – 275,434 (1,674) (1,674) – – – – – – – 2,734 29,426 – – (63,605) (349,708) – – – – – – – – – – – – – – – – – – – – – (164,107) – – – – – – – – (21,047) (5,652) – – (9,697) – – – – 12,496 – – – – 17,235 (28,468) – – Profit for the year Other comprehensive income Total comprehensive income Issue of share capital (notes 28, 29) Cash out of options (note 28) Effect of capital reduction and return of capital (note 28) Shares no longer issuable (note 29) Disposal of shares treated as held in treasury (note 29) Share-based payments (note 28) Other reserves movements, including transfer of realised profits to retained earnings (note 29) Non-controlling interests disposed of Exchange differences on non- controlling interests Total transactions with owners, recognised directly in equity At 31 December 2015 Equity attributable to equity holders of the parent £000 260,431 275,434 (1,674) Non- controlling interests £000 4,065 Total equity £000 264,496 (495) 274,939 – (1,674) (1,674) (1,674) 275,434 273,760 (495) 273,265 2,727 – 5,461 – (11,150) (11,150) (349,708) 1,442 (411,871) (9,697) 9,470 (227) 12,496 (9,750) 2,746 17,235 – 17,235 (192,575) 192,575 – – – – – – – – 5,461 (11,150) (411,871) (227) 2,746 17,235 – – – – – (2,846) (2,846) 115 (115) – 115 115 – – – – – – – – (60,871) (320,282) (164,107) (30,744) (4,389) 115 (519,407) 182,587 (397,691) (2,961) (400,652) 4,596 127,251 (3,312) – 26,647 (3,960) 146,626 (14,722) 136,500 609 137,109 Watchstone Group plc Annual Report and Financial Statements 2016Consolidated Cash Flow Statement for the year ended 31 December 2016 Cash flows from operating activities Cash used in operations before exceptional costs, net finance expense and tax Non underlying operating cash out flows excluding discontinued operations Cash used in operations before net finance expense and tax Note 31 Corporation tax received Net cash used by operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible fixed assets Proceeds on disposal of property, plant and equipment Proceeds from sale of investments Acquisition of subsidiaries net of cash acquired Disposal of subsidiaries net of cash foregone Investment in term deposits Maturity of term deposits Interest income Disposal of associated undertakings Dividends received from associates Repayment of financing loan Net cash (used in)/generated by investing activities Cash flows from financing activities Issue of share capital Capital return Cash out of options Finance expense paid Finance income received Finance lease repayments Additional secured loans Repayment of secured loans Sale of shares treated as held in treasury Repayment of unsecured loans Net cash generated by/(used in) financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Exchange gains/(losses) on cash and cash equivalents Cash and cash equivalents at the end of the year Cash and cash equivalents Cash 35 2015 £000 (57,554) (10,538) (68,092) 419 (67,673) (5,636) (4,285) 143 1,358 (648) 575,001 – – – 7,069 109 – 573,111 1,305 (411,871) (11,150) (1,510) 1,234 (2,738) 793 (30,265) 2,746 (326) 2016 £000 (18,921) (10,422) (29,343) 6,990 (22,353) (5,469) (1,400) – – – 4,013 (82,500) 45,000 97 86 – 1,255 (38,918) 8 – – (66) 743 (103) – – – – 582 (451,782) (60,689) 103,839 564 43,714 43,714 43,714 53,656 50,482 (299) 103,839 103,839 103,839 22 22 22 The above Consolidated Cash Flow Statement includes cash flows from both continuing and discontinued operations. Further details of the cash flows relating to discontinued operations are shown in note 36. As at 31 December 2016 the group had cash and cash equivalents of £43,714,000 (2015: £103,839,000) and term deposits of £37,500,000 (2015: £nil). Watchstone Group plc Annual Report and Financial Statements 201636 Notes to the Financial Statements 1. General information Watchstone Group plc is a company registered and domiciled in the United Kingdom. The Financial Statements are presented in pounds sterling, to the nearest thousand, as this is the currency of the primary economic environment in which the Company operates. The address of the registered office is 21 Tower Street, London WC2H 9NS. The nature of the Group’s operations and its principal activities are set out on page 8. Consolidated Income Statement presentation The Income Statement is presented in three columns. This presentation is intended to give a better guide to underlying business performance by separately identifying adjustments to Group results which are considered to either be exceptional in size, nature or incidence, relate to businesses which do not form part of the continuing business of the Group, or have potential significant variability year on year in non-cash items which might mask underlying trading performance (see notes 8 and 9). The columns extend down the Income Statement to allow the tax and earnings per share impacts of these transactions to be disclosed. Equivalent elements of the Group results arising in different years, including increases in or reversals of items recorded, are disclosed in a consistent manner. 2. Significant accounting policies The principal accounting policies adopted in the preparation of these Financial Statements are set out below. These policies have been consistently applied to all the years presented. Basis of preparation These Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations adopted by the European Union (EU). The Financial Statements have been prepared under the historical cost convention. A summary of the significant Group accounting policies, which have been applied consistently across the Group, is set out below. The Group has reviewed its accounting policies in accordance with IAS 8 and determined that they are appropriate for the Group and have been consistently applied. In preparing these Financial Statements the board has taken into account all available information in the application of its accounting policies and in forming judgments. Going concern The Group holds significant cash reserves and no material bank debt. The Group has concluded that its cash reserves and short term investments in term deposits will be sufficient to fund the ongoing operations of the Group’s businesses, together with any future development needs of those businesses, and the settlement of legacy matters. On this basis, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors have not identified any material uncertainties that would cast significant doubt on the ability of the Group to continue as a going concern. As such, the Directors continue to adopt the Going Concern basis of accounting in the preparation of the Financial Statements. Basis of Consolidation The Financial Statements represent a consolidation of the Company and its subsidiary undertakings as at the Statement of Financial Position date and for the year then ended. Subsidiaries acquired or disposed of during the year are included in the Consolidated Financial Statements from, or up to, the date upon which the investor has control over the investee. In accordance with IFRS 10 the definition of control is such that an investor has control over an investee when a) it has power over the investee; b) it is exposed, or has the rights, to variable returns from its involvement with the investee; and c) has the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. All subsidiary undertakings in which the Group has control have been consolidated in the Group’s results. Non-controlling interests represent the portion of profit or loss in subsidiaries that is not held by the Group and is presented within equity in the Consolidated Statement of Financial Position, separately from the Company shareholders’ equity. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business Combinations The acquisition of subsidiaries is accounted for in line with IFRS 3, ‘business combinations’. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired Watchstone Group plc Annual Report and Financial Statements 201637 (i.e. discount on acquisition) is credited to the Consolidated Income Statement in the year of acquisition. Where the Group acquires a business with which it had a previous relationship, to the extent that is necessary, any settlement of a pre-existing relationship is separated from the business combination accounting. of completion method based upon hours delivered compared to total hours expected or for a maintenance contract revenue is recognised over the agreed term. Provisions for estimated losses on uncompleted contracts are recorded in the year in which such losses become probable, based on contract cost estimates. Where investments are subsequently re-measured, profits or losses are recognised through the Consolidated Income Statement. Assets and disposal groups held for sale Assets are classified as held for sale if their carrying amount will be recovered by sale rather than by continuing use in the business. Where a group of assets and their directly associated liabilities are to be disposed of in a single transaction, such disposal groups are also classified as held for sale. For this to be the case, the asset or disposal group must be available for immediate sale in its present condition, and management must be committed to and have initiated a plan to sell the asset or disposal group which, when initiated, was expected to result in a completed sale within 12 months. Assets that are classified as held for sale are not depreciated. Assets or disposal groups that are classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Revenue recognition Revenue earned by continuing operations The Group receives income through Software ILF (Initial Licence Fee), SaaS (Software as a Service), consulting fees, physiotherapy services, management charges, membership fees, e-commerce revenues, click fees and other success based one-time fees. Intellectual property rights (“IPR”) or distribution rights to IPR are sold as licences and recognised on the delivery of IPR or granting of the rights to the customer either up front and over the term of the license. When selling software, new solution sales typically involve software licences being sold together with Post Customer Support (PCS) services and/or implementation services. Where the commercial substance of such a combination is that the individual components operate independently of each other and fair values can be attributed to each of the components, each are then recognised in accordance with their respective policies described below. Where it is not possible to attribute reliable fair values to two or more components, these are viewed as a combination and revenue is recognised on the combined revenue streams as the combined service is delivered using the percentage When selling products such as telematics devices, a sale is recognised when legal title has passed to the customer. The revenue recognition policies for separately identifiable revenue streams are as follows: Physiotherapy services Revenues are recognised upon the delivery of the service by the healthcare professional. Initial licence fees, SaaS and other success based one-time fees Revenues are recognised when persuasive evidence of an arrangement exists, delivery has occurred, the licence or other one-time fee is fixed or determinable, the collection of the fee is reasonably assured, no significant obligations with regard to success, installation or implementation of the software or service remain, and customer acceptance, when applicable, has been obtained. On certain SaaS contracts where there are fixed and contracted term lengths and no other services are required to be performed during the remainder of the contract, receivables under the contracts are recognised at the point of sale. Maintenance, Hosting and other PCS Services Maintenance, Hosting and PCS services are billed on a periodic basis in advance. The Group recognises revenue on these services evenly over the period of the contract. Solution Delivery Implementation Services Revenues for all fixed fee contracts are delivered using the percentage of completion method based upon hours delivered compared to total hours expected. Project plans are reviewed on a regular basis with any losses recognised immediately in the period in which such losses become probable based on contract cost estimates. Telematics Services and Devices Revenues are recognised evenly over the period of the contract they relate to, including upfront payments, commencing when the end user takes up the telematics service. All elements of the service are treated as an integrated part of the overall offering and are not unbundled or fair valued because they are not separately usable to the end user. Costs excluding telematics boxes are recognised in the period as incurred. Where telematics Watchstone Group plc Annual Report and Financial Statements 201638 devices are included as part of the services to end users they are capitalised and depreciated over their useful economic life. Where telematics devices are sold separately to intermediaries in the telematics revenue chain a sale is recognised for these items when their legal title has passed. Broking Commissions Commissions are earned through negotiating rates with energy suppliers on behalf of business customers and generating revenues by way of commission receivable directly from the energy suppliers. Revenue is recognised when the contract between the customer and the energy supplier becomes live, and is measured at the fair value of the consideration received, or receivable when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the entity. Broking commission for insurance business is recognised at inception of the insurance policy. Where services are subject to clawbacks of revenue over the duration of the contract, an initial estimate of clawback is made based on historical data and an adjustment is made to the revenue already recognised. are separately disclosed in the notes to the consolidated financial statements. Retirement benefit costs The Group provides pension arrangements to certain of its full time UK employees through a money purchase (defined contribution) scheme. Contributions and pension costs are based on pensionable salary and are charged as an expense as they fall due. The Group has no further payment obligations once the contributions have been paid. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme. Borrowing costs All borrowing costs are recognised in the Consolidated Income Statement in the year in which they are incurred. Borrowing costs have not been capitalised on the grounds of materiality as the business has not developed any significant qualifying assets. Operating Segments Share-based payments For reporting purposes, the results of the Group are allocated between reporting segments. These operate in specific product and market areas and are described in note 6. Central costs are shown separately. The Group’s accounting policies are applied consistently across the Group. Marketing expenses Marketing expenses are expensed in the period in which they are incurred. Operating loss Operating loss is loss stated before finance income, finance expense and tax. Exceptional items Exceptional items are those that in management’s judgement, need to be disclosed by virtue of their size, nature or incidence, in order to draw the attention of the reader and to better show the underlying business performance of the Group. These are expected to be non-recurring material items which are outside of the Group’s ordinary activities. Such items are included within the income statement caption to which they relate, and Options The fair value of options granted to individuals is recognised as an expense, with a corresponding increase in equity, over the period in which the unconditional entitlement occurs. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options expected to vest. Upon the exercise of share options, the proceeds received net of attributable transaction costs are credited to share capital and share premium. The Group adopted a Black-Scholes model to calculate the fair value of options granted. Costs relating to employees of subsidiaries has been accounted for by increasing the Company’s cost of investment of those subsidiaries. Post combination vendor remuneration Where consideration towards an acquisition is linked to ongoing employment within the Group this consideration is not treated as a cost of the acquisition. It is treated as post combination remuneration and is recognised in the Consolidated Income Statement over the period in which the employment services are delivered. The valuation of such amounts, where the form of the payment is in shares, Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)39 uses an option valuation model. Where such costs relate to employees of subsidiaries, this has been accounted for by increasing the Company’s cost of investment of those subsidiaries. Foreign currency translation The functional and presentational currency of the Parent Company is UK pounds sterling. Transactions denominated in currencies other than the functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each Statement of Financial Position date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the Statement of Financial Position date, with any gains or losses being included in net profit or loss for the year. On consolidation the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the Statement of Financial Position date. Income and expense items are translated at the average exchange rates for the year. Exchange differences arising, if any, are dealt with through the Group’s reserves, until such time as the subsidiary is sold whereupon the cumulative exchange differences relating to the net investment in that foreign subsidiary are recognised as part of the profit or loss on disposal in the Consolidated Income Statement. Where the Group loans monies to overseas subsidiaries as quasi-equity, to facilitate an acquisition, this is designated as a net investment hedge in foreign operations and the foreign exchange movement is recognised directly in reserves. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Goodwill Goodwill on the acquisition of a business is recognised as an asset at the date the business is effectively acquired (“the acquisition date”) for both Group and subsidiary undertakings. Goodwill is measured as the excess of the sum of the consideration transferred over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. If the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred the excess is recognised immediately in the Consolidated Income Statement as a bargain purchase gain. Goodwill is not amortised but is reviewed for impairment at least annually with any impairment recognised immediately in the Consolidated Income Statement and not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group’s CGUs expected to benefit from the synergies of the combination. If the recoverable amount of the CGU is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of the goodwill allocated to the unit and then to the other assets of the unit on a pro-rata basis. Other intangible assets Intangible assets with finite useful lives are initially measured at cost, or their fair value on the date of acquisition. These assets are assumed to have a residual value of £nil and amortised over their useful economic lives as follows: ■ IPR, software and licences: between 3-10 years; ■ Brands: between 2-10 years; and ■ Customer contracts: over the anticipated life of contracts. Internal costs are capitalised where these are directly attributable to the intangible asset. Impairment of tangible fixed assets and intangible assets including goodwill At each Statement of Financial Position date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent of any impairment loss. The recoverable amount is the higher of the asset’s value in use and its fair value less costs to sell. Value in use is calculated using cash flow projections for the asset (or group of assets where cash flows are not identifiable for specific assets) discounted at a pre-tax discount rate based on the Company’s cost of capital adjusted to reflect current market assessment of time value of money and the risk specific to the asset or cash-generating unit. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised as an expense in the Statement of Comprehensive Income, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Watchstone Group plc Annual Report and Financial Statements 201640 Research and development expenditure – internally generated Expenditure on research activities is recognised as an expense in the year in which it is incurred. Development costs are capitalised as they are incurred where these are separately identifiable and directly attributable to specific intangible assets that meet the IAS 38 (Intangible Assets) criteria whereby an intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (b) its intention to complete the intangible asset and use or sell it; (c) its ability to use or sell the intangible asset; (d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (f) its ability to measure reliably the expenditure attributable to the intangible asset during its development. Subsequent costs continue to be capitalised provided they continue to qualify under IAS 38. The intangible assets are amortised by specific asset on a straight line basis over each assets’ specific economic life. Assets are evaluated annually against IAS 38 for any impairment and where identified are written down immediately in line with IAS 38. Property, plant and equipment Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is not provided on freehold land. On other assets, depreciation is calculated to write off the cost less estimated residual values over their estimated useful lives as follows: ■ Freehold buildings: 2%-5% per annum straight line; ■ Improvements to freehold land and buildings: 5%-10% per annum straight line; ■ Improvements to leasehold land and buildings: Over the term of the lease; and ■ Plant and equipment: 20%-33⅓% per annum reducing balance. Assets in the course of construction are capitalised as expenditure is incurred. Depreciation is not charged until the asset is brought into use. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. Residual value is based on the estimated amount that would currently be obtained from disposal. Estimated residual values and useful economic lives are reviewed annually and adjusted where necessary. Investments Fixed asset investments comprise the Group’s strategic investments in entities that do not qualify as subsidiaries, associates or jointly controlled entities. They are valued at fair value on initial recognition. Any impairments are dealt with through the Consolidated Income Statement, as are differences between carrying values and disposal receipts. Where investment stakes are subsequently increased a stepped acquisition approach is taken, i.e. when each additional tranche of shares is acquired, the indicators of control and influence for that investment are reviewed to determine how that transaction should be reflected in the Consolidated Financial Statements and also whether the shareholding should be accounted for as a fixed asset investment, associate (under the equity method) or a subsidiary undertaking (and consolidated). Where investments are subsequently re-measured, profits or losses are recognised through the Consolidated Income Statement. Leases Rentals payable under operating leases are charged to income on a straight line basis over the term of the relevant lease. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to the ownership of the leased item are capitalised at the inception of the lease at the fair value of the leased asset, or if lower, at the present value of the minimum lease payments. Lease payments are Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)41 apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. The finance cost is charged to the Consolidated Income Statement over the lease period as part of finance expense. Inventories Inventories are stated at the lower of cost and net realisable value. Costs comprise direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less costs to be incurred in marketing, selling and distribution. Trade receivables Trade receivables are held at amortised cost less any impairment provisions and this equates to their recoverable value. Movements in the impairment provision relating to credit risk are recognised within administrative expenses as bad debt expenses. Trade payables Trade payables do not carry any interest and are recognised initially stated at their fair value. Subsequent to initial recognition they are measured at amortised cost. Cash and cash equivalents Cash in the Statement of Financial Position comprises cash at banks and in hand. For the purpose of the Consolidated Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Term deposits Term deposits represent short term (six months or less) investments in fixed interest deposits with a major UK bank. The related gross cash flows are included within investing activities in the Consolidated Cash Flow Statement. The interest receipts relating to term deposits are also shown within investing activities as interest received. Provisions Provisions are recognised when the Group has a present legal or constructive obligation in respect of a past event and it is probable that settlement will be required of an amount that can be reliably estimated. Taxation including deferred tax The tax expense represents the sum of current tax and deferred tax. Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised in equity in which case it is recognised in equity. The current tax is based on taxable profit for the year calculated using tax rates that have been enacted or substantively enacted by the Statement of Financial Position date. Deferred tax is provided using the balance sheet liability method on temporary differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit. In principle deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets or liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each Statement of Financial Position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. Share capital Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Deferred consideration Deferred consideration is recognised when it is probable that future economic benefits associated with the consideration will be received and may be measured reliably. Watchstone Group plc Annual Report and Financial Statements 201642 3. Adoption of new and revised Standards In the current year, the following new and revised Standards and Interpretations have been adopted: Standards, amendment and interpretations affecting the Financial Statements adopted by the Company There are no new standards, amendments or interpretations adopted by the Company that have a material impact on the Financial Statements for this year. Standards, amendments and interpretations not significantly affecting the reported results nor the financial position Amendments to IFRS 11 Accounting for Acquisitions of interests in Joint Operations Amendments to IAS 16 and IAS 38 Clarification of acceptable methods of Depreciation and Amortisation Amendments to IAS 16 and IAS 41 Amendments to IAS 27 Agriculture: Bearer Plants Equity method in Separate Financial Statements Annual Improvements to IFRSs 2012-2014 cycle Amendments to IFRS 10, 12 and 28 Investment Entities: Applying the consolidation Exception Amendments to IAS 1 Disclosure Initiative IFRS 14 Regulatory deferral accounts New standards, amendments and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016 (which in some cases have not yet been adopted by the European Union), and have not been applied in preparing these Consolidated Financial Statements. None of these are expected to have a significant effect on the Consolidated Financial Statements of the Company, as follows: IFRS 16 Annual Improvements to IFRSs 2014-2016 cycle Amendments to IAS 7 Disclosure Initiative Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses IFRS 9 Financial Instruments Amendments to IFRS 2 Amendments to IFRS 4 Amendments to IFRS 10 and 28 Classification and Measurement of Share-based Payment Transactions Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The following standards have not been applied in preparing these Consolidated Financial Statements: IFRS 15 ‘Revenue from contracts with customers’. This standard deals with revenue recognition and establishes principles for reporting useful information to users of Financial Statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard is effective for annual periods beginning on or after 1 January 2018. The Group is assessing the impact of IFRS 15 upon its business. Whist it is expected that a number of agreements with customers will not be impacted the revised standard may result in revenues being recognised in earlier periods. ‘Leases’. This standard replaces IAS 17 and changes the basis for recognising and measuring lease obligations. The major impact of the standard is to remove the concept of operating leases and recognising a related asset and liability on the Statement of Financial Position. The standard is effective for annual periods beginning on or after 1 January 2019. The Group is assessing the impact of IFRS 16. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)43 4. Critical accounting judgements and key sources of estimation uncertainty As set out in the basis of preparation note, in the preparation of these Financial Statements the board has taken into account all available information in the application of its accounting policies and in forming judgments. In the process of applying the Group’s accounting policies, management has made a number of judgements, and the preparation of Financial Statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The key management judgements together with assumptions concerning the future and other key sources of estimation uncertainty at the Statement of Financial Position date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Recognition of revenue Revenues are recognised in-line with the delivery and receipt of services to and for our customers. Each revenue type is considered separately and revenue is recognised when the customer has received the service, the amount of revenue can be reliably measured and conversion of the revenue in to cash or other economic benefit can be assured. The exact timing of the reliable measurement and conversion criterion are judgemental. These considerations are applied to both ongoing core service activities and one off contracts that are entered into. Identification of CGUs and measurement and impairment of goodwill CGUs, or groups of CGUs, are identified as the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill is then allocated to each CGU or group of CGUs. Each unit or group of units to which the goodwill is so allocated represents the lowest level at which goodwill is monitored for management purposes and is not larger than the operating segments disclosed. The CGUs for the Group have been determined based upon the level of integration of the businesses and where interlinking cash flows exist within each division. These CGUs are smaller than the operating segments disclosed in note 6. Further detail regarding CGUs is included in note 15. The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Capitalisation of internally generated development costs The Company capitalises internally generated development costs where these can be clearly and fully assessed against IAS 38 as per the policy laid out in note 2. Such costs are clearly and separately identifiable by developed saleable product, with all products assessed against IAS 38. The assessment of future cash inflows in excess of the costs incurred is uncertain in respect of new product development and therefore judgement must be applied. The amount capitalised for 2016 is laid out in note 14. Identification of discontinued operations The Group classifies the results of component business as discontinued where they are considered to relate to a separate major line of business or geographical area and have been disposed of, or are classified as held for sale. Consideration receivable for the PSD £50,000,000 (plus interest) of the PSD sale consideration is retained in a joint escrow account until the expiration of the warranty period or settlement of a claim. It is expected that a claim will be received in respect of the PSD disposal. The outcome of a potential claim is highly uncertain and therefore the carrying amount of the Group’s receivable in respect of the consideration held in escrow is highly judgmental. At 31 December 2016, the Group has impaired in full its receivable in respect of this consideration. Consideration for the sale of the PSD also included deferred, cash consideration and the Company has had to determine the fair value of this financial asset. At 31 December 2016 and 2015 the fair value has been assessed as £nil. Watchstone Group plc Annual Report and Financial Statements 2016Classification of underlying and non-underlying results Management is required to exercise its judgement in the classification of certain items as exceptional and outside of the Group’s underlying results. The determination of whether an item should be separately disclosed as an exceptional item or other adjustments requires judgement on its nature and incidence, as well as whether it provides clarity on the Group’s underlying trading performance. In exercising this judgement, management takes appropriate regard of IAS 1 “Presentation of financial statements” as well as guidance issued by the Financial Reporting Council and the European Securities and Markets Authority on the reporting of exceptional items and Alternative Performance Measures. 44 Provisions The Group is aware of a number of legal and regulatory matters which, by their nature, are subject to significant judgement and uncertainty. This includes judgements around both the quantum of any related cash outflows and also the timing. The judgements are specific to the facts surrounding each case and often involve historic transactions. All such matters are periodically assessed with the assistance of external professional advisers, where appropriate, to determine the likelihood of the Group incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made. However, the likely cost to the Group of the Serious Fraud Office (“SFO”) investigation and any group litigation which may potentially be brought against the Group is subject to a number of significant uncertainties and these cannot currently be estimated reliably. Accordingly, no provision has been made in respect of these matters. Further detail is provided in note 36. Deferred tax in connection with the continuing business operations Other taxable losses have arisen during the year ended 31 December 2016 which have the potential to give rise to a deferred tax asset. This asset has not been recognised due to the extent of the continuing business losses incurred in 2016 including head office costs, and the developing nature of the continuing businesses such that the expectation of profitability at sufficient quantum was not sufficiently certain within a reasonable timeframe. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)5. Key performance indicators Revenue: Hubio ingenie Healthcare Services BAS Total underlying revenue Underlying gross profit margin Underlying EBITDA (note 6) Underlying group operating loss (note 6) Cash and term deposits (continuing businesses) Total average number of employees (continuing operations) Reconciliation of Alternative Performance Measures to nearest GAAP equivalents Underlying revenue Non underlying revenue Total revenue Underlying EBITDA Underlying depreciation and amortisation* Underlying group operating loss Non-underlying group operating loss Group operating loss 45 2016 £000 15,004 13,926 28,083 3,690 60,703 2015 £000 14,338 12,530 25,203 2,823 54,894 47.6% 43.3% (9,760) (15,091) (11,985) (19,228) 81,214 103,200 1,079 1,426 2016 £000 60,703 3,053 63,756 (9,760) (2,225) (11,985) (8,942) (20,927) 2015 £000 54,894 3,890 58,784 (15,091) (4,137) (19,228) (158,421) (177,649) * excludes depreciation of telematics devices of £2,998,000 (2015: £4,176,000) which is included within cost of sales and is therefore also included within underlying EBITDA. Further detail regarding non-underlying results is provided in note 9. 6. Business and geographical segments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision- maker and represent four divisions supported by a Group cost centre (denoted as Central below). The principal activities of each segment are as follows. Hubio: a provider of telematics and insurance technology solutions. ingenie: Telematics based insurance broking. Healthcare Services: A Canadian based physiotherapy network. Business Advisory Service Limited (“BAS”), an energy brokerage. During 2016, Maine Finance Limited (“Maine Finance”), a life insurance broker and the B2C business of Road Angel Group (being part of Hubio) (“RAG”) ceased and the ingenie Canada business entered a state of managed wind down. Accordingly, the results of these businesses have been reclassified to non-underlying and the amounts for 2015 have been restated to be presented on a comparable basis. Within the results of the discontinued operation are Quintica Holdings Limited (“Quintica”) and property services, both of which were disposed of in 2016. In 2015, discontinued operations additionally includes the PSD, which was disposed of in May 2015. Watchstone Group plc Annual Report and Financial Statements 201646 Segment information about these businesses is presented below. The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 2. A reconciliation of alternative performance measure to nearest GAAP equivalents is presented in note 5. Hubio £000 15,004 (7,025) 7,979 (12,547) ingenie £000 13,926 (7,565) 6,361 (5,316) Healthcare Services £000 28,083 (14,856) 13,227 (13,099) BAS £000 3,690 (2,359) 1,331 (1,622) Central £000 – – – (7,474) Total £000 60,703 (31,805) 28,898 (40,058) (4,568) 1,045 128 (291) (7,474) (11,160) – (4,568) (1,715) (6,283) 368 1,413 (627) 786 1,032 1,160 (562) 598 – (291) (264) (555) – (7,474) 3,168 (4,306) Year ended 31 December 2016 Underlying revenue Underlying cost of sales Underlying gross profit Underlying administrative expenses excluding depreciation and amortisation* Underlying EBITDA before capitalisation of development expenditure Capitalisation of development expenditure Underlying EBITDA before allocation of central costs Allocation of central costs Underlying EBITDA after allocation of central costs Depreciation and amortisation* Share of results from associates Underlying group operating loss Net finance income Underlying group loss before tax Non-underlying adjustments Total group loss before tax from continuing operations Year ended 31 December 2015 Underlying revenue Underlying cost of sales Underlying gross profit Administrative expenses excluding depreciation and amortisation* Underlying EBITDA before capitalisation of development expenditure Capitalisation of development expenditure Underlying EBITDA before allocation of central costs Allocation of central costs Underlying EBITDA after allocation of central costs Depreciation and amortisation* Share of results from associates Underlying group operating loss Net finance income Underlying group loss before tax Non-underlying adjustments Total group loss before tax from continuing operations 1,400 (9,760) – (9,760) (2,225) – (11,985) 1,235 (10,750) (8,111) (18,861) Total £000 54,894 (31,105) 23,789 (43,400) BAS £000 2,846 (2,466) 380 (1,101) Central £000 – – – (9,049) (721) (9,049) (19,611) – (721) (876) (1,597) 174 (8,875) 3,511 (5,364) 4,520 (15,091) – (15,091) (4,240) 103 (19,228) (291) (19,519) (158,469) (177,988) Hubio £000 14,371 (7,324) 7,047 (16,350) ingenie £000 12,530 (7,451) 5,079 (5,290) Healthcare Services £000 25,147 (13,864) 11,283 (11,610) (9,303) (211) 2,996 (6,307) (1,983) (8,290) 1,028 817 (333) 484 (327) 322 (5) (319) (324) * Depreciation added back above when calculating Underlying EBITDA from continuing operations excludes depreciation on telematics devices of £2,998,000 (2015: £4,176,000) which is included within cost of sales. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)United Kingdom £000 Canada £000 USA £000 Rest of World £000 25,965 30,633 4,105 21,224 13,972 4,349 368 517 1,032 550 603 – 22,674 28,430 3,790 31,779 11,614 – 4,639 5,381 283 2,125 489 2,240 Year ended 31 December 2016 Revenue (underlying) Other segment information Total non-current assets Capital expenditure Tangible assets Intangible assets Year ended 31 December 2015 Revenue (underlying) Other segment information Total non-current assets Capital expenditure Tangible assets Intangible assets 7. Operating loss The operating loss for the year is stated after charging/(crediting): Depreciation of property, plant and equipment Amortisation of intangible assets Operating lease rentals Finished goods inventories expensed Net foreign exchange gains Auditor’s remuneration Unused provisions released: – Underlying business – Non-underlying Staff costs (note 10) – 27 – – – 49 24 – 2016 £000 4,327 3,440 549 3,605 (339) 588 (291) (10,434) 42,627 Depreciation of £2,998,000 (2015: £4,176,000) relates to telematics devices which is included within cost of sales. The analysis of Auditor’s remuneration for continuing and discontinued operations is as follows: Fees payable to the Company’s Auditor and its associates for the audit of the Parent Company and Consolidated Financial Statements Fees payable to the Company’s Auditor and its associates for other services: – Additional amounts in relation to the prior year audit – The audit of the Company’s subsidiaries – Audit-related services – Other assurance services – Taxation compliance services – Taxation advisory services 2016 £000 250 55 235 25 – 16 7 588 47 Total £000 60,703 35,773 5,469 1,400 54,894 43,442 5,435 9,746 2015 £000 6,035 15,250 292 3,851 (500) 1,892 (1,130) (8,124) 46,837 2015 £000 372 834 304 50 332 – – 1,892 Watchstone Group plc Annual Report and Financial Statements 201648 8. Non-underlying results The non-underlying results of the business include the income and expenses of businesses classified as non-underlying by virtue of these not forming part of the long term plans for the group and as such are being wound down or disposed of. This includes Maine Finance, ingenie Canada and RAG. Businesses meeting this criterion which also meet the definition of a discontinued operation under IFRS 5 have been further classified as discontinued operations within the non-underlying results. This includes Quintica, BEI and CRC, and additionally in 2015, the PSD. The comparative amounts have been presented to be on a consistent basis. Items which are considered to be exceptional in size, nature or incidence, or have potential significant variability year on year in non-cash items which might mask underlying trading performance are also included within non-underlying. In 2016 this includes providing for the escrowed receivable relating to the PSD disposal, which has been included alongside the discontinued operations to which it relates. Non-underlying administrative expenses is analysed as follows: Exceptional items: – Corporate restructuring – Business restructuring – Legal and regulatory – Tax related matters – Share based payments (note 28) – Impairments of non-cash assets Total exceptional items Other adjustments: – Share based payments – Amortisation of acquired intangibles – Other non-underlying administrative expenses Total other adjustments Total non-underlying administrative expenses 2016 £000 425 1,415 (1,028) (5,419) – 6,627 2,020 441 2,676 4,956 8,073 2015 £000 8,724 2,763 7,055 – 3,914 113,610 136,066 7,874 10,957 7,092 25,923 10,093 161,989 Other adjustments are not exceptional however do not relate to the ongoing future trade of the Group and can vary significantly from year to year. Amortisation of acquired intangibles is significantly impacted by impairment charges in the previous year. Other non-underlying administrative expenses relate principally to the costs of businesses classified as non-underlying and central costs associated with the same. These are specifically identifiable external costs and do not include allocations of internal amounts. Where items have become non-underlying in 2016 the comparable amounts in 2015 have been revised to also be classified on the same basis. Impairments of non-cash assets above relates to: Goodwill Other intangible assets Tangible fixed assets Investments Inventory 2016 £000 6,814 178 – – (365) 6,627 2015 £000 61,836 44,616 1,861 2,691 2,606 113,610 Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)49 The corporate restructuring costs of £425,000 (2015: £8,724,000) for the year ended 31 December 2016 are stated after taking into account the release of unused provisions of £nil (2015: £2,586,000). In 2015, corporate restructuring costs consisted of acquisition related fees of £12,000 credit, employer’s national insurance contributions in respect of the cashing out of options of £243,000, working capital and strategic review costs of £6,666,000 and costs associated with the return of capital of £1,827,000. Business restructuring includes costs in relation to the wind down of ingenie Canada, the closure of Maine Finance and the RAG B2C business and is net of the release of provisions of £1,584,000. The legal and regulatory credit of £1,028,000 includes the releases of provisions of £2,186,000 relating to legal disputes in the UK and the settlement of the Navseeker claim in the US. This is partially offset by additional legal fees in relation to recovery of the outstanding amounts held in escrow upon sale of the PSD. In 2015 costs of £7,055,000 are stated after taking into account the release of unused provisions of £5,538,000, which were created in 2014 and £12,593,000 of costs in relation to the known historical issues. Tax related matters of £5,419,000 (2015: £nil) includes the reversal of £9,029,000 unused provisions (2015: £2,586,000). This reflects the settlement of historic tax matters with HMRC. 9. Other income Continuing operations: Profit on disposal of subsidiary undertakings Loss on disposal of fixed asset investments 2016 £000 – – – 2015 £000 3,329 (1,358) 1,971 In the year ended 31 December 2015, the profit on disposal of subsidiary undertakings related to the disposal of 360GlobalNet and loss on disposal of fixed asset investments was in respect of 360ViewMax. 10. Employee numbers and staff costs The average number of employees during the year including executive Directors for continuing operations was as follows: Front office technology, consulting and outsourcing Back office management and administration 2016 Number 917 162 1,079 2015 Number 953 473 1,426 At 31 December 2015, there were 168 employees relating to the disposal group classified as held for sale split between front office technology, consulting and outsourcing 95 and back office management and administration 73. The remuneration of the executive and non-executive Directors was as follows: Emoluments Compensation for loss of office 2016 £000 2,211 – 2015 £000 1,763 575 Watchstone Group plc Annual Report and Financial Statements 201650 The emoluments of the highest paid director were £1,145,000 (2015: £530,000). Two Directors received a total of £17,000 (2015: two directors a total of £51,000) in connection with contributions to pension schemes. Further details are provided in the Directors’ Remuneration Report and in particular the tables on page 21 form part of this note to the Financial Statements. Total employee costs for continuing operations were as follows: Wages and salaries Social security costs Pension costs Share-based payment charges 2016 £000 39,398 3,006 293 441 43,138 2015 £000 37,494 2,611 274 10,978 51,357 Included in the total above are £511,000 (2015: £4,520,000) of salaries which were capitalised during the year in relation to software development. 11. Net finance income/expense Continuing operations: Bank interest receivable Foreign exchange gain on intercompany loans Other interest receivable Total interest receivable Interest payable on bank loans and overdrafts Interest on obligations under finance leases Foreign exchange loss on intercompany loans Other interest payable Total interest payable Net finance income/(expense) 2016 £000 663 1,592 80 2,335 (24) (8) – (237) (269) 2,066 2015 £000 1,236 – – 1,236 (169) (305) (547) (554) (1,575) (339) Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)51 2016 £000 2015 £000 (44) (131) (175) 662 (5) (222) 435 260 – (2,062) (2,062) (12,408) (180) 1,460 (11,128) (13,190) 2015 £000 (177,988) (36,036) 10,278 6,088 7,250 13 – – (181) (602) (13,190) 12. Taxation Continuing operations: The taxation charge/(credit) comprises: Current tax: – Current year – Adjustments in respect of prior year Total current tax expense Deferred tax expense: – Origination and reversal of temporary differences – Adjustments in respect of changes in tax rates – Adjustments in respect of prior year Deferred tax charge/(credit) Total tax expense Income tax for the UK is calculated at the standard rate of UK corporation tax of 20% (2015: 20.25%) on the estimated assessable profit for the year. The total charge for the year can be reconciled to the accounting profit as follows: Loss on ordinary activities before tax from continuing operations Tax at 20% (2015: 20.25%) thereon Effect of: Expenses not deductible for tax purposes Unrecognised deferred tax on losses Intangible and investment impairments Other short term timing differences Income/credits not taxable Effect of higher/(lower) tax rate overseas Reduction in rate of deferred tax Adjustments to tax charge in respect of prior periods Total tax charge/(credit) for the year 2016 £000 (18,861) (3,772) 1,568 4,000 1,363 (84) (2,412) (44) (5) (354) 260 The tax impact of the items included in the Consolidated Statement of Comprehensive Income is £nil (2015: £nil). Deferred tax assets are recognised for tax losses available for carrying forward to the extent that the realisation of the related benefit through future taxable profits is probable. The continuing business has recognised deferred tax assets of £265,000 (2015: £nil) in respect of losses amounting to £1,559,000 (2015: £nil) that can be carried forward against future taxable income. The total amount of goodwill that is expected to be deductible for tax for continuing business is £10,000 (2015: £1,042,000). At the Statement of Financial Position date, there are unrecognised deferred tax assets of £17,377,000 (2015: £18,077,000). Factors affecting future tax charges Reductions in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015, and an additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the company’s future current tax charge accordingly. The deferred tax liability at 31 December 2016 has been calculated based on these rates. Watchstone Group plc Annual Report and Financial Statements 201652 13. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year. For diluted earnings per share the weighted average number of ordinary shares is adjusted to assume conversion of all dilutive potential ordinary shares where, on warrants or options, exercise price is less than the average market price of the Company’s ordinary shares during the year. The calculation of the basic and diluted earnings per share is based on the following data. The underlying profit for the year and resultant underlying earnings per share is used by the Directors as a measure of the underlying performance of the business: (Loss)/profit attributable to ordinary shareholders Net loss/(gain) from discontinued operations (including profit on disposal from discontinued operations) Loss attributable to ordinary shareholders from continuing activities: Other adjustments in respect of non-underlying results: – Gross profit – Non-recurring administrative expenses – Other income – Finance (income)/expense – Tax effect on the above Underlying loss attributable to ordinary shareholders Basic weighted average number of shares Dilutive potential ordinary shares Diluted weighted average number of shares 2016 £000 (69,062) 49,949 2015 £000 275,434 (439,737) (19,113) (164,303) (1,151) 10,093 – (831) (204) (11,206) (1,597) 161,989 (1,971) 48 (9,524) (15,358) 46,037,718 45,229,213 – – 46,037,718 45,229,213 Due to their anti-dilutive effect in 2016 and in 2015, options which could potentially be exercised after the balance sheet date have not been included in the calculation of diluted earnings per share and underlying diluted earnings per share in 2016. (Loss)/earnings per share (pence): – Basic – Diluted Loss per share from continuing operations (pence): – Basic – Diluted Underlying loss per share (pence): – Basic – Diluted (Loss)/earnings per share from discontinued operations (pence): – Basic – Diluted 2016 Pence (150.0) (150.0) (41.5) (41.5) (24.3) (24.3) (108.5) (108.5) 2015 Pence 609.0 609.0 (363.3) (363.3) (34.0) (34.0) 972.2 972.2 Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)53 2015 £000 7,539 28,377 35,916 Total £000 98,374 390 4,520 (147) (4,464) (291) 98,382 2,155 (2,600) 1,138 99,075 32,103 15,250 44,616 (83) (952) (91) 90,843 3,440 178 (2,407) 762 92,816 Note 15 2016 £000 6,259 23,221 29,480 Customer contracts, data, brands and relationships IPR, software and licences £000 £000 70,778 361 – (147) (1,444) – 69,548 – (2,600) 92 67,040 17,169 11,452 36,174 (83) (284) – 64,428 2,405 178 (2,407) 1 64,605 27,596 29 4,520 – (3,020) (291) 28,834 2,155 – 1,046 32,035 14,934 3,798 8,442 – (668) (91) 26,415 1,035 – – 761 28,211 2,435 5,120 3,824 2,419 6,259 7,539 14. Intangible assets Other intangible assets Goodwill The movement in other intangible assets was as follows: Cost At 1 January 2015 Additions – internally generated Additions – purchased Transfer to assets of disposal group classified as held for sale Disposals Exchange differences At 1 January 2016 Additions – internally generated* Disposals Exchange differences At 31 December 2016 Amortisation At 1 January 2015 Charge for the year Impairments Transfer to assets of disposal group classified as held for sale Disposals Exchange differences At 1 January 2016 Charge for the year Impairments Disposals Exchange differences At 31 December 2016 Net book value 31 December 2016 31 December 2015 * additions include £755,000 reclassified from prepayments. Amortisation relating to discontinued activities during the year ended 31 December 2016 was £nil (2015: £1,568,000). Impairment charges of £nil (2015: £64,000) were recognised in the Consolidated Income Statement in the year in respect of discontinued activities. During the year ended 31 December 2016, £913,000 of research and development was taken directly to profit and loss (2015: £4,034,000). Watchstone Group plc Annual Report and Financial Statements 201654 Brands are included within customer contracts, data, brands and relationships. The carrying value of brands at 1 January 2016 was £2,638,000 (2015: £14,335,000) with amortisation charged in the year of £1,220,000 (2015: £1,245,000) and impairment charges of £nil (2015: £1,367,000) recognised in the Consolidated Income Statement in the year. Brands with a carrying value of £193,000 (2015: £9,085,000) were disposed of in the year. The carrying value at 31 December 2016 was £1,225,000 (2015: £2,638,000). All of these assets are recognised at fair value at acquisition or cost to purchase and are amortised over their estimated useful lives. Fair values of acquired intangible fixed assets have been assessed by reference to the future estimated cash flows arising from the application of assets, discounted at an appropriate rate to present value, or by reference to the amount that would have been paid in an arm’s length transaction between knowledgeable and willing parties. The amortisation charge is included within administrative expenses. The Group has conducted a review of all intangible assets at the balance sheet date and identified further assets previously valued at £178,000 (2015: £19,789,000) which are or will become obsolete, either because they are unused and are expected to remain so or will be replaced by other similar and existing assets held by the Group at the balance sheet date. In note 33 an explanation is given to show the degree to which fair values are observable. These are grouped into three levels: Level 1, Level 2 and Level 3. Where fair value calculations have been performed to identify separable intangible assets as part of the cost of an acquisition, to show separately from goodwill within other intangible assets, the level was as follows: Non-current assets: Other intangible assets Fair value degree observable 2016 £000 2015 £000 Level 3 – 4,795 The fair value degree represents unobservable inputs as they are based on an assessment of assets acquired. Where valuation techniques have been used the key inputs included an assessment of future performance and cash flows, growth rates, appropriate discount rate, the valuation of assembled workforces and contributory asset charges. The sensitivity to the unobservable inputs is not considered significant as the only impact of these fair values is an amortisation charge in the Consolidated Income Statement from separable intangibles identified on acquisitions. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)15. Goodwill The movement in goodwill is as follows: Cost At 1 January 2015 Additions – purchased Arising on acquisition of subsidiaries Disposal of a subsidiary (note 36) Transfer of assets of disposal group classified as held for sale Exchange differences At 1 January 2016 Exchange differences At 31 December 2016 Impairment At 1 January 2015 Charge for the year Disposal of a subsidiary (note 36) Transfer to assets of disposal group classified as held for sale Exchange differences At 1 January 2016 Charge for the year Exchange differences At 31 December 2016 Net book value 31 December 2016 31 December 2015 Goodwill is allocated to the Group’s CGUs as follows: Total Hubio ingenie Healthcare Services BAS 55 Goodwill £000 226,486 511 4,325 (4,875) (36,028) (4,503) 185,916 7,978 193,894 128,654 61,836 (1,836) (27,487) (3,628) 157,539 6,814 6,320 170,673 23,221 28,377 2015 £000 3,143 14,674 6,889 3,671 28,377 2016 £000 – 14,674 8,547 – 23,221 The categorisation and description of the Group’s CGUs was revised in 2016 following strategic changes implemented by management. Hubio-UK, previously comprised Metaskil and Hubio Technologies businesses. These have been separated in the year into two CGU’s where all of the goodwill was allocated to the Metaskil CGU. Upon performing an impairment review of this goodwill against the projected cash flows of the business the goodwill has been written down to nil. The RAG business (providers of GPS based safety camera and other such products for the UK consumer and commercial markets) represented a single CGU in 2015. During 2016, the consumer (B2C) elements of the RAG business has ceased with the remaining commercial elements of the business becoming Hubio Fleet. The RAG CGU has been split into two CGUs, RAG B2C and Hubio Fleet and the goodwill allocated between. Watchstone Group plc Annual Report and Financial Statements 201656 The BAS business was previously included within ‘Other’ along with the Maine Finance business. Since Maine Finance closed to new business in 2016 it no longer represents its own CGU and therefore BAS is now presented on its own. Basis of valuation and key assumptions for impairment testing of goodwill and intangible assets The recoverable amount of goodwill for businesses at the year-end is determined on the basis of Value in Use, using a discounted cash flow (“DCF”) appraisal based on explicit forecast periods of between 3 and 4 years (2015: 5 to 7 years) to reflect the maturity of the businesses and/or markets they operate in. External market data has been used where possible and the Group has also drawn upon data used in its annual planning cycle, with reference to other market participants. In particular, changes in working capital and future investments in non-current assets are key assumptions. For each of the CGUs with a significant amount of goodwill, the key assumptions used in the Value-in-Use calculations and recoverable amounts of goodwill are stated below. 2016 Long term growth rate DCF appraisal period Annualised revenue growth over DCF appraisal period Pre-tax discount rate Recoverable amount of goodwill (m) Hubio Fleet 2% 4 years 11% 19% £nil 2015 Long term growth rate DCF appraisal period Annualised revenue growth over DCF appraisal period Pre-tax discount rate Recoverable amount of goodwill (m) RAG B2C n/a n/a n/a n/a n/a RAG 2% 7 years 9% 17% £3.0 Metaskil 2% 3 years 7% 13% £nil Hubio UK 2% 7 years 9% 17% £0.2 ingenie 2% 3 years 8% 13% £14.7 ingenie 2% 7 years 6% 18% £14.7 Healthcare Services 2% BAS 2% 3 years 3 years 5% 15% £8.5 Healthcare Services 2% 5% 11% £nil BAS 2% 5 years 5 years 8% 13% £6.9 6% 12% £3.7 Annualised revenue growth rates vary by operating division depending on the current development to maturity of the CGU. Hubio Fleet is higher due to the roll out of its newly developed proposition and the short appraisal period. In determining the applicable discount rate, management has applied judgement in respect of several factors, including, inter alia, assessing the risk attached to future cash flows. Pre-tax discount rates have been assessed for each CGU. The discount rate for Hubio Fleet reflects the risks associated with new product launches in a developing and immature market. Discount rates in the Healthcare Services and BAS CGUs are lower reflecting the reduced risk associated with those more mature markets. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)Movement in Goodwill by CGU The movement in goodwill by CGU is as follows: Hubio UK Metaskil RAG RAG B2C Hubio Fleet Total Hubio ingenie Healthcare Services BAS Total Splitting of CGUs Foreign exchange movements Impairment £000 (171) 171 (2,972) 2,080 892 – – – – – £000 n/a – n/a – – – – 1,658 – 1,658 £000 n/a (171) n/a (2,080) (892) (3,143) – – (3,671) (6,814) 2015 £000 171 n/a 2,972 n/a n/a 3,143 14,674 6,889 3,671 28,377 57 2016 £000 n/a – n/a – – – 14,674 8,547 – 23,221 During 2016, changes in management have resulted in the Hubio UK CGU being split between Hubio Technologies and Metaskil, with the existing goodwill relating to Metaskil. Review of the carrying value of this goodwill against the forecast cashflows of Metaskil alone result in an impairment charge of £171,000 against this CGU. Similarly, in 2015 RAG represented a single CGU. In 2016 this business was split in to two, representing the RAG B2C products and the Fleet management products. The goodwill was allocated between the two CGUs on the basis of revenues at acquisition. The B2C business ceased in the year and consequently its allocated goodwill has been impaired to £nil (a charge of £2,080,000). The remaining business has become Hubio Fleet, and includes a new product to market. Due to the uncertainties surrounding the future success of a new product and the upfront investment in working capital required this goodwill has also been impaired to £nil (a charge of £892,000). Despite the strong revenue growth in BAS an impairment charge of £3,671,000 arises from reassessment of the prospects for the business in a highly competitive and mature market. If there were an increase in the pre-tax discount rate of 1 percentage point there would be no additional impairments to the amounts above. Similarly, if there were a decrease of 1 percentage point in the long term growth rate or annualised revenue growth over the DCF appraisal period there would be no additional impairments to the amounts above. Watchstone Group plc Annual Report and Financial Statements 201658 16. Property, plant and equipment Cost At 1 January 2015 Additions Disposals Transfer to assets of disposal group classified as held for sale Exchange differences At 1 January 2016 Additions Disposals Reclassification Transfer to assets classified as held for sale Exchange differences At 31 December 2016 Depreciation At 1 January 2015 Charge for the year Impairments Disposals Transfer to assets of disposal group classified as held for sale Exchange differences At 1 January 2016 Charge for the year Disposals Reclassification Transfer to assets classified as held for sale Exchange differences At 31 December 2016 Net book value 31 December 2016 31 December 2015 Freehold land and buildings £000 Leasehold land and buildings Plant and equipment £000 £000 3,566 29 (1,270) – (6) 2,319 27 (44) 40 (1,816) 214 740 1,854 125 – (1,186) – – 793 178 (44) 40 (516) 2 453 2,423 128 (225) – (436) 1,890 223 (506) 1,315 – 539 3,461 497 124 – (163) – (234) 224 300 (225) 1,315 – 572 2,186 15,159 5,278 (8,462) (806) (624) 10,545 5,219 (6,720) 8,216 – 1,851 19,111 4,706 5,786 1,861 (4,998) (645) (413) 6,297 3,849 (5,098) 8,216 – 1,116 14,380 Total £000 21,148 5,435 (9,957) (806) (1,066) 14,754 5,469 (7,270) 9,571 (1,816) 2,604 23,312 7,057 6,035 1,861 (6,347) (645) (647) 7,314 4,327 (5,367) 9,571 (516) 1,690 17,019 287 1,526 1,275 1,666 4,731 4,248 6,293 7,440 As part of the Group’s review of assets post disposal of the PSD a reclassification has been made between cost and accumulated depreciation. This has no impact upon net book value. There were no material commitments for the acquisition of property, plant or equipment at either 31 December 2016 or 31 December 2015. Depreciation of £157,000 (2015: £298,000) was charged in the year on assets of the disposal groups classified as held for sale. Assets with a net book value of £nil (2015: £13,000) are held under finance leases, on which depreciation of £13,000 (2015: £382,000) was charged in the year. Telematics devices which are included as part of the services to end users were held with a net book value of £3,903,000 (2015: £4,865,000) on which depreciation of £2,998,000 (2015: £4,176,000) was charged in the year. The depreciation on these devices is included within Cost of Sales. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)17. Associates At 31 December 2016, the Group did not have any associates. Reconciliation of summarised financial information: 2016 Opening net assets at 1 January 2016 Disposals Closing net assets 2015 Opening net assets/(liabilities) at 1 January 2015 Reclassified as subsidiary undertaking Additions Disposals Closing net liabilities Group’s share of net liabilities Consolidation and other adjustments Impairment Carrying value Nationwide Accident Repair Services plc (“NARS”) £000 – – – NARS £000 (4,624) – – 4,624 – – – – – Other £000 86 (86) – Other £000 495 (497) 10,040 (10,040) (2) – 100 (14) 86 59 Total £000 86 (86) – Total £000 (4,129) (497) 10,040 (5,416) (2) – 100 (14) 86 On 10 February 2016, the Group disposed of its interest in Ferneham Health Limited for £86,000, which resulted in a £nil gain/ loss on disposal. 18. Investments Investments carried at fair value Fair value degree observable Level 3 2016 £000 – 2015 £000 – In note 33, a definition is given to record the degree to which fair values are observable. These are grouped into three levels: Level 1, Level 2 and Level 3. Where fair value calculations have been performed for investments, the level is disclosed above under “fair value degree observable”. The fair value degree represents unobservable inputs as they are based on unquoted entities – as listed in note 42. Watchstone Group plc Annual Report and Financial Statements 201660 Cost At 1 January 2015 Disposals Recategorisation Exchange differences At 1 January 2016 Exchange differences At 31 December 2016 Impairment At 1 January 2015 Disposals Recategorisation Movement for the year At 1 January 2016 Movement for the year At 31 December 2016 Net book value 31 December 2016 31 December 2015 Shares in investments £000 4,347 (1,788) 1,500 132 4,191 552 4,743 330 (330) 1,500 2,691 4,191 552 4,743 – – The following information relates to the fixed asset investment of the Group: Investment name eeGeo Inc. OS3 Distribution Limited Country of incorporation USA Percentage holding 8.9% England and Wales 5.3% The principal activity of each investment is the provision of software, consulting and other services. In March 2016, as a result of various investments by new third parties, the company’s interest in eeGeo Inc. fell to 8.9%. In December 2015, OS3 Distribution Limited (formerly Quob Park Solutions Limited) allotted and issued new share capital, which diluted the Group’s holding to 5.3% so this investment, as a result, was recategorised from being an Associate to a Fixed Asset Investment. The fair value of investments was assessed on net present value of cash flows or sales value less cost of sale and fall within Level 3 of the fair value hierarchy. These investments were impaired due to uncertainty over obtaining any future value in the investment. Uncertainty remains over the future value of these investments and hence both will continue to be held at £nil net book value unless greater certainty is evident. Details of subsidiary undertakings are provided in note 42. 19. Inventories Finished goods for resale Telematics devices held pending fitting 2016 £000 214 727 941 2015 £000 376 495 871 Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)61 There is no material difference between the book value and the replacement cost of the inventories shown. Telematics devices are taken to tangible fixed assets upon fitting to end user vehicles. During 2016, £365,000 credit (2015: £2,506,000) impairment for obsolescence and firmware upgrades has been expensed prior to end user fitting. 20. Trade and other receivables Trade receivables (net of impairment provision) Monies held in escrow (net of impairment provision) Other receivables Prepayments Accrued income 2016 £000 7,247 – 1,641 1,231 109 10,228 2015 £000 6,477 55,049 2,405 1,930 308 66,169 As discussed in note 36 an amount of £50,120,000 held in joint escrow in relation to the disposal of the PSD to S&G in 2015 has been retained. It is considered highly likely that a claim will be received before the expiration of the warranty period. No provisions have been made in respect of a settlement. It is considered that the escrow monies, which have been fully provided for at 31 December 2016 will be sufficient to settle any claim. The Directors consider that the net carrying amount of trade receivables approximates to their fair value. Further disclosures concerning trade receivables are given in note 33. 21. Term deposits Term deposits represent cash which has been invested in to short term (less than six months) fixed interest bearing instruments with a major UK bank. Term deposits 22. Cash and cash equivalents Cash and cash equivalents comprise the following for the purposes of the cash flow statement: Cash Amounts classified as held for sale Cash 2016 £000 37,500 37,500 2016 £000 43,714 43,714 – 43,714 2015 £000 – – 2015 £000 103,200 103,200 639 103,839 Cash and cash equivalents comprise cash held by the Group. The carrying amount of these assets approximates to their fair value. Watchstone Group plc Annual Report and Financial Statements 201662 23. Trade and other payables Current liabilities Trade payables Payroll and other taxes including social security Accruals Deferred income Other liabilities 2016 £000 2,547 1,641 10,919 9,118 1,670 25,895 2015 £000 5,488 3,695 15,921 9,324 7,239 41,667 Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs. The Directors consider that the carrying amount of trade payables approximates to their fair value. 24. Borrowings Current Cumulative redeemable preference shares Other secured loans Finance leases (note 25) Non-current liabilities Cumulative redeemable preference shares Finance leases (note 25) Total The borrowings are repayable as follows: – On demand or within one year – In the second to fifth years inclusive Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months 2016 £000 – 163 102 265 6,131 – 6,131 6,396 2016 £000 265 6,131 6,396 (265) 6,131 2015 £000 427 154 144 725 4,816 64 4,880 5,605 2015 £000 725 4,880 5,605 (725) 4,880 The cumulative redeemable preference shares are in respect of pt Healthcare Solutions Corp. (“ptHealth”) and relate to non-voting Series ‘A’ preference shares (issued by ptHealth between 2008 and 2011) with a cumulative dividend (if declared) of 8.0% per annum. Holders of these shares may require ptHealth to redeem them 10 years from the date of issuance at par of £6,622,000. In the event of any liquidation, dissolution or winding up of ptHealth, the Series ‘A’ holders shall be entitled to receive, from the assets of ptHealth, a sum equal to the redemption amount before any amount is paid or assets of ptHealth are distributed to common shares or any shares ranking junior to the Series ‘A’ preference shares. The Series ‘A’ preference shares shall not otherwise be entitled to any other amount or assets of ptHealth. In note 33 an explanation is given to show the degree to which fair values are observable. These are grouped into three levels: Level 1, Level 2 and Level 3. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)63 Fair value degree observable 2016 £000 2015 £000 Level 3 6,131 5,243 Liabilities: Cumulative redeemable preference shares The fair value degree represents unobservable inputs as they are based on internal valuation techniques. The key variable components and assumptions within this model include the discount rate, the effective internal rate of return, the redemption profile and timing and dividend payments. The sensitivity to the unobservable inputs is not considered significant as the impact of this fair value valuation is insignificant in the Consolidated Income Statement. The weighted average interest rates paid for continuing operations were as follows: Other secured loans Cumulative redeemable preference shares The Directors estimate the fair value of the Group’s borrowings as follows: Cumulative redeemable preference shares Finance leases 2016 % – 8.00 2016 £000 6,131 102 6,233 2015 % – 8.00 2015 £000 5,243 208 5,451 Due to the cash holding of the group and its forecast working capital requirements the committed undrawn borrowing facilities were not renewed in the year. At 31 December 2016, these were at floating interest rates based on prevailing LIBOR rates: Expiring within one year 25. Obligations under finance leases Minimum lease payments Within one year In the second to fifth year inclusive Less future finance charges Present value of lease obligations Present value of minimum lease payments Within one year In the second to fifth years inclusive Present value of lease obligations Analysed as: Amounts due for settlement within one year Amounts due for settlement after more than one year 2016 £000 – – 2016 £000 103 – 103 (1) 102 102 – 102 94 8 102 2015 £000 1,000 1,000 2015 £000 124 98 222 (14) 208 144 64 208 92 116 208 Watchstone Group plc Annual Report and Financial Statements 201664 It is the Group’s policy to lease certain of its fixtures and equipment under finance leases. The average lease term is 4 years (2015: 4 years). For the year ended 31 December 2016, the average effective borrowing rate was 8.6% (2015: 6.4%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated in sterling or Canadian dollars. The fair value of the Group’s lease obligations is approximately equal to their carrying amount. The Group’s obligations under finance leases are secured by the lessor’s rights over the leased assets disclosed in note 16. 26. Provisions At 1 January 2015 Additional provisions Unused amounts released Used during the year At 1 January 2016 Additional provisions Unused amounts released Used during the year Exchange movements At 31 December 2016 Split: Non-current Current Tax related matters Tax related matters Legal disputes Onerous contracts £000 21,108 6,586 (3,716) (435) 23,543 3,231 (9,181) (2,500) – 15,093 £000 7,538 4,400 (5,538) – 6,400 1,814 (1,300) (800) – 6,114 £000 1,511 6,502 – (4,370) 3,643 525 (100) (1,349) – 2,719 Other £000 2,867 1,885 – (1,328) 3,424 3,315 (144) (2,313) 33 4,315 Total £000 33,024 19,373 (9,254) (6,133) 37,010 8,885 (10,725) (6,962) 33 28,241 – 15,093 419 5,695 – 2,719 6 4,309 425 27,816 A provision for tax-related matters has been established with respect to judgemental tax positions primarily in relation to historic PAYE and VAT issues which have not yet been resolved. Key judgements exist around the classification of certain transactions and therefore the related tax treatment. The amount provided represents the Directors’ estimate of the likely outcome based upon the information available; however the ultimate settlement may be different. The Group is taking steps to resolve this and believe the majority will be settled within twelve months from the balance sheet date. Certain elements of the provisions held at 31 December 2015 have been settled during the year at amounts less than management’s estimate of the expected outflow at the time of the preparation of the 31 December 2015 Financial Statements. Any provision held over and above any specific settlement amount have been released as unused. Legal disputes On 5 August 2015, the SFO informed the Group that it had opened an investigation, which relates to past business and accounting practices at the Group. The Group is co-operating fully with the SFO investigation. At this stage, the timing of completion of the SFO investigation and its conclusions cannot be anticipated. Therefore, having taken external advice, no liability has been recognised at the balance sheet date as it is not possible to reliably estimate a liability (if any) in respect of this matter. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)65 On 14 December 2015, the Company received a letter of claim from a law firm (“Claimant Firm”) acting for 342 claimants commencing an action against the Company under the Financial Services and Markets Act 2000 (“Letter of Claim”). Despite the Company’s endeavours in correspondence with the Claimant Firm, the Company is not in a position to verify the assertions in the Letter of Claim which, inter alia, details the expected value of the potential claims against the Company to be approximately £9.4 million. No proceedings have been commenced to date in respect of this matter. Having taken external advice, no liability has been recognised at the balance sheet date as it is not possible to reliably estimate a liability (if any) in respect of this matter. The amount provided in respect of these legal cases is in respect of defence costs and is considered to be in the mid-range of possible outcomes given the uncertainty in relation to these outcomes. If successful in defending these disputes then the final costs may be lower than the total provision recognised above. Additional provisions in the table above relate to expected legal costs to defend a claim arising after the retention of the PSD escrow monies (see notes 20 and 36). This is in addition to further amounts being provided for the expected legal costs of the other matters discussed above, although no amounts have been provided for the costs of any actual settlement Additional provisions in the table above relate to expected legal costs to defend a claim arising after the retention of the PSD escrow monies (see notes 20 and 36). This is in addition to further amounts being provided for the expected legal costs of the other matters discussed above, although no amounts have been provided for the costs of any actual settlement. Amounts used during the year represents legal costs incurred to date as a result of the above items. The provisions will be utilised further as the cases progress. There were also a number of other smaller legal cases outstanding for which £2,000,000 was provided at 31 December 2015. £1,000,000 of unused amounts released relates to a historic technology related dispute within one of the Group’s trading entities. Since no further correspondence has been received on this matter during 2016 the related provision has been released to the Consolidated Income Statement. A further £300,000 has been released due to agreement being reached over a historic claim which will now be settled during the first half of 2017. Onerous contracts Where contracted income is expected to be less than the related expected expenditure the difference is provided in full. The timing and amount of these items can be reasonably determined. The majority of the amount provided at 31 December 2016 relates to three onerous property leases and therefore amounts used during the year relate to the ongoing costs of these obligations. Management are looking to sublet or settle these obligations within twelve months. Unused amounts reversed is a consequence of a change in estimate regarding the timing of the settlement of one such lease and new provisions relate to additional property being vacated during the year. Other Provisions have been established for expected costs where a commitment has been made at the balance sheet date and for which no future benefit is anticipated. No reimbursement has been recognised in relation to any provision as there is no certainty of recovery or reliable means of estimation. This primarily relates to three areas, commission clawback relating to non-underlying businesses, warranties provided by the Group and outstanding restructuring payments and has given rise to an additional £3,315,000 charge in 2016. With the exception of the latter, the exact timing and quantum of the amounts is uncertain and the provision is based upon historic trends in these businesses. The amounts of the restructuring provision can be reasonably estimated and are time bound within an upper limit of one year. Amounts used in the year primarily relate to commission clawback and unused amounts released are as a result of actual device warranty claims being lower than previously anticipated. Watchstone Group plc Annual Report and Financial Statements 201666 27. Deferred tax The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior year. At 1 January 2015 Credit to Income Statement Transfer to liabilities of disposal group classified as held for sale At 1 January 2016 Debit to Income Statement At 31 December 2016 Deferred tax liabilities Deferred tax assets Accelerated capital allowances £000 11,209 (11,061) 236 384 625 1,009 Provisions and other temporary timing differences £000 (13) (67) – (80) (188) (268) 2016 £000 1,009 (268) 741 Total £000 11,196 (11,128) 236 304 437 741 2015 £000 384 (80) 304 At the Statement of Financial Position date, there are unrecognised deferred tax assets of £17,377,000 (2015: £18,077,000). 28. Share capital 2016 At 1 January – issued shares of 10 pence Issued shares of 10 pence At the end of the year 2015 At 1 January – issued shares of 15 pence Issued shares of 15 pence fully paid Effect of capital reduction Issued shares of 1 pence fully paid Effect of share consolidation Issued shares of 10 pence At the end of the year Nominal value fully paid £000 4,585 8 4,593 Nominal value fully paid £000 65,298 2,681 (63,447) 39 – 14 4,585 Nominal value unpaid Nominal value total £000 11 – 11 £000 4,596 8 4,604 Nominal value unpaid Nominal value total £000 169 – (158) – – – 11 £000 65,467 2,681 (63,605) 39 – 14 4,596 Number 000 45,963 75 46,038 Number 000 436,447 17,871 – 3,909 (412,405) 141 45,963 Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)67 On 16 December 2015, the High Court of Justice in England and Wales made an order approving the reduction of the Company’s share capital under the Companies Act 2006, which had been approved by shareholders at a General Meeting held on 26 November 2015. The capital reduction became effective on 18 December 2015 and the nominal value of the Company’s shares reduced to 1 pence at that time, which had the effect of reducing the nominal value of issued share capital by £63,605,000 and share premium by £349,708,000. Subsequently, £411,871,000 was paid out to shareholders as a return of capital. On 21 December 2015, the ordinary shares of the Company were consolidated. The share consolidation replaced every 10 existing ordinary shares of 1 pence each with 1 new ordinary share of 10 pence. The impact of the share consolidation on the number of allotted, called up, unpaid and fully paid shares was 412 million. There was no change in the total nominal value of the Company’s issued share capital. The Company has one class of ordinary shares of 10 pence each which carry no right to fixed income. The Company issued the following ordinary shares during the year: Reason for issue Exercise of options: Effective date of issue (2016) Issue share price Pence Number Issue Premium £000 4 Jan 10. 75 – Share based payments – all schemes (warrants, options and post-combination vendor remuneration) Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in all of the Group’s option pricing models are the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. In estimating the future volatility of the Company’s share price, the Board considers the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option, taking into account the remaining contractual life of the option. Share based payments in the 2016 Consolidated Income Statement include options charges of £441,000 (2015: options charges of £7,064,000, 2013 post combination vendor remuneration charge of £4,162,000 and 2012 post combination vendor remuneration charge of £562,000, totalling £11,788,000, plus a further £6,257,000 was charged to the loss from discontinued operations). Share-based payments – options The Group has previously issued options, which are equity settled share based payments. Generally, these options vest in equal annual or 6-monthly tranches if the performance criteria for each option holder, which includes reference to the Group’s upper targets for adjusted earnings per share, has been met for that year. The Group had the following options outstanding as at 31 December 2016: Grant Date 21 November 2013 21 November 2013 21 November 2013 21 November 2013 6 March 2014 20 June 2014 12 January 2015 Exercise Price (Pence) 1,500.00 1,500.00 1,500.00 1,500.00 5,100.00 1,500.00 Expiry Date 30 June 2019 30 June 2019 30 June 2017 30 June 2019 30 June 2019 30 June 2019 10.00 12 January 2025 2016 2015 Number (options over 10 pence shares) 272,637 Number (options over 10 pence shares) 281,525 134,425 15,583 10,417 – 100,000 – 533,062 158,523 15,583 31,250 58,333 108,333 75,000 728,547 Watchstone Group plc Annual Report and Financial Statements 201668 Details of the movement in options outstanding are as follows: Outstanding at the beginning of the year Granted Forfeited Cancelled Exercised Cashed out Effect of share consolidation 21 December 2015 Outstanding at the end of the year Exercisable at the end of the year: Issued at 10 pence Issued at 1,500 pence Issued at 5,100 pence 2016 WAEP Pence 1,634.86 – – Number 24,550,953 31,265,115 (8,728,940) Number 728,547 – – (120,485) (75,000) 3,242.95 (12,593,487) 10.00 (5,315,341) – – – (21,892,991) (6,556,762) 2015 WAEP Pence 110.84 118.16 147.00 160.15 33.00 48.42 533,062 1,500.00 728,547 1,634.86 – – 454,924 1,500.00 – – 454,924 1,500.00 75,000 329,609 25,000 429,609 10.00 1,500.00 5,100.00 1,449.37 The Group recognised a total expense of £441,000 (2015: £7,064,000) related to the cost of options during the year (included as share based payment charges within administrative expenses). A further charge of £nil (2015: £6,257,000) was recognised within the profit on sale of discontinued operations, relating to the accelerated charge for those employees belonging to the PSD. As of 31 December 2016, the weighted-average remaining contractual life of the options outstanding is 2.4 years (2015: 4.0 years) and the weighted-average exercise price was 1,500.00 pence (2015: 1,634.86 pence). The expected life used in the model was adjusted, based on management’s best estimate, for the effects of non-transferability, performance conditions, exercise restrictions, and behavioural considerations. 29. Reserves Share premium account Reverse acquisition and merger reserve Other equity reserves Foreign currency translation reserve Total other reserves Retained earnings Non-controlling interests 2016 £000 127,251 (3,312) 23,316 (4,076) 143,179 (80,218) 973 2015 £000 127,251 (3,312) 26,647 (3,960) 146,626 (14,722) 609 The reverse acquisition and merger reserve represents the fair value of the share consideration over and above the share’s nominal value of 10 pence per share (15 pence per share prior to the share consolidation exercise in December 2015) for those shares issued as consideration for acquisitions that take the Group’s ownership of the acquired entity above 90%. The consolidated Group accounts show the reverse acquisition and merger reserve net of the reverse acquisition reserve of £10,842,000 created on the reverse acquisition of Quindell Limited by Mission Capital plc (now Watchstone Group plc, which occurred in 2011). In the transaction, the Company remains the legal parent and therefore the Company accounts show the gross position of the reverse acquisition reserve. The fair value of the share consideration over and above the share’s nominal value of 10 pence per share (15 pence per share prior to the share consolidation exercise in December 2015) for all other shares issued by the Company is included in the share premium reserve. In addition, directly attributable costs incurred in the issuing of shares are also recognised in the share premium reserve. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)69 Shares treated as held in treasury £000 (12,665) 12,496 – – 169 – – – – Equity reserve £000 54 – – – – 54 – – 54 Share-based payments Share consideration reserve Total other equity reserves £000 20,713 – 17,235 (5,652) (28,637) 3,659 441 (3,772) 328 £000 22,934 – – – – 22,934 – – 22,934 £000 31,036 12,496 17,235 (5,652) (28,468) 26,647 441 (3,772) 23,316 Other equity reserves comprise: At 1 January 2015 Disposal of shares treated as held in treasury Share-based payments (note 28) Shares issued in respect of iter8 Realised profits transfer to retained earnings At 1 January 2016 Share-based payments (note 28) Realised profits transfer to retained earnings At 31 December 2016 Share consideration reserve The share consideration reserve represents the difference between the fair value of shares consideration versus the value of the non-controlling interest acquired. Share-based payment reserve The share-based payment reserve is increased to reflect the fair value to the Group of share-based payment transactions, with the reserve being reduced when shares are issued. An amount of £3,772,000 was transferred to retained earnings, representing amounts which have become realised profits. 30. Operating lease commitments At the Statement of Financial Position date the Company had outstanding commitments for minimum lease payments due under non-cancellable operating leases, which expire as follows: Expiring: Within one year Between two and five years After five years Land and buildings 2015 £000 2016 £000 Plant and equipment 2015 £000 2016 £000 4,675 8,615 498 13,788 4,112 9,073 1,721 14,906 6 – – 6 4 – – 4 Operating lease payments represent rentals payable by the Group for certain of its rehabilitation clinics in Canada, office properties and operating equipment. Leases are typically negotiated for an average period of three years in the case of plant and machinery, five years in the case of buildings. Watchstone Group plc Annual Report and Financial Statements 201670 31. Cash flow from operating activities (Loss)/profit after tax Tax Finance expense Finance income Operating (loss)/profit Adjustments for: – Non underlying operating cash out flows excluding discontinued operations – Share-based payments – Depreciation of property, plant and equipment – Amortisation of intangible assets – Impairment of goodwill – Impairment of investments and associates – Impairment of intangible assets – Impairment of escrow – Impairment of property, plant and equipment – Impairment of inventories – Share of profit of associates – Loss on disposal of plant, property and equipment – Loss on disposal of intangibles – Profit on disposal of interests in property, subsidiary undertakings and operations (note 36) – Profit on disposal of subsidiary undertakings and fixed asset investments Operating cash flows before movements in working capital and provisions – Decrease in inventories – (Increase) in trade and other receivables – (Decrease)/Increase in trade and other payables Cash used by operations before exceptional costs 2016 £000 (69,070) 260 269 (2,335) (70,876) 10,422 441 4,327 3,440 6,814 – 178 50,120 – (365) – 1,903 193 (323) – 6,274 295 (885) (24,605) (18,921) 2015 £000 274,939 (11,788) 1,989 (1,238) 263,902 10,538 17,235 6,333 16,818 70,192 2,691 44,680 – 1,861 2,506 (103) 1,935 – (494,317) (1,971) (57,700) 91 (18,075) 18,130 (57,554) Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)71 32. Reconciliation of net cash flow to movement in net funds 2016 Cash Overdrafts and bank loans Cash and cash equivalents Other secured loans > 1 year Cumulative redeemable preference shares < 1 year Cumulative redeemable preference shares > 1 year Finance leases < 1 year Finance leases > 1 year Net funds 2015 Cash Overdrafts and bank loans Cash and cash equivalents Other secured loans < 1 year Other secured loans > 1 year Cumulative redeemable preference shares < 1 year Cumulative redeemable preference shares > 1 year Unsecured loans < 1 year Unsecured loans > 1 year Finance leases < 1 year Finance leases > 1 year Net funds 1 January £000 Acquisitions & Disposals Cash flow movements Non-cash movements 31 December £000 £000 £000 £000 103,839 (1,087) (59,602) – – – 103,839 (1,087) (59,602) (154) (427) (4,816) (144) (64) 98,234 – – – – – – – – 103 – (1,087) (59,499) 564 – 564 (9) 427 (1,315) (61) 64 (330) 43,714 – 43,714 (163) – (6,131) (102) – 37,318 1 January Acquisitions Cash flow movements Non-cash movements 31 December £000 £000 £000 £000 £000 69,991 (19,509) 50,482 (25,840) (3,879) (500) (4,947) (326) – (1,086) (1,080) 12,824 (3,204) – (3,204) 73 – – – – – – – (3,131) 37,351 19,509 56,860 25,767 3,705 – – 326 – 942 1,035 88,635 (299) – (299) – 20 73 131 – – – (19) (94) 103,839 – 103,839 – (154) (427) (4,816) – – (144) (64) 98,234 Watchstone Group plc Annual Report and Financial Statements 201672 33. Financial instruments (a) Carrying value and fair value The accounting classification of each class of the Company’s financial assets and liabilities, together with their fair values is as follows: At 31 December 2016 Trade and other receivables Monies held in Escrow (note 20) PSD deferred consideration Cumulative redeemable preference shares Other secured loans Trade and other payables Finance leases Term deposits Cash and cash equivalents At 31 December 2015 Trade and other receivables Monies held in Escrow (note 20) PSD deferred consideration Cumulative redeemable preference shares Other secured loans Trade and other payables Finance leases Cash and cash equivalents Loans and receivables Other liabilities Total carrying value £000 £000 £000 Total fair value £000 7,247 – – – – – – 37,500 43,714 – – – (6,131) (163) (4,188) (102) – – 7,247 7,247 – – (6,131) (163) (4,188) (102) 37,500 43,714 – – (6,131) (163) (4,188) (102) 37,500 43,714 Loans and receivables Other liabilities Total carrying value £000 £000 £000 Total fair value £000 6,477 55,049 – – – – – – – – (5,243) (154) (9,183) (208) 6,477 55,049 – (5,243) (154) (9,183) (208) 6,477 55,049 – (5,243) (154) (9,183) (208) 103,200 – 103,200 103,200 The fair values of financial assets and liabilities are determined as follows: (a) The fair value of the PSD deferred consideration has been determined using an income approach taking into account the risk in the expected cash flows (b) The fair value of obligations under finance leases, cumulative redeemable preference shares and other borrowings is estimated by discounting the future cash flows to net present values (c) The fair value of cash and cash equivalents, term deposits and bank overdraft is equivalent to the carrying value due to the short-term nature of those instruments (d) The fair value of other financial assets and liabilities with standard terms and conditions is determined in relation to estimated discounted cash flows to net present values (e) Monies held in escrow is a receivable in respect of an escrow account controlled jointly by the Company and S&G (see Note 20). Fair value has been determined based on an assessment of the likely timing and amount of any cash which the Company will receive from the escrow. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)73 Cash and cash equivalents, classified as loans and receivables mainly comprise investments in major UK bank deposits which can be withdrawn without notice. Term deposits represent investments with fixed returns over periods not exceeding six months. Both term deposits and amounts in escrow are held with major UK banks. (b) Fair value hierarchy The Group’s financial instruments which are carried at fair value comprise available for sale investments in unlisted companies and the PSD deferred consideration. Fair values are measured using inputs that are not based on observable market data and are categorised as Level 3 in the fair value hierarchy. (c) Financial risk management The Group’s financial instruments comprise borrowings, derivative financial instruments, cash and liquid resources and various items such as trade debtors and trade creditors that arise from its operations. The main purpose of these financial instruments is to manage the Company’s operations. Term deposits are used to generate a return for the Company where the invested cash is not required for the operations of the Company. Fair value estimation Certain assets and liabilities, as separately disclosed in these Financial Statements, are carried at fair value. Fair value is determined by a valuation method which is categorised as follows: ■ Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities; ■ Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, prices) or indirectly (that is, derived from prices); and ■ Level 3 – inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). Interest risk and sensitivity The Group’s borrowings mainly comprise preference share (classified as debt) arising from previous acquisitions. These will be settled at maturity. Since the preference shares attract a fixed rate of interest there is minimal exposure to the Group from changes to interest rates upon its borrowings. Interest bearing assets consist of cash balances which earn interest at variable rates. The interest achieved on term deposits is fixed at inception and therefore not subject to interest rate risk, although the future available rates may vary when reinvesting maturing deposits. Finance lease arrangements are contracted on fixed rate terms. An increase of 100 basis points in interest rates at the reporting date would have increased equity and profit and loss by the amounts shown below. This analysis assumes that all other variables remain constant. Variable rate instruments Liquidity risk 2016 £000 – 2015 £000 – The Group has a sufficient level of liquidity to ensure it has a sufficient level of funding to develop its operations, recognising that it operates in markets which it believes are high growth. Liquidity risks are managed through regular forecasting and reporting of working capital requirements, including conducting sensitivity analysis and growth scenario testing. Surplus funds are maintained in accessible deposits. Watchstone Group plc Annual Report and Financial Statements 201674 The following are the contractual maturities of financial liabilities: Non-derivative financial liabilities 2016 Other secured loans Cumulative redeemable preference shares Trade and other payables Finance leases Non-derivative financial liabilities 2015 Other secured loans Cumulative redeemable preference shares Trade and other payables Finance leases Capital risk Carrying amount Contractual cash flows Less than 1 year Between 1-5 years Over 5 years £000 £000 £000 £000 £000 163 6,131 4,217 102 (163) (6,131) (4,217) (103) 10,613 (10,614) (163) – (4,217) (96) (4,476) – – (3,858) (2,273) – (7) – – (3,865) (2,273) Carrying amount Contractual cash flows Less than 1 year Between 1-5 years Over 5 years £000 £000 £000 £000 £000 154 5,243 9,183 208 (154) (7,393) (9,183) (222) 14,788 (16,952) (154) (427) (9,183) (124) (9,888) – – (5,718) (1,248) – (98) – – (5,816) (1,248) The Group defines its capital as the Group’s total equity, including non-controlling interests. Its objectives when managing capital is to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and to have available the necessary financial resources to allow the Group to invest in other areas that may deliver future benefit and to maintain sufficient financial resources to mitigate risks and unforeseen events, without need to raise further equity from shareholders. The Group will manage its capital base to source any future investment requirement from working capital realisation or other cash inflows in respect of deferred consideration for NIHL cases, return of warranty escrow and the proceeds from disposal of non-core assets. It will use its planning cycle to manage capital risk, including conducting sensitivity and scenario testing on forecast capital and in assessing any new investments. Credit risk The Group is not subject to significant concentration of credit risk with exposure spread across many companies. The credit quality of the Group’s trade receivables is considered by management to be good as the exposure to a concentration of debt from a small number of individual end customers is low. Further information is given in the Financial Review in relation to areas of cash and debtor management. No interest is charged on the receivables balances. The Group does not hold any collateral or other credit enhancements over these balances nor has the legal right of offset with any amounts owed by the Group to the receivables counterparty. The Group holds significant deposits which are spread across UK regulated banks holding A3 or higher credit ratings. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)The carrying amounts of borrowings are denominated in the following currencies: Sterling Canadian Dollar Other 75 2016 £000 50 6,181 165 6,396 2015 £000 61 5,390 154 5,605 The carrying amount of financial assets represents the maximum credit exposure. At the reporting date the principal financial assets were: Non-derivative financial assets Trade receivables Term deposits Cash and cash equivalents Note 20 21 22 The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: UK Canada Rest of World The carrying amounts of trade receivables are denominated in the following currencies: Sterling Canadian Dollar Other 2016 £000 7,247 37,500 43,714 88,461 2016 £000 3,501 3,325 421 7,247 2016 £000 3,501 3,325 421 7,247 The ageing of trade and other receivables at 31 December 2016 was as follows: Under 1 year 1-2 years 2-3 years 2016 Gross £000 7,277 703 19 7,999 2016 Impairment £000 253 480 19 752 2016 Net £000 7,024 223 – 7,247 2015 Gross £000 6,144 2,543 61 8,748 2015 Impairment £000 1,246 970 55 2,271 2015 £000 6,477 – 103,200 109,677 2015 £000 3,164 2,631 682 6,477 2015 £000 3,164 2,631 682 6,477 2015 Net £000 4,898 1,573 6 6,477 Watchstone Group plc Annual Report and Financial Statements 201676 The movement in the allowance for impairment in respect of trade and other receivables during the year was as follows: At 1 January Provision for receivables impairment Receivables written off Unused amounts reversed Transfer to assets of the disposal group classified as held for sale Exchange differences At 31 December 2016 £000 2,271 45 (1,338) (410) – 184 752 2015 £000 5,216 1,393 (4,180) (15) (107) (36) 2,271 The allowance has been determined by reference to the recoverability of specific due and overdue debts. The creation and reversal of provisions for impaired trade receivables where they arise are included in administrative expenses in the Consolidated Income Statement. The Directors consider that the carrying amount of trade and other receivables approximates their fair value. 34. Ultimate parent company There were no shareholders with overall control of the Company as at 31 December 2016 or 31 December 2015. 35. Contingent liabilities The Group routinely enters into a range of contractual arrangements in the ordinary course of business which can give rise to claims or potential litigation against Group companies. It is the Group’s policy to make specific provisions at the Statement of Financial Position date for all liabilities which, in the opinion of the Directors, are expected to result in a significant loss. On 5 August 2015, the SFO informed the Group that it had opened an investigation, which relates to past business and accounting practices at the Group. On 14 December 2015, the Company received a letter of claim from a law firm acting for 342 claimants commencing an action against the Company under the Financial Services and Markets Act 2000. Further information on both these matters is presented in note 26. 36. Discontinued operations and disposals Assets classified as held for sale at 31 December 2016 During 2016 the Group vacated its former head office property and marketed it for sale. It is therefore presented as available for sale at 31 December 2016 and is held at its fair value less costs to sell of £1,300,000. Disposal of businesses in 2016 BE Insulated (UK) Limited and Carbon Reduction Company The sale of the BE Initial Limited (formerly BE Insulated (UK) Limited (“BEI”)) and BE Insulated Limited (formerly Carbon Reduction Company (“CRC”)) completed on 7 January 2016 for a nominal consideration of £1 to The BE Smart Group Limited (a company owned by Ben Williams, a statutory director of BEI and CRC) (“BEI Agreement”). Following the completion of the BEI Agreement, the Group ceased to operate directly in the property and maintenance services sector. The results of these businesses have therefore been disclosed as discontinued activities on the face of the Consolidated Income Statement and related notes. Amounts in the Consolidated Statement of Financial Position relating to these businesses were classified as held for sale. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)The assets and liabilities of BEI and CRC classified as held for sale at 31 December 2015 were: Intangibles and goodwill Property, plant and equipment Trade and other receivables Cash and cash equivalents Assets classified as held for sale Trade and other payables Provisions Liabilities classified as held for sale Net liabilities classified as held for sale 77 £000 102 41 1,082 12 1,237 (1,395) (900) (2,295) (1,058) IFRS 5 requires the disposal group to be measured at the lower of its carrying value and its fair value less costs to sell. Accordingly, as at 31 December 2015, the carrying value of this business was written down to realisable value and a goodwill impairment charge of £4.2 million was recognised in the discontinued activities in the year ended 31 December 2015. The Group provided funding to QHL in 2016 prior to disposal. The subsequent profit arising on sale in the period ended 31 December 2016 is as follows: Sales proceeds Net liabilities at disposal Expenses and other costs of sale Profit arising on sale 2016 £000 – 302 (55) 247 The overall result recognised in the Consolidated Income Statement for BEI’s, CRC’s and the other property and maintenance operations disposed of was as follows: Revenue Expenses Loss before tax of discontinued operation Tax Loss after tax of discontinued operation 2016 £000 148 (258) (110) (35) (145) 2015 £000 4,657 (11,926) (7,269) 17 (7,252) The cash flows of BEI and CRC’s discontinued operations recognised in the Consolidated Cash Flow Statement were as follows: 2015 2016 Operating cash outflows Investing cash flows Financing cash flows Total cash flows £000 – – – – £000 (1,198) – 858 (340) Quintica Holdings Limited On 4 March 2016, the Group disposed of the entire issued share capital of Quintica Holdings Limited to Quintica International Holdings Inc (“QIH”) for approximately £1.35 million (the “Quintica Agreement”). The results of this business have therefore been disclosed as discontinued activities on the face of the Consolidated Income Statement and related notes. Amounts in the Consolidated Statement of Financial Position relating to this business are classified as held for sale at the end of 2015. Watchstone Group plc Annual Report and Financial Statements 201678 The assets and liabilities of Quintica classified as held for sale at 31 December 2015 were: Intangibles and goodwill Property, plant and equipment Trade and other receivables Deferred tax Cash and cash equivalents Assets classified as held for sale Trade and other payables Corporation tax Liabilities classified as held for sale Net assets classified as held for sale £000 83 42 1,025 368 627 2,145 (1,153) (86) (1,239) 906 IFRS 5 requires the disposal group to be measured at the lower of its carrying value and its fair value less costs to sell. Accordingly, as at 31 December 2015, the carrying value of this business was written down to realisable value and a goodwill impairment charge of £4.2 million was recognised in the discontinued activities in the year ended 31 December 2015. The subsequent profit arising on sale in the period ended 31 June 2016 is as follows: Sales proceeds Net liabilities at disposal Expenses and other costs of sale Profit arising on sale The overall result recognised in the Consolidated Income Statement for Quintica’s operations disposed of was as follows: Revenue Expenses Loss before tax of discontinued operation Tax Loss after tax of discontinued operation 2016 £000 1,034 (1,038) (4) (3) (7) 2016 £000 1,376 (1,259) (41) 76 2015 £000 5,576 (11,659) (6,083) (58) (6,141) The cash flows of Quintica’s discontinued operations recognised in the Consolidated Cash Flow Statement were as follows: Operating cash outflows Investing cash flows Financing cash flows Total cash flows 2016 £000 (553) (17) 212 358 2015 £000 (2,556) (3) 2,678 119 Disposal of the Professional Services Division (“PSD”) On 29 May 2015, the Group disposed of the PSD (i.e. its interests in its legal, claims management and health service businesses) to Slater and Gordon UK (1) Limited for a total consideration of £644,867,000, of which £55,000,000 was retained in escrow, together with further cash consideration payable in respect of the future settlement of its clients’ noise induced hearing loss (“NIHL”) cases. Of the £55,000,000 held in escrow, £5,000,000 related to a completion mechanism, of which £3,805,000 was received during 2016. The remaining £50,120,000 (including interest) remains in a joint escrow account (“Warranty Escrow”). Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)79 In September 2016, Slater & Gordon (“S&G”) notified the Group of a purported claim in respect of its acquisition of the PSD. In November 2016, S&G obtained an opinion from an independent barrister in respect of the Warranty Escrow that based solely on the information presented to him (and on the assumption that no further evidence would be provided) that the purported claim has on balance a prospect of success and that, if successful, such claim would be likely to have a value of £53,000,000 (“Opinion”). As yet no proceedings have been brought and the Group will defend such claim robustly if commenced. Since proceedings have not been issued to the Company disclosure of key evidence (if any exists) in support of the merits or quantum of a claim cannot yet be enforced. Since the escrow monies have been retained in the Warranty Escrow at this time, the Company has fully provided against its recoverability at 31 December 2016. The Company believes the escrow monies will be sufficient to settle a claim (if any). Given the inherent uncertainties of the NIHL business line, the parties could not agree on an appropriate valuation at completion and so the agreement provides that the Group will receive 50% of the net after tax receipts (after allowing for administrative costs) collected on the NIHL cases outstanding at completion. Approximately 53,000 NIHL cases were active and transferred at completion. The agreement provided for such amounts to be determined on a six monthly basis commencing on 31 December 2015 and continue until 30 June 2017 when a terminal value projection of expected receipts would be agreed. If no agreement was then reached, the process would continue with payments every six months until the earlier of the date when a terminal value was agreed or 31 December 2018. Based on an assessment of the costs that S&G will would need to incur to pursue the NIHL cases and the potential outcome of the NIHL cases, the fair value of the consideration was determined as £nil. There have been no amounts received to date in respect of this consideration and the fair value continues to be assessed as £nil. The profit arising on this disposal comprises the following elements: Sales proceeds Net assets at disposal Expenses and other costs of sale Profit arising on sale £000 644,867 (132,234) (18,316) 494,317 The net gain on disposal of PSD represents sales proceeds of £644,867,000 less net assets at completion of £132,234,000 and expenses of £18,316,000. The overall result recognised in the Consolidated Income Statement for the PSD operations disposed of was: Revenue Expenses Loss before tax of discontinued operation Tax Loss after tax of discontinued operation 2016 £000 – – – – 2015 £000 95,162 (134,988) (39,826) (1,361) (41,187) The cash flows of the PSD discontinued operations recognised in the Consolidated Cash Flow Statement were as follows: Operating cash outflows Investing cash flows Financing cash flows Total cash flows 2016 £000 – – – – 2015 £000 (24,919) (150) 10,260 (14,809) Watchstone Group plc Annual Report and Financial Statements 201680 Nationwide Accident Repair Services Plc The Group disposed of its entire shareholding in NARS on 4 March 2015. No gain or loss occurred in the year on the disposal of NARS. 360 GlobalNet (“360G”) and 360ViewMax (“360V”) The interests that the Group held in 360G and 360V were sold in January 2015 and May 2015. In 2015, a £3,329,000 gain was recognised on the sale of 360G and a loss of disposal of £1,358,000 was recognised on the sale of 360V. These are both reported as Other Income in the Consolidated Income Statement. 37. Related party transactions Transactions between Group undertakings, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Disposal of businesses On 8 January 2016, the Group disposed of its entire investment in BEI and CRC for a nominal consideration of £1 to the BE Smart Group Limited, being a company owned by Ben Williams, a statutory director of BEI and CRC. On 7 March 2016, the Group disposed of its investment in Quintica to QIH being a company owned by Charles Osburn, a statutory director of Quintica, for approximately £1.35 million. The Group will be entitled to additional consideration in the event that Quintica is disposed of (in whole or part) by QIH in the year following completion of the transaction. On 31 March 2017, the Group disposed of its wholly owned subsidiary Metaskil Limited (“Metaskil”) to Paul Hunsdon, a statutory director of Metaskil, for a nominal consideration of £1. This did not result in any gain or loss being recognised in the Consolidated Income Statement of the Group. Compensation of key management personnel The key management personnel are the Directors and the Group General Counsel & Company Secretary. In 2015, key management personnel were the Directors, James Sutcliffe and Richard Rose prior to his appointment as non-executive Chairman on 29 May 2015. During 2015, BaxterBruce Limited, of which James Sutcliffe is the non-executive Chairman, provided strategic consultancy services to the Board of Directors. Richard Rose, Mark Williams and James Sutcliffe were consultants providing services under the arrangement. Included in the table below, as well as emoluments paid to the Company’s Directors, are amounts paid directly to Richard Rose of £1,072,000 (prior to his becoming a Director) and £247,000 to James Sutcliffe in the period to 30 June 2015. Short-term employee benefits Post-employment benefits Termination benefits Share-based payments 2016 £000 3,281 33 – – 3,314 2015 £000 3,041 51 575 6,122 9,789 Transactions with Directors and Key Management Other than noted above, there have been no transactions with Directors and Key Management during 2016. In the first half of 2015, the Group purchased £2,800,000 of financial services from Codex Capital Partners (UK) Limited, a company of which D Currie is a Director, in relation to the disposal of the PSD and an additional £52,000 in relation to other services. No amounts were outstanding at 31 December 2015. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)81 Prior to his resignation from the Board of Directors on 18 November 2014, R Terry was employed as a Director of the Company holding the positions of Chief Executive Officer and Executive Chairman. The Company engaged the services of an internal auditor towards the end of 2015 to review expense claims submitted by Mr Terry and payments made by the Company to him during his period of employment (“Investigation”). The initial phase of the Investigation was completed in February 2016, and identified an amount of expenses and payments that the Directors allege should not have been claimed from the Company. These expenses totalled £184,865. Pending completion of the Investigation, the Company ceased paying Mr Terry instalments of payments relating to Mr Terry’s settlement agreement with the Company entered into upon his exit in November 2014. On 10 December 2015, Mr Terry issued proceedings to claim outstanding instalments and on 8 February 2016 the Company lodged a defence and counterclaim for the recovery of the allegedly improper expenses and payments. The Investigation is on-going as is the litigation with Mr Terry as detailed above. Those transactions that form part of the Company’s defence and counterclaim detailed above had not been disclosed in historic Director’s Remuneration Report or Related Party Transaction notes. The Company will provide full disclosure in due course, if necessary. In the first quarter of 2015, the Group made payments of £20,000 to Quindell Directorial Services, the trading name of R Terry. In the first quarter of 2015, the Group made sales of fixed assets for £134,000 to Quob Park Estate Limited (“QPE”), a company controlled by R Terry. This included an amount of £85,000 for the sale of Quob Barn, the former head office of the Company. From February 2015, QPE subleased an apartment from the Group in Ontario, Canada for CDN$66,000 per annum for a period to 20 August 2016 (being the head lease expiration date). There are no on-going commercial obligations between the Group and QPE or R Terry. Transactions with OS3 Distribution Limited On 28 June 2016, the outstanding loan notes of £1,387,000 were settled by OS3 Distribution Limited (formerly Quob Park Solutions Limited), a Company in which the Group holds an investment. 38. Post balance sheet events Legal claim In February 2017, Hubio Solutions Inc (“Hubio Solutions”) issued a claim in the Ontario Superior Court of Justice against Aviva Canada Inc (“Aviva Canada”) in respect of breach of contract and unpaid amounts due under an agreement entered into by the parties in October 2014 and announced on 21 October 2014 (“Agreement”). At the same time, Aviva Canada issued a claim against Hubio Solutions and ingenie (Canada) Inc. Watchstone is confident in the strength of the Group’s case and will defend any claim robustly. Disposal of Metaskil Limited On 31 March 2017, the Group disposed of its wholly owned subsidiary Metaskil. Further details are provided in note 37. Watchstone Group plc Annual Report and Financial Statements 201682 Company Statement of Financial Position as at 31 December 2016 Non-current assets Property, plant and equipment Investments in subsidiaries Interests in associates Investments Current assets Trade and other receivables Corporation tax assets Term deposits Cash and cash equivalents Assets classified as held for sale Total current assets Total assets Current liabilities Trade and other payables Provisions Total current liabilities Non-current liabilities Deferred tax liabilities Total liabilities Net assets Equity Share capital Other reserves Retained earnings Total equity Note 41 42 42 42 43 44 45 46 46 46 48 49 49 2016 £000 22 24,030 – – 2015 £000 1,484 43,076 86 – 24,052 44,646 25,346 – 37,500 36,641 99,487 1,300 100,787 124,839 87,041 787 – 97,639 185,467 – 185,467 230,113 (61,358) (22,186) (83,544) (72,687) (28,322) (101,009) – – (28) (28) (83,544) 41,295 (101,037) 129,076 4,604 135,163 (98,472) 41,295 4,596 138,494 (14,014) 129,076 The Financial Statements of the Company, registered number 05542221, on 82 to 99 were approved by the Directors on 27 April 2017 and signed on its behalf by: Mark P Williams Director Richard Rose Director Watchstone Group plc Annual Report and Financial Statements 2016 83 2015 £000 (56,678) (1,000) (57,678) 366 (57,312) (31) 558,739 (1,000) 5,194 7,069 – – – (32,355) 8,936 – Note 52 2016 £000 (13,918) (2,089) (16,007) 289 (15,718) (2) 3,805 – – 86 (82,500) 45,000 97 (20,372) 6,968 1,255 (45,663) 546,552 375 8 – – – 383 (60,998) 97,639 36,641 2,375 1,305 (2,000) (411,871) (11,150) (421,341) 67,899 29,740 97,639 45 Company Cash Flow Statement for the year ended 31 December 2016 Cash flows from operating activities Cash used by operations before exceptional costs, net finance expense and tax Non underlying operating cash out flows excluding discontinued operations Cash used by operations before net finance expense and tax Corporation tax received/(paid) Net cash used by operating activities Cash flows from investing activities Purchase of property, plant and equipment Sale of PSD Acquisition of subsidiaries Sale of subsidiaries Sale of associated undertakings Purchase of term deposit Proceeds from maturing term deposits Interest income Loans to group undertakings Loans from group undertakings Repayment of financing loan Net cash (used in)/generated by investing activities Cash flows from financing activities Net finance income received Issue of share capital Repayment of secured loans Return of capital Cash out of options Net cash generated by/(used in) financing activities Net (decrease)/increase 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 Watchstone Group plc Annual Report and Financial Statements 201684 Company Statement of Changes in Equity for the year ended 31 December 2016 At 1 January 2016 Profit for the year Other comprehensive income Total comprehensive income Issue of share capital (notes 28, 29) Share-based payments (note 28) Reserves adjustments, including transfer of realised Profits to retained earnings (note 29) Dividends received Total transactions with owners, recognised directly in equity Share premium account Share capital £000 4,596 £000 127,251 Merger reserve £000 7,530 Other equity reserve £000 54 – – – 8 – – – 8 – – – – – – – – – – – – – – – – – – – – – – Share- based payments reserve £000 3,659 Total other reserves £000 138,494 – – – – – – – – 441 441 (3,772) (3,772) 3,772 – – (3,331) (3,331) 840 4,612 Retained earnings £000 (14,014) (89,070) – Total equity £000 129,076 (89,070) – (89,070) (89,070) – – 8 441 – 840 1,289 At 31 December 2016 4,604 127,251 7,530 54 328 135,163 (98,472) 41,295 for the year ended 31 December 2015 Share capital £000 Share premium account Merger reserve Shares to be issued Other equity reserve Share- based payments reserve Shares treated as held in treasury Total other reserves Retained earnings £000 £000 £000 £000 £000 £000 Total equity £000 At 1 January 2015 (note 5) 65,467 447,533 171,637 30,744 £000 54 £000 20,713 Profit for the year Other comprehensive income Total comprehensive income – – – – – – Issue of share capital (notes 28, 29) 2,734 29,426 – – – – (63,605) (349,708) – – – – Shares no longer issuable (note 29) Cash out of options (note 28) Effect of capital reduction and return of capital (note 28) Share-based payments (note 28) Reserves adjustments, including transfer of realised profits to retained earnings (note 29) Total transactions with owners, recognised directly in equity – – – – – – – – (164,107) – – – (21,047) (9,697) – – – – – – – – – – – – – – – – – (5,652) – – – 17,235 (28,637) (169) 670,512 (206,579) 529,400 – – – – – – – – – – – 2,727 (9,697) 228 – 228 – 9,470 228 – 228 5,461 (227) – (11,150) (11,150) (349,708) 1,442 (411,871) 17,235 – 17,235 169 (192,575) 192,575 – (60,871) (320,282) (164,107) (30,744) (17,054) 169 (532,018) 192,337 (400,552) At 31 December 2015 4,596 127,251 7,530 – 54 3,659 – 138,494 (14,014) 129,076 Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)85 39. General information Watchstone Group plc is a company registered and domiciled in the United Kingdom. The Financial Statements are presented in pounds sterling, to the nearest thousand, as this is the currency of the primary economic environment in which the Company operates. The address of the registered office is 3rd floor, 21 Tower Street, London WC2H 9NS. On this basis, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. The Directors have not identified any material uncertainties that would cast significant doubt on the ability of the Company to continue as a going concern. As such, the Directors continue to adopt the Going Concern basis of accounting in the preparation of the Financial Statements. 40. Significant accounting policies The principal accounting policies adopted in the preparation of these Financial Statements are set out below. These policies have been consistently applied to all the years presented. Basis of preparation These Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations adopted by the European Union (EU). The Financial Statements have been prepared under the historical cost convention. A summary of the significant Company accounting policies is set out below. The Company has reviewed its accounting policies in accordance with IAS 8 and determined that they are appropriate for the Company and have been consistently applied. In preparing these Financial Statements the board has taken into account all available information in the application of its accounting policies and in forming judgments. Going concern The Company holds significant cash reserves and no material bank debt. The Company has concluded that its cash reserves and short term investments in term deposits will be sufficient to fund the ongoing operations of the Company together with any future development needs, and the settlement of legacy matters. Income Statement and Statement of Comprehensive Income The Company has not presented its own Income Statement and Statement of Comprehensive Income as permitted by section 408 of the Companies Act 2006. Operating profit Operating profit is profit stated before finance income, finance expense and tax. Share-based payments Options The fair value of options granted to individuals is recognised as an expense, with a corresponding increase in equity, over the period in which the unconditional entitlement occurs. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options expected to vest. Upon the exercise of share options, the proceeds received net of attributable transaction costs are credited to share capital and share premium. The Company adopted a Black-Scholes model to calculate the fair value of options granted. Costs relating to employees of subsidiaries has been accounted for by increasing the Company’s cost of investment of those subsidiaries. Watchstone Group plc Annual Report and Financial Statements 201686 Post combination vendor remuneration Trade receivables Where consideration towards an acquisition is linked to ongoing employment within the Company this consideration is not treated as a cost of the acquisition. It is treated as post combination remuneration and is recognised in the Income Statement over the period in which the employment services are delivered. The valuation of such amounts, where the form of the payment is in shares, uses an option valuation model. Where such costs relate to employees of subsidiaries, this has been accounted for by increasing the Company’s cost of investment of those subsidiaries. Trade receivables are held at amortised cost less any impairment provisions and this equates to their recoverable value. Movements in the impairment provision relating to credit risk are recognised within administrative expenses as bad debt expenses. Trade payables Trade payables do not carry any interest and are initially stated at their fair value. Subsequent to initial recognition they are measured at amortised cost. Property, plant and equipment Cash and cash equivalents Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is not provided on freehold land. On other assets, depreciation is calculated to write off the cost less estimated residual values over their estimated useful lives as follows: ■ Freehold buildings: 2%-5% per annum straight line ■ Improvements to freehold land and buildings: 5%-10% per annum straight line ■ Improvement to leasehold land and buildings: Over the term of the lease ■ Plant and equipment: 20%-33⅓% per annum reducing balance Assets in the course of construction are capitalised as expenditure is incurred. Depreciation is not charged until the asset is brought into use. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. Residual value is based on the estimated amount that would currently be obtained from disposal. Estimated residual values and useful economic lives are reviewed annually and adjusted where necessary. Cash in the Statement of Financial Position comprises cash at banks and in hand. For the purpose of the Consolidated Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Consideration receivable for the Professional Services Division £50,000,000 (plus interest) of the PSD sale consideration is retained in a joint escrow account until the expiration of the warranty period or settlement of a claim. It is expected that a claim will be received in respect of the PSD purchase. The outcome of a potential claim is highly uncertain and therefore the carrying amount of the Company’s receivable in respect of the consideration held in escrow is highly judgmental. At 31 December 2016 the Company has impaired in full its receivable in respect of this consideration. Term deposits Term deposits represent short term (six months or less) investments in fixed interest deposits with a major UK bank. The related cash flows are included within investing activities in the Company Cash Flow Statement. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)87 Provisions Share capital Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Exceptional costs Exceptional costs are or are expected to be non-recurring material items which are outside of the Company’s ordinary activities. Such items are disclosed separately in the Financial Statements. Provisions are recognised when the Company has a present legal or constructive obligation in respect of a past event and it is probable that settlement will be required of an amount that can be reliably estimated. Taxation including deferred tax The tax expense represents the sum of current tax and deferred tax. Tax is recognised in the Income Statement except to the extent that it relates to items recognised in equity in which case it is recognised in equity. The current tax is based on taxable profit for the year calculated using tax rates that have been enacted or substantively enacted by the Statement of Financial Position date. Deferred tax is provided using the balance sheet liability method on temporary differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit. In principle deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets or liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each Statement of Financial Position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. Watchstone Group plc Annual Report and Financial Statements 201688 41. Property, plant and equipment Cost At 1 January 2015 Additions At 1 January 2016 Additions Transfer to assets classified as held for sale At 31 December 2016 Depreciation At 1 January 2015 Charge for the year At 1 January 2016 Charge for the year Transfer to assets classified as held for sale At 31 December 2016 Net book value 31 December 2016 31 December 2015 42. Investments Cost At 1 January 2015 Additions Disposals Other At 1 January 2016 Additions Disposals At 31 December 2016 Impairment At 1 January 2015 Charge for the year Disposals Other At 1 January 2016 Charge for the year Disposals At 31 December 2016 Net book value 31 December 2016 31 December 2015 Leasehold land and buildings £000 1,815 31 1,846 1 (1,815) 32 235 127 362 163 (515) 10 22 1,484 Total £000 276,117 9,158 (13,007) (278) 271,990 3,397 (261) Shares in investments Shares in associates Shares in group undertakings £000 £000 £000 15,471 257,458 3,188 – (1,688) – 1,500 – – 1,500 1,567 (12) (55) – 1,500 – – 1,500 – (9,504) (278) 5,689 – (261) 5,428 8,302 14 (2,435) (278) 5,603 – (175) 5,428 9,158 (1,815) – 264,801 3,397 – 268,198 275,126 135,707 86,018 – – 221,725 22,443 – 145,576 86,020 (2,490) (278) 228,828 22,443 (175) 244,168 251,096 – – – 86 24,030 43,076 24,030 43,162 Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)89 Investment additions during the year mainly relate to forgiveness of subsidiary loans. The following information relates to the related undertakings of the Company. Unless otherwise stated, all holdings are 100% and the principal activity of the undertaking is the provision of software, consulting and other services. Name of investment Investments incorporated in Canada Registered Address: 20 Victoria Street, 6th Floor, Toronto, Ontario, M5C 2N8 Connected Car Solutions Inc Hubio SaaS Solutions Inc Hubio Solutions Inc Intrinsic Holding Company Inc Intrinsync Insurance Company Inc Iter8 Consulting Services inc Watchstone (Canada) Inc Registered Address: 35 The Esplanade, Suite 250, Toronto, Ontario, M5E 1Z4 Quindell Services Inc Registered Address: 510-157 Adelaide St W, Toronto, Ontario, M5H 4E7 ingenie (Canada) Inc Registered Address: 70 Frid Street, Unit 2, Hamilton, Ontario, L8P 4M4 pt Healthcare Solutions Corp 7211589 Canada Inc Registered Address: 11510-40 Street S E, Calgary, Alberta, T2Z 4V6 Edgewater Employee Services Inc Registered Address: 67 Yonge Street, Suite # 1101, Toronto, Ontario, M5E 1J8 pt Health Aspen Limited Partnership Registered Address: c/o Actus Law Droit, 900 Main Street, Moncton, New Brunswick, E1C 1G4 pt Health NB 2015 Professional Corporation Inc Investments incorporated in South Africa Registered Address: 28 Hilton Avenue, Hilton, Kwa-Zulu Natal, 3245 Quindell Business Process Outsourcing (Pty) Limited Investments incorporated in United Kingdom Registered Address: 10 East Street, Fareham, Hampshire, PO16 0BN OS3 Distribution Limited Registered Address: 15 Olympic Court, Whitehills Business Park, Blackpool, FY4 5GU Brand Extension (UK) Limited Business Advisory Service Limited Maine Finance Limited QPS Energy Limited QPS Scaffolding Limited QPS South West Limited QSM (UK) Limited Quindell Property Services Limited Sunlite Solutions Limited Class and percentage of shares held (100% ordinary shares unless otherwise stated) Nature of holding Indirect Direct Indirect Indirect Indirect Indirect Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Direct Indirect Direct Indirect Indirect Indirect Indirect Indirect Direct Indirect 50% 51% 25% Common shares, 100% preference share 5.29% Watchstone Group plc Annual Report and Financial Statements 201690 Name of investment Investments incorporated in United Kingdom (continued) Registered Address: 2nd Floor, Home Ground Barn, Pury Hill Business Park, Towcester, NN12 7LS Black Spot Interactive Limited ~ Black Spot Limited ~ Hubio Fleet Limited Ingleby (1653) Limited Morpheous Holdings Limited Road Angel Group Limited Road Angel Pogo Limited ~ RoadPilot Limited Registered Address: 2nd Floor, Building 4, Meadows Business Park, Blackwater, Camberley, Surrey Hubio Technologies Limited Metaskil Group Limited Metaskil Limited Open Square Limited Registered Address: 3rd Floor, 21 Tower Street, London, WC2H 9NS, England Connected Car Solutions Limited Hubio Solutions Limited Quindell Business Process Services Limited Watchstone Limited Registered Address: 4 Prince Albert Road, London, NW1 7SN, England, Glanty Limited Registered Address: Pillar House, 113/115 Bath Road, Cheltenham, Gloucestershire, GL53 7LS BestPriceHotDeals Limited Registered Address: 1 Barnes Wallis Road, Segensworth East, Fareham, Hampshire, PO15 5UA ACH Management Services Limited Enzyme International Limited ~ Overland Associates Limited ~ Quindell Champion and Challenger Methods Limited ~ Quindell Motor Services Limited ~ SMI Telecoms Distribution Limited SWB Consulting Limited ~ Utility Switch Limited ~ Registered Address: Quob Park, Titchfield Lane, Wickham, Fareham, Hampshire OS3 Telecoms Distribution Limited Registered Address: The Stables, Thorncroft Manor, Thorncroft Drive, Leatherhead, Surrey ingenie (UK) Limited ingenie Limited ingenie Services Limited ingenie Software Limited ~ Class and percentage of shares held (100% ordinary shares unless otherwise stated) Nature of holding Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Direct Direct Direct Indirect Direct Direct Direct Direct Direct Indirect Direct Indirect Direct Direct Direct Indirect Indirect Indirect Indirect Indirect Direct Indirect Indirect 99.92% 98.4% 3.15% 50% 5.29% Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)91 Class and percentage of shares held (100% ordinary shares unless otherwise stated) Nature of holding 5.29% 8.9% Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Indirect Name of investment Investments incorporated in United States of America Registered Address: 280 Madison Avenue, Room 912 – 9th Floor, New York 10016 SMI Telecoms LLC Registered Address: 160 Greentree Drive, Ste 101, Dover, DE 19904 Hubio Inc. Registered Address: 3800 N Central Ave, Ste 460, Phoenix, AZ 85012 Navseeker Inc Registered Address: Corporate Trust Co., Corporate Trust Center, 1209 Orange Street, Wilmington, DE 19801 ingenie (US) Limited SMI Telecoms Distribution LLC Registered Address: Corporation Service Company, 2711 Centerville Road, Ste 400, Wilmington, DE 19808 eeGeo Inc Iter8 (USA) Inc Registered Address: National Registered Agents, 818 W 7th Street, Ste 930, Los Angeles, CA 90017 LocX Inc ~ denotes that the Group has applied to have the company struck off The financial year ends of the Group’s subsidiaries are 31 December 2016. The above investments are treated as consolidated subsidiaries of the Group, with the exception of those set out below. The following information relates to investments of the Company also treated as investments within the Group accounts (see note 18): Name of investment OS3 Distribution Limited (5.29%) SMI Telecoms LLC (5.29%) OS3 Telecoms Distribution Limited (5.29%) eeGeo Inc (8.9%) Glanty Limited (3.15%) Country of incorporation UK Nature of holding Direct USA UK USA UK Indirect Indirect Indirect Direct The fair value of investments was assessed on sales value less cost to sell and falls within Level 3 of the fair value hierarchy. 43. Trade and other receivables Payroll and other taxes including social security Other debtors Monies held in escrow (net of impairment provision) Prepayments Amounts due from subsidiary undertakings 2016 £000 142 477 – 93 24,634 25,346 2015 £000 567 1,553 55,049 111 29,761 87,041 Watchstone Group plc Annual Report and Financial Statements 201692 Monies held in escrow of £50,120,000 have been fully impaired to £nil and relate to the disposal of the PSD to S&G. All receivables fall due within one year of the balance sheet date. The Directors consider that the net carrying amount of trade receivables approximates to their fair value. 44. Term deposits Term deposits represent cash which has been invested in to short term (less than six months) fixed interest bearing instruments with a major UK bank. Term deposits 45. Cash and cash equivalents Cash and cash equivalents comprise the following for the purpose of the cash flow statement: Cash and cash equivalents 46. Liabilities Current liabilities Trade payables Amounts owed to Group undertakings Other creditors Accruals Provisions Non-current liabilities Deferred tax liabilities The Directors consider that the net carrying amount of liabilities approximates to their fair value. 2016 £000 37,500 2015 £000 – 2016 £000 36,641 2015 £000 97,639 2016 £000 488 57,881 – 2,989 22,186 83,544 – – 2015 £000 1,692 56,671 3,960 10,364 28,322 101,009 28 28 Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)93 Total £000 23,016 14,618 (5,538) (3,774) 28,322 5,556 (7,726) (3,966) 22,186 – 22,186 Tax related matters Legal disputes £000 16,697 4,000 – – 20,697 3,231 (7,626) (2,202) 14,100 – 14,100 £000 5,538 4,400 (5,538) – 4,400 1,800 – (800) 5,400 – 5,400 Other £000 781 6,218 – (3,774) 3,225 525 (100) (964) 2,686 – 2,686 The analysis of provisions is as follows: At 1 January 2015 Additional provisions Unused amounts reversed Used during the year At 1 January 2016 Additional provisions Unused amounts reversed Used during the year At 31 December 2016 Split: Non-current Current Tax related matters A provision for tax-related matters has been established with respect to judgemental tax positions primarily in relation to historic PAYE and VAT issues which have not yet been resolved. Key judgements exist around the classification of certain transactions and therefore the related tax treatment. The amount provided represents the Directors’ estimate of the likely outcome based upon the information available; however the ultimate settlement may be different. The Company is taking steps to resolve this and believe the majority will be settled within twelve months from the balance sheet date. Certain elements of the provisions held at 31 December 2015 have been settled during the year at amounts less than managements’ estimate of the expected outflow at the time of the preparation of the 31 December 2015 Financial Statements. Any provision held over and above any specific settlement amount have been released as unused. Legal disputes On 5 August 2015, the SFO informed the Company that it had opened an investigation, which relates to past business and accounting practices at the Company. The Group is co-operating fully with the SFO investigation. At this stage, the timing of completion of the SFO investigation and its conclusions cannot be anticipated. Therefore, having taken external advice, no liability has been recognised at the balance sheet date as it is not possible to reliably estimate a liability (if any) in respect of this matter. On 14 December 2015, the Company received a letter of claim from a law firm (“Claimant Firm”) acting for 342 claimants commencing an action against the Company under the Financial Services and Markets Act 2000 (“Letter of Claim”). Despite the Company’s endeavours in correspondence with the Claimant Firm, the Company is not in a position to verify the assertions in the Letter of Claim which, inter alia, details the expected value of the potential claims against the Company to be approximately £9.4 million. No proceedings have been commenced to date in respect of this matter. Having taken external advice, no liability has been recognised at the balance sheet date as it is not possible to reliably estimate a liability (if any) in respect of this matter. The amount provided in respect of these legal cases is in respect of defence costs and is considered to be in the mid-range of possible outcomes given the uncertainty in relation to these outcomes. If successful in defending these disputes then the final costs may be lower than the total provision recognised above. Additional provisions in the table above relate to expected legal costs to defend a claim arising after the retention of the PSD escrow monies (see notes 20 and 36). This is in addition to further amounts being provided for the expected legal costs of the other matters discussed above, although no amounts have been provided for the costs of any actual settlement. Additional provisions in the table above relate to expected legal costs to defend a claim arising after the retention of the PSD escrow monies (see notes 20 and 36). This is in addition to further amounts being provided for the expected legal costs of the other matters discussed above, although no amounts have been provided for the costs of any actual settlement. Watchstone Group plc Annual Report and Financial Statements 201694 Amounts used during the year represents legal costs incurred to date as a result of the above items. The provisions will be utilised further as the cases progress. Other Provisions have been established for expected costs where a commitment has been made at the balance sheet date and for which no future benefit is anticipated. No reimbursement has been recognised in relation to any provision as there is no certainty of recovery or reliable means of estimation. An element of this relates to a restructuring provision which can be reasonably estimated and are time bound within an upper limit of one year. The majority of the amount provided at 31 December 2016 relates to two property leases and therefore amounts used during the year relate to the ongoing costs of these obligations. Management are looking to sublet or settle these obligations within twelve months. Unused amounts reversed is a consequence of a change in estimate regarding the timing of the settlement of one such lease and new provisions relate to additional property being vacated during the year. 47. Financial instruments and financial risk management (a) Financial instruments The Company’s financial instruments comprise: 1. Loans and receivables comprising: trade and other receivables including amounts due from subsidiary undertakings £24,634,000 (2015: £29,761,000) 2. Monies held in Escrow of £nil (2015: £55,049,000) 3. PSD deferred consideration of £nil (2015: £nil) 4. Cash and cash equivalents of £36,641,000 (2015: £97,639,000) 5. Other liabilities comprising: trade and other payables including amounts owed to Group undertakings of £58,369,000 (2015: £ 58,363,000) The carrying value and fair values are approximately the same. The fair values of assets and liabilities and fair value hierarchy is as described in note 33. (b) Financial risk management The Company manages its exposure to capital, liquidity and credit risk as set out in note 33. The following are the contractual maturities of financial liabilities: 2016 Trade and other payables Amounts owed to Group undertakings 2015 Trade and other payables Amounts owed to Group undertakings Carrying amount Contractual cash flows Less than 1 year Between 1-5 years Over 5 years £000 £000 £000 £000 £000 488 57,881 58,369 1,692 56,671 58,363 (488) (57,881) (58,369) (1,692) (56,671) (58,363) (488) (57,881) (58,369) (1,692) (56,671) (58,363) – – – – – – – – – – – – Included within trade and other payables is an amount of CDN$9,000 (2015: CDN$520,000); all other financial instruments are denominated in pounds sterling. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)95 Nominal value fully paid £000 4,585 8 4,593 Nominal value fully paid £000 65,298 2,681 (63,447) 39 – 14 4,585 Nominal value unpaid Nominal value total £000 11 – 11 £000 4,596 8 4,604 Nominal value unpaid Nominal value total £000 169 – (158) – – – 11 £000 65,467 2,681 (63,605) 39 – 14 4,596 Number £000 45,963 75 46,038 Number £000 436,447 17,871 – 3,909 (412,405) 141 45,963 48. Called up share capital 2016 At 1 January – issued shares of 10 pence Issued shares of 10 pence At the end of the year 2015 At 1 January – issued shares of 15 pence Issued shares of 15 pence fully paid Effect of capital reduction Issued shares of 1 pence fully paid Effect of share consolidation Issued shares of 10 pence At the end of the year On 16 December 2015, the High Court of Justice in England and Wales made an order approving the reduction of the Company’s share capital under the Companies Act 2006, which had been approved by shareholders at a General Meeting held on 26 November 2015. The Reduction of Capital became effective on 18 December 2015 and the nominal value of the Company’s shares reduced to 1 pence at that time, which had the effect of reducing the nominal value of issued share capital by £63,605,000. On 21 December 2015, the ordinary shares of the Company were consolidated. The share consolidation replaced every 10 existing ordinary shares of 1 pence each with 1 new ordinary share of 10 pence. The impact of the share consolidation was to reduce the number of allotted, called up, unpaid and fully paid shares by 412 million shares. There was no change in the total nominal value of the Company’s issued share capital. The Company has one class of ordinary shares of 10 pence each which carry no right to fixed income. 49. Reserves Share premium account Merger reserve Other equity reserve Share-based payments reserve Other reserves Retained earnings 2016 £000 127,251 7,530 54 328 135,163 (98,472) 2015 £000 127,251 7,530 54 3,659 138,494 (14,014) The fair value of the share consideration over and above the share’s nominal value of 10 pence per share (15 pence per share prior to the share consolidation exercise in December 2015) for all other shares issued by the Company is included in the share premium reserve. In addition, directly attributable costs incurred in the issuing of shares are also recognised in the share premium reserve. The merger reserve represents the fair value of the share consideration over and above the share’s nominal value of 10 pence per share (15 pence per share prior to the share consolidation exercise in 2015) for those shares issued as consideration for acquisitions that take the Company’s ownership of the acquired entity above 90%. Watchstone Group plc Annual Report and Financial Statements 201696 The equity reserve represents the equity component of share-based payments prior to 1 October 2010. The share-based payment reserve is increased to reflect the fair value to the Company of share-based payment transactions, with the reserve being reduced when shares are issued. Further details relating to reserves are included in the Company Statement of Changes in Equity on page 84. At the Statement of Financial Position date, the Company had negative distributable reserves of £100,039,000, as a result of unrealised profit amounts totalling £1,567,000 in retained earnings. 50. Income statement of the Company The Company has taken advantage of the exemption under section 408 of the Companies Act 2006 to not disclose the Income Statement of the Company. The loss after taxation of the Company for the year ended 31 December 2016 was £89,070,000 (2015: profit of £228,000). 51. Operating lease commitments At the Statement of Financial Position date the Company had outstanding commitments for minimum lease payments due under non-cancellable operating leases, which expire as follows: Expiring: Within one year Between two and five years After five years Land and buildings 2016 £000 709 1,717 – 2,426 2015 £000 632 2,426 – 3,058 Operating lease payments represent rentals payable by the Company for office properties. Leases are typically negotiated for an average period of five years in the case of buildings. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)97 2015 £000 228 (782) 202 (2,603) (2,955) 1,000 2,320 127 337 (218,327) 86,020 92,253 – 72 (39,153) 303 (17,828) (56,678) 2016 £000 (89,070) (33) 14 (712) (89,801) 2,089 237 163 – – 22,443 13,855 50,120 – (894) (1,640) (11,384) (13,918) Cash flow 1 January movements 31 December £000 £000 £000 97,639 97,639 97,639 29,740 29,740 (2,000) 27,740 (60,998) (60,998) (60,998) 67,899 67,899 2,000 69,899 36,641 36,641 36,641 97,639 97,639 – 97,639 52. Cash flow from operating activities (Loss)/profit after tax Tax Finance expense Finance income Operating loss Adjustments for: – Non underlying operating cash out flows excluding discontinued operations – Share-based payments – Depreciation of property, plant and equipment – Amortisation of intangible assets – Profit on disposal – Impairment of investments – Impairment of intercompany – Impairment of escrow – Impairment of intangible assets Operating cash flows before movements in working capital and provisions – (Increase)/decrease in trade and other receivables – Decrease in trade and other payables Cash used by operations before exceptional costs Reconciliation of net cash flow to movement in net funds: 2016 Cash Cash and cash equivalents Net funds 2015 Cash Cash and cash equivalents Other secured loans < 1 year Net funds Watchstone Group plc Annual Report and Financial Statements 201698 53. Discontinued operations and disposals Quintica Holdings Limited (“Quintica”) On 4 March 2016, the Company disposed of the entire issued share capital of Quintica to QIH for approximately £1.35 million. In addition, the Company will be entitled to additional consideration in the event that Quintica is disposed of (in whole or part) by QIH in the year following completion of the transaction. Under the Quintica Agreement, the Company received £1 million in cash (£0.5 million paid immediately and £0.5 million due by 1 January 2017), plus the repayment of intra-company debt of US$0.5 million (approximately £0.35 million). The net assets of Quintica classified as held for sale at 31 December 2015 were £nil. There was a gain on the disposal of Quintica of £190,000. Ferneham Health Limited (“Ferneham”) On 10 February 2016, the Company disposed of its interest in Ferneham Health Limited for £86,000. There was no gain or loss on the disposal of Ferneham. Further details on discontinued operations and disposals are included in note 36. 54. Deferred tax Deferred tax liabilities Deferred tax assets 2016 £000 – – – 2015 £000 28 – 28 55. Ultimate controlling party There are no shareholders with overall control of the Company as at 31 December 2016 or 31 December 2015. 56. Contingent liabilities The Company routinely enters into a range of contractual arrangements in the ordinary course of events which can give rise to claims or potential litigation against group companies. It is the Company’s policy to make specific provisions at the Statement of Financial Position date for all liabilities which, in the opinion of the Directors, are expected to result in a significant loss. Watchstone Group plc Annual Report and Financial Statements 2016Notes to the Financial Statements (continued)99 57. Related party transactions The Directors had no material transactions with the Company during the year, other than disclosed in the Directors’ Remuneration Report on pages 18 to 21 or as described in note 37. The Directors are considered to be the key management personnel of the Company. During the year, the Company entered into transactions, in the ordinary course of business, with other related parties as follows: Subsidiary undertakings: Purchases Sales At 31 December the outstanding balances with subsidiaries are as follows: Amounts due from subsidiary undertakings Amounts due to subsidiary undertakings 58. Post balance sheet events Disposal of Metaskil Limited 2016 £000 (3,311) 2,727 2016 £000 24,634 (57,881) 2015 £000 (1,931) 2,217 2015 £000 29,761 (56,671) On 31 March 2017 the Group disposed of its wholly owned subsidiary Metaskil. Further details are provided in note 37. pt Healthcare Solutions Corp The Company has provided a guarantee to pt Healthcare Solutions Corp post year end regarding specific intercompany balances. 59. Dividends The Company did not pay any dividends during the year, nor in the prior year. Watchstone Group plc Annual Report and Financial Statements 2016100 Officers and Professional Advisers Auditor KPMG LLP 15 Canada Square London E14 5GL Solicitors Dorsey & Whitney LLP 199 Bishopsgate London EC2M 3UT Herbert Smith Freehills LLP Exchange House Primrose Street London EC2A 2EG Registrars Capita Asset Services The Registry, 34 Beckenham Road Beckenham Kent BR3 4TU Directors Mr R Rose (Chairman) Mr D Currie Rt. Hon. Lord M Howard Mr A Illsley Mr D Young Mr I Mukerjee Mr M P Williams Company Secretary Mr S Borson Registered Office 3rd Floor, 21 Tower Street London WC2H 9NS Company Registration No. 05542221 Bankers Royal Bank of Scotland Plc Abbey Gardens 4 Abbey Street Reading RG1 3BA Broker and Nominated Adviser Peel Hunt LLP Moor House 120 London Wall London EC2Y 5ET Watchstone Group plc Annual Report and Financial Statements 2016 Watchstone Group plc Annual Report and Financial Statements 20163rd Floor 21 Tower Street London WC2H 9NS watchstonegroup.com 

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