Innovative Informative KBC Advanced Technologies plc Annual report 2014 Invaluable KBC delivers innovative software technology and informative specialist consultancy to solve the hydrocarbon processing industry’s toughest challenges from reservoir to refinery, pump to processing facility. We aim to provide invaluable solutions to our customers, empowering them to achieve proven, sustainable and substantial improvements to their asset performance. OVERVIEW STRATEGIC REPORT GOVERNANCE OUR BUSINESS FINANCIAL STATEMENTS SHAREHOLDER INFORMATION We deliver preferred solutions in two ways: 1 2 1 2 Innovative technology Informative consulting KBC’s market-leading software modelling solutions and intellectual property enable clients to generate design and operating strategies across the complete hydrocarbon value chain for upstream, midstream, downstream and petrochemicals. KBC’s talented consultants have a distinct blend of technical and organisational expertise that equip us with a spectrum of operational services to guide our clients’ key strategic decisions. Read more about our Technology business on p9 Read more about our Consulting business on p8 Through the integration of these two offerings we offer an invaluable service, dedicated to making our clients world-class in operational excellence and profitability. 3 CONTENTS OVERVIEW 2 4 FINANCIAL STATEMENTS At a glance Chairman’s statement 30 Independent auditors’ report 31 Group income statement and Group statement of comprehensive income 32 Group statement of changes in equity 33 Group balance sheet 34 Group cash flow statement 35 Notes to the Group financial statements 57 Company balance sheet 58 Notes to the Company financial statements STRATEGIC REPORT 7 Chief Executive’s review 10 Our business model and strategy 12 Financial review and key performance indicators 14 Principal risks and risk management GOVERNANCE 16 Board of Directors 17 Executive Committee and Operating Committee 18 Introduction to governance 19 Corporate governance statement 22 Remuneration Committee report 26 Directors’ report SHAREHOLDER INFORMATION 62 Notice of the Annual General Meeting IBCFive‑year summary and shareholder information HIGHLIGHTS Revenue Adjusted profit before tax Pipeline of contracted work £76.0m £9.5m £88.0m 76.0 14 13 65.1 12 11 10 63.1 55.7 53.1 14 9.5 13 8.4 14 12 5.8 12 11 5.9 11 10 4.9 88.0 13 10 78.2 82.9 48.7 58.7 KBC Advanced Technologies plc Annual report 2014 1 AT A GLANCE Our business KBC is strategically placed to grow in both new and existing markets. We are focusing on key high-growth markets that will allow us to expand substantially whilst consistently delivering invaluable services for our existing clients. where we operate 1 For more than 30 years KBC has been linking advanced technology with consulting expertise to guide hydrocarbon processing companies to greater heights in over 90 countries across the globe. With the acquisitions of Infochem and FEESA, KBC is positioned to be the leading trusted software provider and technical consultancy across both upstream and downstream sectors. Contracts awarded £79.8m Countries of business 90+ Number of employees 330+ Read more about our people in the Chief Executive’s review on p7–9 2 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Middle East Our offices In the first year of increased focus on this region, KBC successfully established strong positions in Saudi Arabia and Kuwait, in addition to positioning itself well in the United Arab Emirates and Oman. In Saudi Arabia, KBC contracted a long-term partnership agreement with the world’s largest integrated refining and petrochemical complex. In Kuwait, KBC signed contracts with various national oil company subsidiaries. 2 3 1 North America KBC continued its long-term engagements for all software and service offerings by providing major North American clients with significant industry expertise – critical to the safe and reliable operation of their facilities – while also adding new major client accounts to leverage future growth. 2 Russia North Africa KBC positioned itself well in both Egypt and Algeria, two countries where the Group had opportunities for growth. KBC signed wide-ranging agreements to form partnerships for workforce development, operational excellence and profit improvement. In Algeria, KBC executives positioned the Group for a partnership with one of Africa’s largest oil companies. South America KBC continued its strong support for major national oil companies throughout South America, most notably being awarded a US$48.6m addition to a large business transformation contract for one of its key clients. KBC continues to pursue opportunities in the FSU given the refining sector will undergo significant expansion in the future but we approach this region cautiously with close attention to current constraints in this market sector. 3 Asia KBC was engaged by a national oil company in South East Asia to lead the content and delivery of an Operational Excellence Academy (OEA) programme. The OEA programme was designed around best practice instructional delivery design and focused on developing plant leaders with technical functional leadership capabilities to effectively drive operational excellence and sustain performance. The OEA programme has been rolled out to cover downstream operations with an initial contract value at over US$3m. KBC Advanced Technologies plc Annual report 2014 3 CHAIRMAN’S STATEMENT Delivering growth throughout the year HIGHLIGHTS Another year of good strategic, operational and financial performance Revenues up 17% to £76.0m (2013: £65.1m) Adjusted profit before tax1 up 13% to £9.5m (2013: £8.4m) Reported profit before tax of £6.7m (2013: £7.1m) Recommended final dividend up 10% to 1.1p per share (2013: 1.0p) Equity fundraising of £23.1m, net of expenses, to fund acquisitions and provide working capital for larger contracts (1)Adjusted for development costs carried forward, amortisation of development costs carried forward, amortisation of acquisition intangibles, share based payment charges and other items which do not reflect underlying operations (see note 5b) Acquisition and integration of FEESA, improving KBC’s product and service offerings across the full breadth of the hydrocarbon processing industry Consulting revenue increased by 17%, with strong performance in South America, further growth in Asia and the Middle East, and continued improvement in Consulting operating margin Another record year for Technology, with revenues up 17% and key contract awards in Asia, South America, the Middle East and Europe Strong year end pipeline of contracted work, up by 13% to a record £88.0m (2013: £78.2m) Strengthened executive leadership with appointment of a new CEO KBC’s medium and long-term market prospects continue to offer encouraging international growth opportunities Summary 2014 was another good year for KBC. The Group performed in line with expectations, raised equity for acquisitions and working capital and completed an important strategic acquisition. The Company also implemented a successful executive succession, appointing a new Chief Executive Officer from within the Group and appointing a new independent non-executive director to the Board. Following a strong finish to 2014, KBC has started 2015 well and, although there are many new industry challenges, we remain well positioned to continue our long‑term strategy of increasing and strengthening the Technology business, improving the margins of the Consulting business and continuing our long‑term expansion in the upstream oil and gas industry, together with growth in hotspots such as the Middle East, Southeast Asia and South America. Results Group revenue for the year increased by 17% to £76.0m (2013: £65.1m). Profit before tax calculated on an adjusted basis, as detailed in note 5b, was 13% higher than the previous year at £9.5m (2013: £8.4m). This reflected an adjusted profit margin of 13%. Adjusted profit after tax increased by 20% from £5.5m to £6.6m. The Company raised £23.1m net of expenses from an equity placing in June 2014. £10m of the placing monies was used to fund the acquisition of FEESA Limited in July 2014 and a further £4m was used for working capital, particularly for large projects in South America and the Middle East. 2014 was another good year for KBC, with strong financial performance and continued progress across the Group in all aspects of our strategy.” OVERVIEW STRATEGIC REPORT GOVERNANCE Despite an improved performance, the net result of this fundraising, coupled with prior period one-off tax credits, meant that basic earnings per share reduced to 5.7p (2013: 9.5p) and earnings per share calculated on an adjusted basis remained broadly steady at 9.3p per share in 2014, from 9.5p in 2013. Diluted earnings per share was 5.5p in 2014, compared to 9.2p in 2013. Dividend The Board proposes to pay a final dividend for the 2014 financial year of 1.1p per share (2013: 1.0p). The total cost of the proposed dividend amounts to £0.9m for the 2014 full year (2013 full year: £0.8m). Board and management During 2014 we strengthened the Board and executive leadership of KBC with major external hires and internal promotions. In November we announced the appointment of a new Chief Executive Officer effective 1 January 2015, a succession we committed to when I took over the executive leadership of KBC. Andrew Howell was appointed to drive the next phase of KBC’s strategy, with particular emphasis on developing its position in the upstream oil and gas industry and the Technology business. Andrew was previously the Managing Director of KBC’s Technology business and had gained wide oil and gas experience with BP, Hyprotech and Schlumberger before joining KBC in 2011. I remain Chairman of the Company. We also strengthened the composition of the Board with the addition in February 2014 of a new independent non-executive director, Paul McCloskey, and with the appointment of Andrew Howell and Kevin Smith to the Board in April 2014. A new and effective executive team was established at the end of the year in order to deliver clear leadership across all aspects of our business. Kevin Smith was promoted to Chief Commercial Officer (“CCO”), a new client-facing position which spans both Consulting and Technology, to drive the commercial performance of KBC. Mike Aylott has been promoted to Chief Technology Officer (“CTO”) from his role of managing all the engineering software development. The CTO position has been created to drive the realisation of the strategic direction of the Group towards commercial technology platforms underpinning all KBC’s activities. This includes expanding the range of our engineering software as well as delivering the full range of KBC knowledge and intellectual property through technology. Ramon Loureiro, our most senior partner, remains a key member of the executive team, ensuring the tradition and success of KBC’s profit improvement programmes is captured and further developed within the Group’s strategy. In addition, the business development resources of the Group have been strengthened with a number of external recruits as part of a sales transformation strategy to improve commercial performance. Current trading and outlook During the second half of 2014 the oil and gas industry experienced a major upheaval, with a significant increase in production in North America and Iraq, an unexpected slowdown in growth regions such as China and a subsequent oil price fall as a result of OPEC choosing not to control the market price. The longer‑term implications for the market are still not fully clear, but KBC is assuming a scenario of low oil prices for at least 18 months and some further belt-tightening by our clients. KBC is not affected directly by the US domestic oil exploration downturn since a large proportion of its business is in the downstream part of that market which will be less adversely affected. Despite this backdrop, KBC achieved solid results in 2014 and so far in 2015 the market for KBC’s services, while shifting, has remained steady. It is difficult to predict the full effect of the oil price on KBC’s performance in 2015. Some aspects are positive: more clients need to optimise their existing assets; Operational Excellence practices are in high demand; KBC’s Technology solutions are helping clients optimise production rates at lower energy costs; there is strategic rechecking of the economic viability of large capital expenditure projects; as oil companies reduce their work forces, they will need consultants to fill the gaps; downstream refining profitability is now returning to higher margins than have been seen for several years; and upstream operators are looking to drive more efficient production. FINANCIAL STATEMENTS SHAREHOLDER INFORMATION We entered 2015 with a record pipeline of contracted work and a healthy balance sheet to support the Group and its continued growth.” At the same time there are potential challenges for KBC: pricing pressure from a general focus on the oil and gas supply chain; cash collection and conversion; revenue from upstream oil exports sometimes being needed by national oil companies (“NOCs”) in order to fund downstream modernisation projects; and upstream capital projects delayed and postponed. Therefore, KBC is not being complacent and is taking action to reshape and refocus its business and organisation and has additional contingency plans should the market for our services deteriorate. We entered 2015 with a healthy pipeline of contracted work of £88.0m (2013: £78.2m), a record for the Group. Together with a number of key Consulting contract wins in the first two months of 2015, this leaves KBC well positioned to meet its objectives for the coming year. As always, the exact timing of contract awards will continue to affect results within any year. However, the strength of the pipeline of contracted work, an enhanced range of products and services and major internal progress in 2014 give the Board confidence for 2015. Ian Godden Chairman 17 March 2015 KBC Advanced Technologies plc Annual report 2014 5 Strategic report 7 Chief Executive’s review 10 Our business model and strategy 12 Financial review and key performance indicators 14 Principal risks and risk management 6 KBC Advanced Technologies plc Annual report 2014 OVERVIEW CHIEF EXECUTIVE’S REVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Good prospects for the year ahead 53.0 55.7 63.1 65.1 76.0 55.0 47.2 44.3 17.9 2013 21.0 18.8 2012 13.0 In line with our corporate strategy, we have continued to productise parts of our Consulting knowledge, experience and information into our software and digital technologies to enhance Technology revenue, TOTAL REVENUE £m 42.7 Innovation and information During 2014 KBC embarked on an ambitious project to align all our software releases to a common release schedule with shared infrastructure and integration. Version 6 of Petro-SIM™ (process facility simulator), the SIM™ models (refinery reactors), Maximus™ (wellbore and pipeline hydraulics simulator), Multiflash™ (reservoir PVT chemistry) and Energy-SIM™ (energy optimisation) have all now been aligned, with significant advances in the interoperability of our technology. Clients will now benefit from the full integration of well, pipeline, offshore platform, gas plants, refineries and petrochemicals models with the ability to execute time-based scenarios including use of their own workflows and plug-ins to increase production and reduce costs. 2014 also saw the expansion of KBC’s alliances with the addition of Flaretot™, a third‑party process plant flare safety simulator, to the KBC software suite and the announcement of a plug-in to Petro SIM for transient pipeline modelling from BPT, a Norway based technology company. KBC will continue to expand the “ecosystem” in which hydrocarbon process industry clients can embed technology that furthers the value of our platforms and provides another high quality revenue stream and will seek further alliances with oil field services and industrial automation players. Revenue by segment 39.2 2014 was another good year for KBC on several fronts and it was particularly pleasing to see the measures put into place by the management team over recent years resulting in improved performance and growth by the Company. The partner organisation in Consulting has driven personal ambition and a focus on commercial targets for margin realisation and quality of work delivered. The continued expansion of Technology sales through the Consulting business and newly expanded direct sales channels led to a record level of revenue. Consulting and Technology, working closely together, each delivered 17% growth in top‑line revenue for the year. KBC further penetrated the upstream oil and gas market, assisted by the important acquisition of FEESA, which enables the Group to offer software and consulting in the production flow assurance area, anchoring wells and pipelines to KBC’s established business in gas processing, refining and petrochemicals. KBC is now very well positioned to offer technical engineering and people performance solutions across the full breadth of the hydrocarbon processing industry and is able to move quickly in this chain to support the developing segments. 13.8 Delivering on our strategy 2014 saw significant strategic contract wins for KBC in both our targeted upstream market and our core downstream business. Consulting continued to deliver successfully in South America, winning a $48.6m contract extension with a South American oil and gas company. This was complemented by strong Consulting performance in the Middle East as well as further growth in Asia and Europe. Our Technology offering in upstream oil and gas continued to grow and we were particularly pleased to see the products from our newest acquisition (FEESA) having an immediate impact when bundled with our existing offerings. The contract award from a European oil field services company in the fourth quarter of 2014 followed a number of other Technology contract awards of note in the United States, the Middle East, China, Thailand and Vietnam. It is very encouraging to see the strong demand for KBC’s Technology products supporting KBC’s focus as a key software player in the hydrocarbon industry. 2010 2011 TECHNOLOGY 2014 CONSULTING PIPELINE OF CONTRACTED WORK BY SEGMENT Technology 35% Consulting 65% allow for intellectual property charges in Consulting fees and support the scale and leverage of the Consulting organisation around technology platforms. The appointment of a CTO for KBC will drive this technology strategy throughout the Group and our alliance partners. Our people The KBC team includes a diverse set of consulting and software experts in more than 11 countries, delivering high quality project work and software technology. In 2014 the enhancement of both Consulting and software resources as well as corporate shared services has driven results for KBC. KBC began a reorganisation in the last quarter of 2014 to promote the new company strategy with a defined commercial sales group covering sales, KBC Advanced Technologies plc Annual report 2014 7 CHIEF EXECUTIVE’S REVIEW CONTINUED Ever greater, more integrated solutions Our people continued business analysis, product management and marketing, all targeted at achieving high quality, recurring revenue. A new delivery organisation has been built that concentrates on delivering all aspects of quality in client projects to achieve target margins. KBC’s focus on software technology platforms and productising Consulting knowledge, to drive higher margin sales and increased scale in Consulting, has been further enhanced by the establishment of a CTO role with a remit to expand technology development and adoption by KBC. The Company has been reorganised into a clear structure that provides focus on commercial, operational, innovation and back office disciplines appropriate for a technology‑based consulting firm. KBC’s market For the five years to 2014 high energy prices drove strong capital investment and strong profit margins throughout the oil industry. Those same economics also encouraged technical innovations that led to a rapid oil production increase and an increasingly oversupplied energy market. The oil market responded rapidly to the decision by OPEC at the end of November 2014 to renounce its traditional market-balancing role, with oil prices plunging more than 50%. These lower prices turned the industry on its head and for oil companies the key to both survival and success is to control their positions in the market, rather than being controlled by it. To achieve this, KBC believes that the operators will need access to many of KBC’s products and services to enhance their performance. In the near term, companies in our industry need to focus on revenue generation and capital investment to safeguard their balance sheets, generate cash flow and service debt. In the medium term, success requires companies to focus on sound operational fundamentals and ongoing evaluation of their market position to ensure performance is optimised against a changing market environment. In the long term, companies will be best served by revisiting and revalidating their investments against the market potential and their own corporate strategy. KBC can assist in all these areas and has a strong reputation for delivering value on all these horizons. 8 KBC Advanced Technologies plc Annual report 2014 Consulting Revenue Pipeline of contracted work £55.0m (2013: £47.2m) 14 55.0 13 47.2 12 (2013: £52.7m) 46% Revenue due in more than 1 year (2013: 42%) 44.3 11 10 £57.3m 54% Revenue due within 1 year (2013: 58%) 42.7 39.2 ACHIEVEMENTS IN 2014 Continued quality execution of the South American business transformation project A large (US$48m) extension to the same South American project First profit improvement and strategy project in Kuwait in many years Repeat business for a second gas plant optimisation project in Saudi Arabia An award for the establishment of an Operational Excellence Academy in Malaysia A significant sustainable profit improvement programme in Thailand A major technical capability development project award in Saudi Arabia Consulting revenue in 2014 increased by 17% to £55.0m (2013: £47.2m) with an operating margin of 4% (2013: 3%). Out of the Consulting pipeline of work of £57.3m (2013: £52.7m), £31.2m (2013: £30.6m) is expected to convert into revenue in 2015. Through our focus on high quality Consulting revenue, our target is to deliver Consulting margins of 9%–10% over the next two years. Many other promising developments in the Middle East and North Africa have resulted from a focused investment in the region that will add further value for KBC. 2014 saw a return to growth for Consulting solutions in the North America market, strong growth in Southeast Asia and good growth in Russia. The large South American business transformation project continues to deliver on time and on budget, with clear recognition by the client of KBC’s quality consulting, methodologies, project management and technology in delivering value in many aspects of the refinery transformation. The focus on the Consulting partner model with its sales, solution, execution and mentoring accountability has continued to prove valuable in the quest to raise Consulting margins and build strength in KBC’s key geographical markets. Senior leadership has been strengthened and the Group is in a good position to take advantage of growth areas in the South America, Middle East and Southeast Asia markets. The Consulting business functions have been grouped into four key areas for delivery of services to clients: Production Optimisation, Operations Management, Strategic Business Transformation and Human Performance Improvement. These are the core value areas of KBC’s Consulting offering and are being re-packaged to achieve bigger contract engagements with clients to improve leverage, utilisation and margins for KBC. OVERVIEW STRATEGIC REPORT GOVERNANCE Pipeline of contracted work £21.0m (2013: £17.9m) 14 21.0 13 17.9 12 11 10 £30.7m (2013: £25.5m) 30% Revenue due within 1 year (2013: 26%) 70% Revenue due in more than 1 year (2013: 74%) 18.8 13.0 13.8 ACHIEVEMENTS IN 2014 Two major South American software contracts with greater than US$5m total contract value each A £3.3m contract with a European oil field services company Large software licence expansion projects in Thailand, Vietnam and China Large renewals and licence expansions in the Middle East New upstream licence agreements in Australasia Agreement signed with Flaretot Limited of London, UK, to market its flare system design and rating tool, integrated with Petro-SIM 2014 was a record year for KBC’s Technology business, reflecting the focus and determination of the organisation to be a key engineering software provider to the industry. Revenue for the year was up 17% on 2013 at £21.0m (2013: £17.9m), representing good year on year progress. The increase in Technology revenue reflects our drive and determination to raise the proportion of Technology revenue in the long term with Technology representing 28% of 2014 revenue (2013: 27%). Recurring revenue for 2014 was a record £9.0m (2013: £7.8m). Out of the total Technology contracted pipeline of work of £30.7m (2013: £25.5m), £9.3m (2013: £6.7m) is expected to convert into revenue in 2015. FEESA and Infochem technology revenue has exceeded our initial expectations with both acquisitions being accretive in 2014 and enabling the pull-through of Petro-SIM into the upstream market space. FINANCIAL STATEMENTS SHAREHOLDER INFORMATION FEESA was acquired in July 2014 and has been successfully integrated, with the two founders of that company now holding senior executive positions on KBC’s Operating Committee. Work continues, as planned, to ensure that the acquired company standardises on KBC’s product lifecycle management processes and quality assurance. Technology Revenue The Technology margin decreased from 34% in 2013 to 24% in 2014 due to much higher amortisation from the recent acquisitions and a focused investment in sales and marketing for Technology. As part of the successful equity placing in June 2014, undertaken primarily to raise funds for acquiring technology assets, Norway’s Kongsberg Gruppen ASA acquired a 5% stake in KBC and has since engaged in an upstream technology and services alliance to add higher value solutions to its oil company clients and accelerate KBC’s penetration into this market. This alliance is seen as giving KBC an accelerated critical mass in upstream to position, sell and deliver significant expansion in upstream technology revenue. Of particular importance in the year was the seven-year contract with a major oil field services company for the licensing of KBC’s upstream full simulation portfolio including Multiflash, Maximus and Petro-SIM. This is the first significant sale combining the technology of our two recent upstream acquisitions with KBC’s heritage software and demonstrates the value of KBC’s integrated upstream technology strategy. KBC’s traditional refining technology business continued to strengthen in 2014 with key contract awards in Asia, South America and the Middle East. Our Japanese market saw a marked reduction in Technology revenue in 2014 due to one unusually high contract award in 2013. The refinery reactor and process simulation technology, supported by energy simulation, forms a high value, rigorous picture of refinery wide profitability and, when delivered with KBC’s consulting services, is a world‑class solution. KBC continues to look for value-adding acquisitions that will expand the Technology portfolio and contribute to revenue and profit growth. Andrew Howell Chief Executive Officer 17 March 2015 KBC Advanced Technologies plc Annual report 2014 9 OUR BUSINESS MODEL AND STRATEGY We are progressing toward our goals In late 2014 KBC launched a revised strategy, building on the success of the 2011 to 2014 period, to grow revenues, further improve the Group’s profitability and drive shareholder value. It is clear, bold, aggressive and will transform KBC into a technology company supported by expert consulting. ocused market F penetration Focus on growth in the following markets: Technology Upstream Integrate sales of Maximus, Multiflash and Petro-SIM, continue expansion in oil field services companies and launch upstream operational excellence and profit improvement programmes ISE T C Y G O RT PE EX SOFT WA RE TE CH NO L Increase footprint in second tier independent refiners, convert more national oil company refiners and win new business with engineering, procurement, construction and management (“EPCM”) companies Growth markets (Latin America, Asia, MENA) Invest in these key hotspot regions for Technology platform sales and business transformation projects HIGH TECHNOLOGY OFFERING OF UNRIVALLED DEPTH AND QUALITY enerate additional revenue G streams through organic, alliance and acquisitive technology growth Y IN T E LLEC TUAL PROPERT All our activity supports or underpins the technology drive of the Group, with all Consulting offerings to be delivered on a technology platform, either our own or licensed from third parties and customised for resale. Productising Consulting knowledge will also enable KBC to improve both leverage from resources and increase the lower grade to higher grade ratio of employees, which in turn will contribute to the scalability and focus on delivered profit margin for the Consulting business. The Group also has a strong focus on working with selective alliance partners in the industry to deliver our technology and services deeper into our markets. 10 KBC Advanced Technologies plc Annual report 2014 Broaden and strengthen strategic partnerships and alliances Enhance the third-party ecosystem for technology plug-ins to the KBC software platforms and develop an alliance culture llow for expansion in scope A of production solutions in the upstream market Further develop existing alliance relationships and partner with key engineering companies and consultancies that have niche presence in upstream Maximise hydrocarbon market reach through strategic acquisitions, partnerships and alliances Corporate strategy to target new alliances in 2015/16 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION KBC’s growth strategy comprises six simple focus areas: ccelerate Technology A revenues and increase Consulting margins Increase Technology sales Increase KBC’s revenue from Technology, productise Consulting knowledge and create an ecosystem of third‑party technology suppliers Increase Consulting margin to 10%+ Use technology to increase the leverage of resources, pursue larger, combined, business transformation projects and focus on key margin generating business roductise Consulting IP to P commercialise as technology Use KBC operations and engineering knowledge to provide content for software systems, configure KBC and third‑party technology to scale consulting and increase leverage, and develop new software as a service with Consulting solutions apital reinvestment and C strong financial discipline Tight cost control 2015 discretionary cost reduction programme, long-term reshaping of Consulting leverage and changes in back office systems integration to improve efficiencies Progressive dividend KBC is committed to a progressive dividend policy Increase profits and cash flow The core focus of KBC is free cash flow from increased profit throughout the business with a key drive towards becoming a technology company with expert consulting 1 2 3 4 5 6 Be a technology leader for engineering and operations software, increasing the high quality software revenue mix and anchoring all Consulting solutions to a technology platform Position in our market sectors with differentiated advanced technology Secure revenue, profit and cash flow from Consulting activity and the move into upstream Profit Improvement Programmes with key industry alliances that reduce client costs and increase their production Modernise KBC’s own systems be operationally excellent ourselves with efficiency and scale Ensure KBC is a great place to work that develops leaders with robust succession plans Ensure a high quality image and brand that commands premium prices and repeat business throughout the market Progress was made on all six fronts in 2014 with a step up in the strategy execution planned for the current year. KBC Advanced Technologies plc Annual report 2014 11 FINANCIAL REVIEW AND KEY PERFORMANCE INDICATORS Strong results 2014 was a year of strong results for KBC. The Group continues to improve significantly and a more solid base has been established in the last 12 months from which to make further gains across all areas of the business. Results Group revenue increased by 17% in 2014 to £76.0m (2013: £65.1m). Consulting revenue was up by 17% to £55.0m (2013: £47.2m). Technology revenue was also up 17% to £21.0m (2013: £17.9m) and included £9.0m of royalty, maintenance, support and upgrade revenue (2013: £7.8m). Direct costs increased by 41% (£3.8m) to £13.1m in 2014 (2013: £9.3m), mainly due to an increase in subcontractor costs (£2.0m) and the provision of one-off software for a South American Consulting project. The use of subcontractors is dependent on the types of contract we work on during the year and can therefore fluctuate year on year. The 11% increase in staff and associate costs to £35.9m (2013: £32.4m) was proportionally less than the increase in revenue, reflecting average headcount 9% higher than 2013 and an increase in short‑term employee costs relating wholly to medical insurance and claims. Indirect operating costs increased by 22% to £14.1m (2013: £11.6m) reflecting increased investment in IT systems, people and sales training. In addition the costs incurred in acquiring FEESA of £0.4m (2013: £nil) are included here. Depreciation and amortisation charges were significantly higher at £5.7m (2013: £4.4m) due to increased amortisation relating to the acquisition of FEESA in mid‑2014, the Group’s continuing investment in intellectual property and contract‑based intangibles. Profit before tax, adjusted for items which do not reflect underlying operations, rose by 13% to £9.5m (2013: £8.4m). This measure adjusts for development costs carried forward of £1.6m (2013: £1.3m), amortisation of development costs carried forward of £1.3m (2013: £1.1m), amortisation of acquisition intangibles of £2.1m (2013: £1.4m), share‑based payment charge of £0.7m (2013: £0.5m) and other items which do not reflect underlying operations. Profit before tax was £6.7m (2013: £7.1m), a 6% reduction on 2013. 12 KBC Advanced Technologies plc Annual report 2014 Tax The tax charge of £2.6m (2013: £1.6m) is made up of a current tax expense of £3.1m and a deferred tax credit of £0.5m. The current tax expense includes £2.5m (2013: £2.5m) of tax payable on overseas operations and £1.6m (2013: £1.0m) of withholding tax. £0.6m of the withholding tax is expected to be recovered against overseas tax payable by way of double tax relief. As in prior periods, the balance is not expected to be fully recoverable as a result of there being no creditable tax liability in the UK. The 2014 tax charge is higher than last year, with an increase in the overall effective tax rate from 22% to 39%. Following revision of the Group’s transfer pricing framework last year, the 2013 effective tax rate benefited significantly from a one-off tax credit. The 2013 effective tax rate before the prior period tax credit was 42% which would correspond to an overall reduction in the comparable group effective tax rate over the period. The Group effective tax rate continues to benefit from enhanced tax deductions for qualifying research and development expenditure. The Group is continuing to review the location of its assets and resources globally to further reduce its effective tax rate in subsequent periods. Earnings and dividends The profit after tax for 2014 of £4.1m (2013: £5.5m) equates to basic earnings per share of 5.7p (2013: 9.5p) and diluted earnings per share of 5.5p in 2014 (2013: 9.2p). The decrease in basic earnings per share is a result of the share placing in June 2014 and the prior period one-off tax credits. Revenue £76.0m 14 76.0 13 65.1 12 63.1 11 55.7 10 53.1 Adjusted profit before tax £9.5m 14 9.5 8.4 13 12 3.7 4.9 11 10 3.6 OVERVIEW STRATEGIC REPORT GOVERNANCE The earnings per share calculated on the adjusted measure was 9.3p (2013: 9.5p). See note 5 for more details. The Board has decided to continue the payment of dividends with a proposal to pay a dividend in respect of the 2014 financial year. Assuming it is approved by shareholders at the Annual General Meeting, the dividend will be paid on 22 July 2015 to shareholders on the register at close of business on 10 July 2015. Carry forward of software development costs During 2014 the Group incurred research and development costs of £3.7m (2013: £2.7m). This increase largely reflects additional research and development costs of Infochem and FEESA following the acquisition. Of this amount £1.6m (2013: £1.3m) related to development expenditure for the Group’s software suite and has been carried forward as an intangible asset to be amortised against expected future sales. The balance was charged directly to staff and associate costs and direct costs in the Income statement. The amortisation of previously capitalised software development costs amounted to £1.3m (2013: £1.1m). Net cash and working capital Net cash at 31 December 2014 was £11.0m (2013: £6.9m). The increase is due to the addition of the net placing funds (£23.1m), offset by the acquisition of FEESA (£10.0m) and an increase in working capital requirements. At the year end the Group had no outstanding bank loans (2013: £3.0m). Trade and other receivables increased during the year from £23.2m to £42.3m. The increase in trade receivables of £5.3m to £15.0m reflects a timing difference on the receipt of cash. This had substantially reduced by the end of January 2015, when trade receivables had fallen to £9.2m and net cash had increased to £15.0m. Amounts recoverable under contracts increased by £13.8m, reflecting higher Technology accrued revenue of £6.1m and higher Consulting amounts recoverable of £7.7m. This is expected to be billed in the first half of 2015. Trade and other payables also increased during the year from £12.2m to £17.5m due largely to a significant multi-year contract. Going concern The Group’s financial statements are prepared on a going concern basis. The Directors are satisfied that the Group has sufficient resources and borrowing facilities to meet its requirements for a period of at least 12 months from the date of this statement. FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Earnings per share 5.7p 14 5.7 9.5 13 12 (2.9) 5.9 11 4.0 10 Operating margin 9.4% 9.4 14 11.4 13 12 6.1 11 10 9.0 7.1 Andrew Howell Chief Executive Officer Andrew Hebb Interim Chief Financial Officer 17 March 2015 KBC Advanced Technologies plc Annual report 2014 13 PRINCIPAL RISKS AND RISK MANAGEMENT Managing risk KBC recognises the importance of identifying and assessing our principal risks and uncertainties. We have set out below the key risks with the main systems and processes that are in place to manage and mitigate these risks. 1. Foreign currencies 3. Credit 6. Market risks Most transactions continue to be in US dollars, euro or sterling. The main credit risk faced is attributable to trade receivables. As the majority of the Group’s clients are state-owned or very large oil companies, the risk of non-payment tends to be less of the traditional credit nature and more related to client satisfaction and/or trade sanctions. There is a risk of slow adoption of upstream technology by oil and gas companies. It is a normal risk for all consulting firms, including KBC, that their services are discretionary and are subject to change and cancellation by clients at short notice. The proportion of revenue in each currency was: US dollars Euro Sterling Other 2014 2013 79% 7% 7% 7% 81% 8% 6% 5% Mitigation The Group’s policy, where possible, is to sign contracts that are denominated in their functional currency (primarily US dollars or sterling) and to match the currency to which expenses have been incurred. The Group has a number of overseas subsidiaries and branches whose revenues and costs are denominated in currencies other than sterling, the most significant of which are in the USA. Where appropriate the Group considers hedging against the foreign currency translation exposure arising on their results. 2. Liquidity Client payment terms vary from contract to contract and can involve extended periods of time before invoices are raised and cash flow can be irregular. In addition, cash is sometimes received in countries where exchange control regulations delay the Group’s ability to transfer the cash outside those countries. Mitigation At 31 December 2014 the Group held net cash balances of £11.0m compared £6.9m as at 31 December 2013. Cash balances in excess of immediate needs are placed on short-term deposit in the money markets. During the year the Group restructured its financing facilities by fully repaying the outstanding balance on a bank loan (2013: £3.0m), terminating a three year revolving credit facility (2013: £2.0m) and increasing the Group’s overdraft facility to £3.5m (2013: £1.5m). The overdraft facility is available to the Group for use in managing the timing of cash flow in different countries and currencies. Interest charges on the Group’s overdraft facility are linked to the LIBOR rate appropriate to the duration and currency of any drawdown. 14 KBC Advanced Technologies plc Annual report 2014 Mitigation Wherever possible, early cash flow is incorporated into contract terms. Provision is made for doubtful receivables when there are circumstances which, based on experience, are evidence of a likely reduction in the recoverability of the receivable. 4. Economic and social Changes in the market sectors, including oil price, energy demand, M&A activity and the availability to our clients of skilled staff, can all impact upon the volume of business available to KBC. Mitigation Our range of services has expanded over the years and continues to evolve so that we are able to offer appropriate solutions to our clients in varying circumstances. Contingency plans are prepared in case the market for the Group’s services deteriorates. 5. Political and environmental Some of KBC’s work and proposed work is in regions subject to political changes and environmental disasters which could disrupt the markets or affect our ability to execute work for clients and/or collect payment for work performed. Mitigation Appropriate payment terms are negotiated whenever possible to ensure KBC’s exposure is minimised and the nature of our contracts requires us to work in a flexible manner. Resourcing is managed globally which enables us to adapt and redeploy the workforce as and when necessary. We minimise fixed overhead in countries at risk. Security consultants are retained for advice on potential risk and we avoid working in very high risk or hostile areas. Mitigation We are conservative in our forecasting of Technology revenues from the upstream sector and focus our sales efforts on the large oil field service companies to endorse KBC’s products and introduce our software to the upstream industry. Our strategy includes recruitment of personnel with upstream experience. Our mix of manpower includes use of associates for certain skills and to retain some flexibility in the staff numbers. The compensation structure at senior levels now includes a higher proportion of variable pay. In addition, we continue to consider different scenarios when forecasting resourcing needs of the business. 7. Loss of intellectual property (“IP”) Theft or misuse of the Group’s IP is an ongoing risk. Mitigation Strict contractual terms ensure that ownership of IP is retained by the Group. We continue to innovate in both software and services as well as protecting software by anti-piracy measures. 8. S ystems failure, internal fraud, financial mismanagement KBC is heavily dependent on internal IT and management systems. Any organisation needs to ensure it protects itself against the risk of fraudulent activity and mismanagement of its finances. Mitigation KBC has strong, well-established financial and IT controls, as well as rigorous policies and procedures for IT backup and recovery processes. We continue to innovate and improve these areas through our internal Operational Excellence programme. Governance 16 Board of Directors 17 Executive Committee and Operating Committee 18 Introduction to governance 19 Corporate governance statement 22 Remuneration Committee report 26 Directors’ report BOARD OF DIRECTORS A dedicated Board 1 The Board recognises the importance of high standards of corporate governance and has ultimate responsibility for the management of the Group. There are a number of Board committees to which the Board has delegated certain key matters. 2. Andrew Howell 4. Paul Taylor Chief Executive Officer Deputy Chairman and Independent Non-Executive Director A R N Skills and experience: 1. Ian Godden A R N Chairman Skills and experience: Ian is a Non-Executive Director of Bristows Group Inc (USA) and Chairman and CEO of Glenmore Energy Inc (USA). He was until recently Chairman of Farnborough International, the company responsible for the Farnborough Airshow and other international aerospace, defence and security events. After gaining experience in the worldwide oil industry early in his career, Ian focused on strategy consulting in the USA and Europe. During the 1990s he was UK Managing Partner and a European Board member of Booz Allen and Hamilton. From 2000 to 2004, he was UK Managing Partner of Roland Berger Strategy Consultants and from 2007-2011 he was Chairman of ADS, the trade organisation of the UK aerospace, defence and security industries. Ian has a BSc Engineering degree from Edinburgh University and an MBA from Stanford University, California. He is a Fellow of the Royal Aeronautical Society. Ian was appointed a Non-Executive Director of KBC in July 2008 and became Chairman in January 2011. He acted as Executive Chairman in 2013 and 2014 and returned to being Non-Executive Chairman on 1 January 2015. He is a member of the Audit, Nomination and Remuneration Committees. Andrew was appointed as Chief Executive Officer on 1 January 2015. He previously held the role of Managing Director of Technology, managing the Technology side of KBC’s business including technology development, customer support and strategy development. Prior to joining KBC Andrew worked for Schlumberger, holding senior management positions related to oil and gas development and production, and for Aspen Technology (Hyprotech) where he managed technology development for the oil and gas industry. He started his process engineering career with BP Exploration and has a degree in Chemical Engineering from the University of Cambridge. Andrew is a member of the Executive Committee and was first appointed as a Director of KBC in April 2014. KBC Advanced Technologies plc Annual report 2014 Paul is a Non-Executive Director and Chairman of the Audit Committees of Anite plc, Ubisense Group plc, Escher Group Holdings plc and Digital Barriers plc. From 2001 to 2011 he was Group Finance Director with AVEVA Group plc. Paul is a Fellow of the Association of Chartered Certified Accountants. He was appointed a Non-Executive Director of KBC in May 2013 and Deputy Chairman in October 2013. He is Chairman of the Audit Committee and a member of the Nomination and Remuneration Committees. He is also the Senior Independent Director. 5. Paul McCloskey A R N Independent Non-Executive Director 3. Kevin Smith Skills and experience: Chief Commercial Officer Paul worked for Husky Energy, one of Canada’s largest integrated energy companies, between 2009 and 2013 where he ran the Atlantic Region business unit, being responsible for oil exploration, development and production operations. A graduate in Chemical Engineering, Paul previously held management positions in Hess, a leading global independent energy company primarily engaged in the exploration and production of crude oil and natural gas, and other organisations in the oil and gas industry. He commenced his career with Conoco. Paul was appointed a Non-Executive Director of KBC in February 2014. He is a member of the Audit, Nomination and Remuneration Committees. Skills and experience: Kevin was appointed as Chief Commercial Officer on 1 January 2015. He previously held the role of Managing Partner with responsibility for overseeing KBC’s consulting business, including all aspects of related business development, project execution and innovation. Prior to that he was Executive Vice President, responsible for KBC’s Organisational Consulting business which has grown since its inception with the acquisition of TTS Performance Systems Inc where he was Vice President of Operations at the time of acquisition by KBC in 2006. He previously worked for EQE International Inc, an ABS Group company, and Kimberly Clark Corp, with whom he holds five patents. He has a BS in Chemical Engineering from the University of Tennesse, Knoxville. Kevin is a member of the Executive Committee and was first appointed as a Director in April 2014. We take pride in working collaboratively and innovatively with our clients worldwide to drive bottom-line improvements in business performance and operational skills.” 16 Skills and experience: 6. Oliver Scott A R N Non-Executive Director Skills and experience: Oliver is a co-founder and partner of Kestrel Partners LLP, where he acts as a fund manager and is also responsible for structuring the partnership’s investment management activities. He was formerly a Director of corporate finance at KBC Peel Hunt, stockbrokers and financial advisors, where he specialised in advising smaller quoted and unquoted companies. He is currently Chairman (Non-Executive) of both ClearSpeed Technology Ltd and ZF Acquisitions Ltd. Oliver has a degree in Business Economics and is a member of the Securities and Investment Institute. He was appointed a Non-Executive Director of KBC in December 2010. He is Chairman of the Nomination and Remuneration Committees and a member of the Audit Committee. OVERVIEW STRATEGIC REPORT GOVERNANCE KEY Chairman Member A Audit Committee R Remuneration Committee N Nomination Committee 2 SHAREHOLDER INFORMATION The KBC Executive Committee focuses on the long-term vision and strategy for the Company, as well as management of the overall results for the business, directing the Operating Committee and managing corporate activities. Andrew Howell Chief Executive Officer See biography on page 16 Michael Aylott Chief Technology Officer 4 FINANCIAL STATEMENTS EXECUTIVE COMMITTEE Kevin Smith Chief Commercial Officer See biography on page 16 3 Mike was appointed as Chief Technology Officer on 1 January 2015, having most recently held the post of Senior Vice President, R&D. Mike’s work with KBC has always been in process simulation and engineering software development, starting with the development of Petrofine in the mid-1980s and then both developing and managing R&D over a broad range of technology and application developments including Petro-SIM and related products. Mike holds a Masters in Chemical Engineering from Cambridge and learnt his trade while a research associate at Edinburgh University and ICI working on dynamic process simulation. Andrew Hebb Interim Chief Financial Officer Andrew has been a professional Interim CFO since 2009 for a number of companies in both the professional services and technology sectors. Prior to that, as Chief Financial Officer, he helped build Hedra plc into a major public sector consulting business which was sold to Mouchel in 2008. Andrew has also held Chief Financial Officer and operational roles in a number of major UK companies including PWC Consulting and Burton group. He is a Fellow of the Chartered Institute of Management Accountants. 5 Janet Ireland Company Secretary Janet joined KBC in 1985 and was appointed Company Secretary in June 2000. She is responsible for administration of board affairs as well as legal, statutory and compliance matters. She previously held administrative positions in the John S Latsis Group and at Pritchard-Rhodes Ltd. Janet is a Fellow of the Institute of Chartered Secretaries and Administrators. Anna McLean Global HR Executive Anna is responsible for leading the development and delivery of the HR strategy to attract, retain and develop KBC’s world-class talent pool. With over 15 years’ HR experience in the consulting industry, Anna joined KBC in September 2013. Her previous experience includes delivery of HR services for the UK and Singapore practices of an American consulting business followed by seven years with Ernst & Young where she ultimately led the UK & Ireland Advisory Services HR function through its significant growth during her tenure. Anna has a degree in European Community Studies and is a member of the Chartered Institute of Personnel and Development. Ramón Loureiro Senior Partner Ramón is responsible for mentoring the Technical Partners and future Consulting Partners of the company, as well as ensuring the core process and technical skills of KBC are enhanced and developed. A chemical engineer with over 40 years of experience, Ramón started his career at Exxon Research and Engineering Co in the USA, where he held various technical roles. He joined KBC in 1986 and helped conceive, develop and lead many Profit Improvement Programmes worldwide. He has previously led the Research and Development group, and the regional business development and operations groups of KBC. Ramón holds a BS in Chemical Engineering. OPERATING COMMITTEE The KBC Operating Committee provides leadership and oversight for day-to-day operational performance and drives the implementation of the short-term business strategy to achieve the annual plan and the first steps in the foundation of the longer-term strategy. Members of the Operating Committee are: 6 Bill Tetreault Neil Hawkes Managing Partner, Global Operations Senior Vice President, Research and Development Jonathan Allwood Jason Durst Managing Partner, Consulting Solutions Senior Vice President, Operational Excellence Martin Watson Anna McLean Managing Director, Software and Marketing Global HR Executive David Parsons James Jordan Senior Vice President, Global Sales Group Financial Controller KBC Advanced Technologies plc Annual report 2014 17 INTRODUCTION TO GOVERNANCE Complying with corporate governance best practice Paul Taylor Deputy Chairman and Senior Independent Director We have seen a number of changes announced and delivered during the year relating to the structure of the Board. These are covered in more detail elsewhere but key to good governance is the leadership demonstrated by the Board and as such the appointment of Andrew Howell as CEO, Ian Godden returning to the role of Non Executive Chairman, the appointments of Paul McCloskey as an Independent Non Executive Director and Kevin Smith as an Executive Director not only add real commercial strength to the Board’s activities but also embrace the ongoing improvements in our governance structures. We are hoping to conclude the search for a new Chief Financial Officer shortly. The Board continues to recognise the importance of good governance and its role in ensuring that the business is well managed. The framework in which we operate and continue to develop is one that is aimed at dealing with the complexities of our business and acknowledging our size but also capable of adding value to the business as we grow. The Company continued to review its corporate governance framework which, taking account of both the size and nature of the business and its specific circumstances, sets the standards aimed to meet the general provisions of the “Corporate Governance Code for Small and Mid-size Quoted Companies”, published in 2013 by the Quoted Companies Alliance (the “QCA Corporate Governance Code”). BOARD COMPOSITION THE ROLE OF THE BOARD This remains the standard at which we aim to perform at all levels within the business. The Board sets KBC’s overall strategic direction, reviews management performance and ensures that the Group has the right level of resources in place to support these. The Board is satisfied that the necessary controls and resources are in place to ensure that these responsibilities are addressed. Operational management is delegated to the Executive Committee and Operating Committee to cover such matters as sales, project delivery, customer relationships and investment opportunities. The membership provides a broad mix of disciplines, industry experience and geographical coverage. Paul Taylor Deputy Chairman and Senior Independent Director 17 March 2015 AS AT 17 MARCH 2015 ROLE OF THE CHAIRMAN 6 BOARD MEMBERS Chairman (1) Executive Directors (2) Non-Executive Directors (3) two of which are independent The QCA Corporate Governance Code provides that the Board should be balanced between executive and non-executive directors and should have at least two independent non-executive directors. 18 KBC Advanced Technologies plc Annual report 2014 The Chairman provides leadership to the Board of Directors and ensures that the Board works cohesively to set the Group’s strategy and direction. He ensures that meetings of the Board address the appropriate issues for the Group and focus on key tasks. The Chairman is the direct liaison between the Board and the Chief Executive Officer. He is also responsible for ensuring effective communication with shareholders and is the principal representative of the Company externally. ROLE OF THE EXECUTIVE DIRECTORS The Executive Directors, led by the Chief Executive Officer, provide input to the Board in setting the strategic direction of the Group, implement the Board’s approved strategy and ensure adequate resources to achieve effective management of the Group’s operations. R OLE OF THE NON-EXECUTIVE DIRECTORS The Non-Executive Directors provide objective input and guidance to the setting of strategy and management of the business, challenging and scrutinising management’s performance, ensuring that appropriate controls and risk management systems are in place, determining remuneration policies for executive directors and considering board composition and succession planning. OVERVIEW CORPORATE GOVERNANCE STATEMENT STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION The Board of Directors is accountable to the Company’s shareholders for good corporate governance. This statement describes how this has been applied. The workings of the Board and its Committees The Board At the date of this report the Board comprises the Chairman, two Executive Directors, and three Non-Executive Directors. Throughout 2013 the current Chairman held the role of Executive Chairman. The Chief Financial Officer resigned from the Board as of 6 April 2014 and two additional executive directors were appointed at the end of April 2014. There were two non-executive directors up until 24 February 2014 when a third was appointed. Two of the Non-Executive Directors, Paul Taylor and Paul McCloskey, are considered independent. Paul Taylor is also Deputy Chairman and the Senior Independent Director. The details of all Directors are set out on page 16. The Board meets at least six times per year to deal with matters specifically reserved for its decision. These matters include agreeing and monitoring strategic plans and financial targets, major decisions on resource, overseeing management of the Company in the interest of shareholders and ensuring processes are in place to manage major risks, treasury matters, changes in accounting policies, corporate governance issues, litigation and reporting to shareholders. The Executive Committee, which includes the two Executive Directors, focuses on implementation of the Board’s approved strategy and oversees day-to-day operating decisions to ensure proper management of the Company’s business. During 2014 the Board met eight times, excluding ad hoc meetings, to deal with procedural and other matters. Attendance at Board and non-executive director subcommittee meetings is recorded in the table on page 20. To enable the Board to discharge its duties all Directors receive appropriate and timely information. Briefing papers are distributed by the Company Secretary to all Directors in advance of Board meetings. The Chairman ensures that all Directors are properly briefed on issues arising at Board meetings. The Chairman ensures that all Directors, in the furtherance of their duties, have access to independent professional advice as required and at the Company’s expense. All Directors are encouraged to bring independent judgement to bear on issues of strategy, performance, resources (including key appointments) and standards of conduct. The Non-Executive Directors have a particular responsibility to ensure that the strategies proposed by the Executive Directors are fully considered. All Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures are followed and that the Board complies with applicable rules and regulations. The appointment and removal of the Company Secretary is a matter for the Board as a whole. The following Committees report to the main Board, thereby enabling the main Board to meet its responsibilities. The terms of reference of the Nomination, Remuneration and Audit Committees are available on the Group’s website. NOMINATION COMMITTEE 1 CHAIRMAN 3 MEMBERS During 2014 the Company’s Nomination Committee was, and continues to be, chaired by Oliver Scott. The Nomination Committee consists of the Non-Executive Directors and the Chairman of the Board. The Nomination Committee meets as required and is responsible for proposing candidates for appointment to the Board and the structure and composition of the Board as a whole. In appropriate cases recruitment consultants are used to assist the process. The Nomination Committee met four times during 2014, excluding ad hoc meetings. All Directors are subject to election by the shareholders at the first Annual General Meeting following their appointment and to further re-election thereafter by the shareholders at least every three years. REMUNERATION COMMITTEE 1 3 CHAIRMAN MEMBERS During 2014 the Company’s Remuneration Committee was, and continues to be, chaired by Oliver Scott. The Remuneration Committee consists of the Non-Executive Directors and the Chairman of the Board. The Remuneration Committee meets at least twice a year, with the Executive Directors in attendance by invitation as appropriate, to determine the remuneration of the Executive Directors and oversee remuneration issues for senior executives of the Group. The Remuneration Committee is responsible for determining policy, within agreed terms of reference, of the Group’s framework of executive remuneration and its cost. The Remuneration Committee sets the contract terms, remuneration and other benefits for Executive Directors, including performance related bonus plans, pension rights and compensation payments. Further details of the Group’s policies on remuneration, service contracts and compensation payments are given in the Remuneration Committee report on pages 22 to 25. The Remuneration Committee met four times during 2014, excluding ad hoc meetings. KBC Advanced Technologies plc Annual report 2014 19 CORPORATE GOVERNANCE STATEMENT CONTINUED The workings of the Board and its Committees continued The Board continued AUDIT COMMITTEE 1 3 CHAIRMAN MEMBERS During 2014 the Audit Committee was and continues to be, chaired by Paul Taylor. The Audit Committee comprises the Non-Executive Directors and the Chairman of the Board. The Audit Committee, which meets at least twice a year, provides a forum for reporting by the Group’s external auditors. Meetings are also attended, by invitation, by the Executive Directors. The Audit Committee follows written terms of reference and is responsible for reviewing a wide range of matters including adequacy of the Group’s accounting systems and control environment, the integrity of the Group’s financial statements and its reporting procedures to shareholders. The Audit Committee advises the Board on the appointment of external auditors and their remuneration and discusses with the external auditors the nature, scope and results of the audit. The Audit Committee keeps under review the cost effectiveness, independence and objectivity of the external auditors, including the level of non-audit fees charged. Auditor objectivity and independence is safeguarded by ensuring that non-audit services provided by the external auditors are kept to a minimum and are restricted to matters concerning tax compliance and associated advisory services. The Audit Committee also monitors the effectiveness of the Group’s internal controls and risk management systems. It considers annually whether it is appropriate to introduce a separate internal audit function. To date it has concluded that this is not necessary given the structure of the Group’s accounting function and the size of the Group. The Executive Committee comprises the Executive Directors and other senior managers. It focuses on the long-term vision and strategy for the Company. Primary responsibilities include the oversight of the development, maintenance and implementation of the strategy, management of the overall financial results for the business, directing the Operating Committee and managing shareholder, corporate governance and growth activities. Members of the Executive Committee are shown on page 17. OPERATING COMMITTEE The Audit Committee met twice during 2014, excluding ad hoc meetings. EXECUTIVE COMMITTEE The Executive Committee handles implementation of the Group’s strategy on behalf of the Board. During 2014 operations of the Group were managed through two separate business lines, Consulting and Technology, with an Operating Board (comprising the Chairman of the Board, the leaders of the two business lines and the Senior Partner) having oversight of strategic and operational activities. At the end of the year a reorganisation took place to combine management of the Consulting and Technology businesses on a global basis. The Operating Committee, formed at the end of 2014, comprises key operational managers from within the Group, providing leadership and oversight for the day-to-day operational performance of the business, and drives the implementation of the short-term business strategy to achieve the annual plan and the first steps in the foundation of the longer-term strategy. The Operating Committee reports to the Executive Committee with a primary interface through the Chief Commercial Officer. Members of the Operating Committee are shown on page 17. ATTENDANCE AT MEETINGS OF DIRECTORS Number of scheduled meetings I Godden P McCloskey O Scott P Taylor C Brown (to 6 April 2014) A Howell (from 28 April 2014) K Smith (from 28 April 2014) 20 KBC Advanced Technologies plc Annual report 2014 Board meetings Audit Committee meetings Nomination Committee meetings Remuneration Committee meetings 8 7 7 8 8 2 6 6 2 2 2 2 2 — — — 4 4 3 4 4 — — — 4 3 3 4 4 — — — OVERVIEW STRATEGIC REPORT GOVERNANCE Performance evaluation Performance of the Board and Non-Executive Director Committees of the Board is reviewed collectively by all the Directors. Except as set out below, individual performance evaluation of each Director is carried out by the Chairman or the Senior Independent Director and the results are reviewed with the other Directors. The Chairman is appraised by the Non-Executive Directors, led by the Senior Independent Director. An evaluation of the performance during 2014 of the Board as a whole, the Committees and individual Directors commenced in early 2015. The Senior Independent Director reviewed these matters with each Director individually and the Chairman conducted a review with the Senior Independent Director. The conclusions of the overall assessments and actions required are reviewed by all the Directors. Internal control The Board has overall responsibility for the Group’s system of internal control. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives. In pursuing these objectives, internal controls can only provide reasonable and not absolute assurance against material misstatement or loss. A process was in place during the first part of the year for identifying, evaluating and managing the significant risks faced by the Group. In the middle of the year the Chairman conducted a thorough review of the current risks faced by the business and revised processes and procedures are currently being put in place. Internal controls and risk management are regularly reviewed by the Audit Committee. The Board performs a regular review of the effectiveness of the system of internal control and takes actions necessary to remedy any significant failings or weaknesses identified in the review. The processes used by the Board to review the effectiveness of the system of internal control include the following: »» the Audit Committee reviews the effectiveness of the Group’s risk management process and significant risk issues are referred to the Board for consideration; »» the Chairman of the Audit Committee reports the results of Audit Committee meetings to the Board and the Board receives minutes of all such meetings; »» the Audit Committee maintains close contact with the Chief Financial Officer and periodically instigates investigations into the effectiveness and other aspects of internal control; »» the Board receives the results of self‑assessment reports from senior managers covering the risks faced by the Group, together with compensating internal controls. A record of such risks is maintained and reviewed on a regular basis, with risk weightings assigned to ensure priority is given to the major risks identified by the Group; and »» the Board receives regular reports concerning specific contract risks faced by the Group. FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Relations with shareholders KBC values and maintains an active dialogue with its shareholders through a programme of investor relations. The Directors meet frequently with representatives of institutional shareholders to discuss their views and review corporate governance issues. Feedback from these meetings is discussed at meetings of the Directors. Major shareholders are consulted on significant issues concerning the Company’s corporate governance. Information is also made available to shareholders via the Annual and Half Year Reports and the Group’s website (www.kbcat.com). The Annual General Meeting provides an opportunity to communicate with private and institutional shareholders and the Company welcomes their participation. The Chairman ensures that members of the Audit, Remuneration and Nomination Committees are available at Annual General Meetings to answer questions. Details of resolutions to be proposed at the Annual General Meeting in 2015 can be found in the Notice of Meeting at page 62. By order of the Board Janet Ireland Company Secretary 17 March 2015 Principal risks facing the business are described on page 14. KBC values and maintains an active dialogue with its shareholders through a programme of investor relations.” KBC Advanced Technologies plc Annual report 2014 21 REMUNERATION COMMITTEE REPORT The Group’s policy is to attract, retain and motivate high calibre executives capable of achieving the Group’s objectives and to offer a remuneration package that is competitive within the sector in which the Group operates. Details of each Director’s remuneration are set out on page 25. Remuneration Committee composition, responsibilities and operation During 2014 the Company’s Remuneration Committee (the “Committee”) consisted of the Non-Executive Directors (Oliver Scott, who chaired the Committee, Paul Taylor and Paul McCloskey from 24 February 2014) and the Chairman of the Board (Ian Godden). Paul Taylor and Paul McCloskey are considered independent. The Executive Directors have been invited as necessary to attend meetings other than when their own remuneration has been considered. The Committee determines the policy, within agreed terms of reference, of the overall remuneration package for Executive Directors and oversees remuneration issues for other senior executives. The Group and the Committee seek advice from time to time from external remuneration consultants. The Committee was advised on remuneration related matters by MM&K in 2014 and 2013. MM&K provides administration services to the Company in connection with operation of the Group’s share incentive plans. It did not provide any other services to the Company during 2014 or 2013. Remuneration policy The Group’s policy is to attract, retain and motivate high calibre executives capable of achieving the Group’s objectives and to offer a remuneration package (consisting of basic salary, benefits, incentive share schemes, pension and a performance related bonus) that is competitive within the sector in which the Group operates. The details of individual components of the remuneration package and service contracts are discussed below. Basic salary and benefits The basic salaries and benefits of all employees are reviewed every year. In reviewing salaries, consideration is given to personal performance, the Group’s overall performance and external comparative information. Benefits principally relate to pensions, car allowances, life assurance, disability insurance and private health care. Statement of consideration of conditions elsewhere in the Group The Committee takes into account the pay and employment conditions of all employees in the Group when considering changes to salaries and other benefits for Directors. The Committee is kept aware of changes in remuneration policy for other senior executives in the Group and these are taken into consideration, consistent with the Group’s general aim of seeking to reward all employees fairly according to the nature of their role, their performance and market forces. Incentivisation of Executive Directors and senior staff In 2013 the Committee discontinued the previous cash and share incentivisation plans and replaced them with a new plan, with the objective of aligning the interests of the Executive Directors and senior managers more closely with those of shareholders over the medium to long term. Further details are set out below. Performance bonuses A performance bonus is payable to Executive Directors and senior staff on the achievement of performance conditions established by the Remuneration Committee. The performance conditions include the Group’s financial performance and market expectations, as well as individual performance. Following the adoption in 2013 of a new incentivisation plan for Executive Directors and senior staff, cash bonuses are no longer capped, but are at the discretion of the Committee. DIRECTORS’ CONTRACTS Nature of agreement I Godden, Chairman P McCloskey, Non-Executive Director(2) O Scott, Non-Executive Director P Taylor, Non-Executive Director C Brown, Executive Director(3) A Howell, Executive Director(4) K Smith, Executive Director(4) (1) Replaced earlier agreement (2) Appointed 24 February 2014 (3) Resigned 6 April 2014 (4) Appointed 28 April 2014 22 KBC Advanced Technologies plc Annual report 2014 Service agreement Contract for services Contract for services Contract for services Service agreement Service agreement Service agreement Effective date of agreement 18 February 2014(1) 24 February 2014 1 December 2013 24 May 2013 19 September 2012 28 April 2014 28 April 2014 Unexpired term at 31 December 2014 Notice period — 2.2 years 1.9 years 1.4 years n/a — — 3 months 3 months 3 months 3 months n/a 6 months 6 months OVERVIEW STRATEGIC REPORT GOVERNANCE Pensions The Group operates defined contribution pension schemes. Contributions are calculated as a percentage of basic salary. The Chairman and Non-Executive Directors are not eligible for membership of the Group’s pension schemes. Fees The Committee sets the fees of the Chairman. The fees for the Non-Executive Directors are determined by the Executive Directors. Neither the Non-Executive Directors nor the Chairman are involved in any discussions or decisions about their own remuneration. Directors’ contracts Details of the contracts of Directors who served during the year are shown on page 22. Directors’ interests in shares The beneficial interests of the Directors in the Ordinary share capital of the Company are shown on page 26. Share options and incentive plans The Group has operated share option plans and a Long Term Incentive Plan, as described on the following pages. Share options outstanding over new shares at 31 December 2014 are summarised in note 25 to the financial statements. These are included in the details of options held by the Directors during the year shown on page 24. Long Term Incentive Plan 2006 (“LTIP 2006”) The LTIP 2006 was closed in 2013 and replaced with the Discretionary Share Option Plan 2013. No awards have been made under the LTIP 2006 since 2012. In summary, two types of award were granted under the LTIP 2006: 1.Awards of shares in the Company (“Matching Shares”), linked to and ‘‘matching’’ on a maximum 1:1 basis (gross of tax) shares acquired by participants following compulsory or voluntary investment of an amount equivalent to a defined proportion of their annual bonus in shares (‘‘Deferred Shares’’). 2.Awards of Performance Shares to Executive Directors and selected senior managers, which ordinarily vest three years after the date of the award, subject to continued employment of the individual concerned within the Group and to the satisfaction of challenging performance conditions. Awards under the LTIP 2006 are included in the details of options held by the Directors during the year and are shown on page 24. Discretionary Share Option Plan 2013 (“DSOP 2013”) The DSOP 2013 was introduced in June 2013 and is due to last five years. Share options of 5% of the Company’s issued share capital were granted within the first 12 months of the DSOP 2013. Subsequent grants of share options up to 2% of the Company’s then-issued share capital have been and will be made in each of the four following 12 month periods. Under the DSOP 2013 share options awarded to participants are split between “Career Options” and “Price Target Options”. Career Options automatically vest after an agreed period of time, provided the participant remains employed by the Group. The vesting periods for the initial tranche of Career Options awarded in June 2013 was split with 50% vesting 18 months from the date of grant and 50% vesting three years from the date of grant. Career Options awarded subsequently have three-year vesting time periods. Career Options range between 40% and 60% of an individual’s total share option award. Price Target Options vest on the attainment of certain share price targets for a continuous period of three months. The share price targets and the associated vesting are: »» 3 3.3% of the Award vests on a 50% increase on the Base Price; »» 3 3.3% of the Award vests on a 75% increase on the Base Price; and »» 3 3.3% of the Award vests on a 100% increase on the Base Price. The “Base Price” for the annual award in each year is the average share price between 1 January and 31 March in the year of grant. FINANCIAL STATEMENTS SHAREHOLDER INFORMATION The Base Price for new staff (or for employees promoted) at other points in the year is the average price over the three months preceding the date of the award. Share price targets must be achieved within ten years from the date of grant. Once achieved, the Price Target Options vest. Share options were granted to the two Executive Directors on 5 June 2014 and 18 November 2014. The Base Price for these share options was 115.3p and 102.4p respectively. Share options were also granted to senior staff on 5 June 2014 and 27 October 2014. The Base Price for these share options was 115.3p and 108.5p respectively. In 2013 share options were granted to an Executive Director and senior staff on 26 June 2013 and to senior staff on 1 October 2013. The Base Price for these share options was 65.5p and 78.6p respectively. Unapproved Share Option Plan (“USOP”) On 26 June 2013 share options were granted to Godden Associates Limited of which Ian Godden is a director. The performance conditions related to adjusted profit before tax for the 2013 financial year, adjusted EPS for 2014 and an increase in the Company’s share price from a base price of 65.5p. It is not envisaged that any further share options will be granted to anyone under this plan. Employee Trusts The KBC Advanced Technologies plc Employee Trust and the KBC Advanced Technologies plc Employee Benefit Trust 2013 (the “Trusts”) are available to transfer existing issued shares in the Company upon exercise of share options. Directors’ interests in share options and Long Term Incentive Plan awards The interests of the Directors in options to purchase or subscribe for shares of the Company at 31 December 2014, which include options granted by the Trusts, are set out overleaf. Awards under the Group’s long-term incentive plan are also included. Performance conditions for all options and awards are shown above. KBC Advanced Technologies plc Annual report 2014 23 REMUNERATION COMMITTEE REPORT CONTINUED Directors’ interests in share options and Long Term Incentive Plan awards continued Options exercised by Directors during the year are set out below. No options were exercised by Directors during the year ended 31 December 2013. Options have been exercised since the year end by Andrew Howell over 82,500 shares and by Kevin Smith over 42,500 shares. Other than the foregoing, the interests of the Directors to subscribe for or acquire Ordinary shares have not changed up to the date of this report. The mid-market price of the Company’s shares at the end of the year was 91p and the range of mid-market prices during the year was between 82.5p and 138p. At 1 January 2014 (1) Exercise price Pence Mid market closing price (if higher)(2) Pence Period during which options are exercisable Net value at 31 December 2014(3) £ Exercised Granted Lapsed At 31 December 2014 100,000 100,000 43,750 13,333 — — 56,250 86,667 — — — 2.5 46.0 78.0 n/a n/a — — 275,000 125,000 — — — — — — 275,000 125,000 — — 78.0 78.0 2015–2018 2015–2018 250,250 113,750 50,000 40,000 10,000 10,000 22,500 22,500 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 21,600 32,400 10,000 15,000 50,000 40,000 10,000 10,000 22,500 22,500 21,600 32,400 10,000 15,000 — — 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 59.5 77.5 78.0 78.0 78.0 78.0 135.5 135.5 91.0 91.0 2015 2015–2016 2015 2015–2023 2015 2016–2017 2015–2024 2017–2018 2015–2024 2017–2018 45,500 36,400 8,850 8,850 19,913 19,913 19,116 28,674 8,850 13,275 16,000 20,000 10,000 22,500 22,500 — — — — — — — — — — — — — — — — — — 21,600 32,400 10,000 15,000 — — — — — — — — 16,000 20,000 10,000 22,500 22,500 21,600 32,400 10,000 15,000 — 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 77.5 78.0 78.0 78.0 78.0 135.5 135.5 91.0 91.0 2015–2016 2015 2015–2023 2015 2016–2017 2015–2024 2017–2018 2015–2024 2017–2018 14,560 17,700 8,850 19,913 19,913 19,116 28,674 8,850 13,275 C Brown LTIP 2006 DSOP 2013 I Godden(4) USOP USOP A Howell LTIP 2006 LTIP 2006 DSOP 2013 PTO DSOP 2013 PTO DSOP 2013 Career DSOP 2013 Career DSOP 2013 PTO DSOP 2013 Career DSOP 2013 PTO DSOP 2013 Career — K Smith LTIP 2006 DSOP 2013 PTO DSOP 2013 PTO DSOP 2013 Career DSOP 2013 Career DSOP 2013 PTO DSOP 2013 Career DSOP 2013 PTO DSOP 2013 Career — DSOP 2013 PTO = Price Target Options (see explanation on page 23) DSOP 2013 Career = Career Options (see explanation on page 23) (1) Or on appointment if later (2) On day immediately prior to date of the award (3)Net value of options are calculated using mid market price of the Company’s shares at the end of the year, less exercise price. Net values are before performance criteria, which will determine the extent to which exercise is permitted (4) Options granted to Godden Associates Limited 24 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Directors’ remuneration The remuneration of individual Directors is shown in the table below. 2014 £000 2013 £000 Emoluments: – basic salaries – compensation for loss of office – benefits 665 101 56 446 — 5 – fees 822 78 451 205 – pension contributions 900 16 656 — 916 656 The remuneration of individual Directors was as follows: Salary and fees £000 I Godden P McCloskey(2) O Scott P Taylor C Brown(3) (1 January–6 April 2014) A Howell(4)(5) (28 April–31 December 2014) K Smith(4)(5) (28 April–31 December 2014) Benefits(1) £000 2014 Total £000 2013 Total £000 2014 Pension £000 2013 Pension £000 281 30 35 35 164 177(6) 122 24 — — — — 30 (6) 2 305 30 35 35 164 207 124 297 — 35 21 252 — — — — — — — 8 8 — — — — — — — 844 56 900 656 16 — (1) Benefits are made up primarily of private health care, life assurance, disability insurance and provision of car allowance (2) Appointed as a Director 24 February 2014 (3) Resigned as a Director 6 April 2014 (4) Remuneration was paid in US dollars and has been translated at an average rate of $1.6465 for 2014 (5) Appointed as a Director 28 April 2014 (6) Includes relocation costs Ms Brown exercised options during the year and simultaneously realised a cash gain of £65,423 through the sale of the shares acquired in part to fund the tax liability upon exercise of the options. Ms Brown received a cash payment in lieu of a pension contribution. In 2014 this represented 8.69% of basic salary (2013: 8.62%). Messrs Howell and Smith participated in the Group’s profit-sharing/401(k) plan, a defined contribution employee benefit plan in the USA. The employer’s contribution for each of them was 8% of aggregate basic salary in a full year up to a maximum salary of US$260,000 per annum. No payments were made, or benefits accrued, under any other pension arrangements. The charges to the Income statement in the year for share-based incentives in respect of the Directors were: Ms Brown £7,000 (2013: £38,000), Mr Godden £97,000 (2013: £145,000), Mr Howell £44,000 (2013: £nil) and Mr Smith £35,000 (2013: £nil). By order of the Board Janet Ireland Company Secretary 17 March 2015 KBC Advanced Technologies plc Annual report 2014 25 DIRECTORS’ REPORT Key performance indicators used in the business are shown in the graphs on page 1 and in the Strategic report on pages 8, 9, 12 and 13. A more detailed review of the development and performance of the business is given in the Chairman’s statement on pages 4 and 5 and in the Strategic review on pages 7 to 14. The Directors present their report and audited financial statements for the year ended 31 December 2014. of share options and Mr Scott (through Kestrel Opportunities) acquired an additional 321,870 shares. Dividend The Board’s recommendation for the payment of a final dividend is shown in the Strategic report on page 13. Other than the above, there have been no changes in the shareholdings of current Directors up to the date of these financial statements. Directors and their interests The Directors during the year are shown in the table below. The interests of the Directors in the share capital of the Company (all beneficially held except where noted) at 31 December 2014 are shown below. Employees The Group continues to place a high emphasis on attracting, retaining and developing employees to achieve the Group’s business plan objectives. The Group pursues an active policy of employee involvement and development, including communication through staff meetings, written communications to all staff and use of the Group’s intranet. The interests of the Directors in options to acquire shares of the Company, which includes options granted by the Trusts and awards under the Company’s Long Term Incentive Plans and the Discretionary Share Option Plan 2013, are shown on page 24. None of the Non-Executive Directors have any interest in options to acquire shares in the Company. Since the year end, Mr Godden acquired 75,000 additional shares, Mr Howell acquired 54,843 additional shares through the exercise of share options, Mr Smith acquired 25,893 additional shares through the exercise Employees are provided with information on matters affecting them as employees, on developments within the business and on the various factors affecting the Group’s performance. Group policies and practices are continually reviewed and improved as required to meet the needs of employees and the business. Principal risks and uncertainties facing the Company and its subsidiary undertakings and how they are controlled are described on page 14. The Group is committed to providing equality of opportunity for all employees and in particular ensures that fair selection and development procedures apply. The aim of the Group’s policy is to ensure that no job applicant or employee receives less favourable treatment than any other on the grounds of age, sex, sexual orientation, disability, marital status, colour, religion, race or ethnic origin. The Group encourages the involvement of senior employees in the Group’s success through share incentive schemes, as well as a bonus scheme which emphasises performance and delivery of business plan objectives. Ethics The Group has well established policies on business ethics. Employees are given a copy of the policies on joining the Group and all employees are required to review the policies regularly and report any non-compliance or suspicion of non-compliance. A regular review emphasises understanding of the policies, consultation where required and sound judgement. The results of reviews are reported to the Board via the Audit Committee. INTERESTS OF THE DIRECTORS IN THE SHARE CAPITAL OF THE COMPANY 2.5p Ordinary shares At 1 January 2014 (1) I Godden P McCloskey O Scott(3) P Taylor C Brown A Howell K Smith (1) Or at date of appointment if later (2) Or at date of resignation if earlier (3) Non-beneficial interest held through Kestrel Opportunities Fund (“Kestrel Opportunities”) 26 KBC Advanced Technologies plc Annual report 2014 157,500 — 7,378,863 — — — 21,790 At 31 December 2014 (2) 201,000 — 9,858,428 — — — 21,790 OVERVIEW STRATEGIC REPORT GOVERNANCE Corporate governance Information concerning corporate governance is set out in the Corporate governance statement on pages 18 to 21. Financial instruments An explanation of the Group’s financial risk management objectives, policies and strategies is set out on page 14 and in note 23. Shares held in treasury In October 2014 the Company purchased 214,000 Ordinary shares of 2.5p each in the Company which were transferred into treasury to satisfy the future exercise of share options. Outstanding shareholders’ authority The authority granted on 4 June 2014 by the shareholders for the Company to make market purchases, within the meaning of Section 693 of the Companies Act 2006, of up to 8,873,307 Ordinary shares of 2.5p each in the capital of the Company remains outstanding until the earlier of the conclusion of the Annual General Meeting of the Company in 2015 and 30 June 2015. Shares issued The Company issued 20,869,565 new Ordinary shares of 2.5p each on 10 June 2014 in a share placing. One million new Ordinary shares of 2.5p each were issued in July 2014 as part of the consideration for the acquisition of FEESA on 21 July 2014. Half of these consideration shares are subject to selling restrictions for 12 months from the date of acquisition with the remainder restricted for a further 12 months. FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Except for the above, no shares were issued during 2014 other than in connection with the operation of the Company’s employee share incentive schemes. Disclosure of information to auditors All of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company’s auditors for the purposes of their audit and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware. Registered auditors A resolution to re-appoint BDO LLP as the Company’s auditors and to authorise the Directors to fix their remuneration will be put to the members at the Annual General Meeting. Substantial shareholdings SUBSTANTIAL SHAREHOLDINGS AS AT 31 DECEMBER 2014 At 31 December 2014 the Company had been notified of the interests shown below, excluding those of Directors, in 3% or more of its issued share capital. Name Percentage of issued share capital % Kestrel Partners LLP, UK AXA Investment Managers SA, UK Killik Asset Management, UK Kongsberg Gruppen ASA, Norway Coltrane Master Fund, L.P., USA Hargreave Hale Limited, UK 13.55 11.81 5.66 4.93 3.85 3.67 SUBSTANTIAL SHAREHOLDINGS AS AT 17 FEBRUARY 2015 At 17 February 2015 the Company had been notified of the interests shown below, excluding those of Directors, in 3% or more of its issued share capital. Name Percentage of issued share capital % Kestrel Partners LLP, UK AXA Investment Managers SA, UK Killik Asset Management, UK Kongsberg Gruppen ASA, Norway Coltrane Master Fund, L.P., USA Hargreave Hale Limited, UK 13.91 11.75 5.63 4.90 3.83 3.65 KBC Advanced Technologies plc Annual report 2014 27 DIRECTORS’ REPORT CONTINUED Directors’ responsibility for the financial statements The Directors are responsible for preparing the Strategic report, the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies whose securities are traded on AIM. In preparing these financial statements, the Directors are required to: »» select suitable accounting policies and then apply them consistently; »» make judgements and accounting estimates that are reasonable and prudent; »» state whether the Group financial statements have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; »» state whether the Company financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), subject to any material departures disclosed and explained in the financial statements; and »» prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may differ from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. By order of the Board Janet Ireland Company Secretary 17 March 2015 28 KBC Advanced Technologies plc Annual report 2014 Financial statements 30 Independent auditors’ report 31 Group income statement and Group statement of comprehensive income 32 Group statement of changes in equity 33 Group balance sheet 34 Group cash flow statement 35 Notes to the Group financial statements 57 Company balance sheet 58 Notes to the Company financial statements SHAREHOLDER INFORMATION 62 Notice of the Annual General Meeting IBCFive‑year summary and shareholder information INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF KBC ADVANCED TECHNOLOGIES PLC We have audited the financial statements of KBC Advanced Technologies plc for the year ended 31 December 2014 which comprise the Group and Company balance sheets, the Group income statement, the Group statement of comprehensive income, the Group cash flow statement, the Group statement of changes in equity and the related notes. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union. The financial reporting framework that has been applied in preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ 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 auditors As explained more fully in the Statement of Directors’ responsibilities, 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 Financial Reporting Council’s (“FRC’s”) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the FRC’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion: »» the financial statements give a true and fair view of the state of the Group’s and the parent company’s affairs as at 31 December 2014 and of the Group’s profit for the year then ended; »» the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; »» the parent company’s financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; 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 Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: »» adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or »» the parent company financial statements are not in agreement with the accounting records and returns; or »» certain disclosures of Directors’ remuneration specified by law are not made; or »» we have not received all the information and explanations we require for our audit. John Everingham (Senior Statutory Auditor) For and on behalf of BDO LLP, statutory auditors Gatwick 17 March 2015 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127) 30 KBC Advanced Technologies plc Annual report 2014 GROUP INCOME STATEMENT OVERVIEW FOR THE YEAR ENDED 31 DECEMBER 2014 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Note Revenue 3 Direct costs Staff and associate costs 8 Depreciation and amortisation 5 Other operating charges 2014 £000 2013 £000 75,954 65,080 (13,113) (9,254) (35,855) (32,383) (5,691) (4,414) (14,132) (11,640) Operating profit 5 7,163 7,389 Finance revenue 6 86 208 Finance cost 6 Profit before tax Tax expense 9 Profit for the year (578) (476) 6,671 7,121 (2,592) (1,584) 4,079 5,537 Earnings per share attributable to the ordinary equity shareholders of the parent company Basic 10 5.7p 9.5p Diluted 10 5.5p 9.2p 2014 £000 2013 £000 4,079 5,537 — exchange differences on translation of foreign operations recognised directly in equity 1,595 (856) Total comprehensive income recognised in the year 5,674 4,681 GROUP STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014 Profit for the year Other comprehensive income/(loss): KBC Advanced Technologies plc Annual report 2014 31 GROUP STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2014 Issued capital £000 Share premium £000 Capital redemption reserve £000 Merger reserve £000 At 1 January 2013 1,470 9,370 113 929 Profit for the year — — — — Other comprehensive loss — — — — Sharebased payments £000 Foreign exchange reserve £000 Retained earnings £000 Total £000 (172) 2,180 2,166 15,311 31,367 — — — 5,537 5,537 — — (856) — (856) Own shares £000 Total comprehensive (loss)/income — — — — — — (856) 5,537 4,681 Share-based payments — — — — — 530 — — 530 9 67 — — (1) — — — 75 Shares issued Purchase of non-controlling interest (note 15) — — (137) (137) 2,710 1,310 20,711 36,516 — — 4,079 4,079 — 1,595 — 1,595 — — 1,595 4,079 5,674 — — — — At 1 January 2014 1,479 9,437 113 929 Profit for the year — — — — — Other comprehensive profit — — — — — Total comprehensive income — — — — Share-based payments — (173) — — — — — 700 — — 700 540 22,607 — — — — — — 23,147 Shares issued in business combination (note 22) 25 — — 1,205 — — — — 1,230 Share buyback — — — — (196) — — — Movement in own shares — — — — (149) — — 149 Dividends — — — — — — — (802) 2,044 32,044 113 2,134 3,410 2,905 Shares issued for cash, net of transaction costs At 31 December 2014 32 KBC Advanced Technologies plc Annual report 2014 (518) 24,137 (196) — (802) 66,269 GROUP BALANCE SHEET OVERVIEW AS AT 31 DECEMBER 2014 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Note 2014 £000 2013 £000 Property, plant and equipment 12 1,026 851 Goodwill 13 15,401 10,200 Other intangible assets 13 18,336 12,011 9 786 447 35,549 23,509 42,312 23,178 2,438 1,647 11,883 11,960 Non-current assets Deferred tax assets Current assets Trade and other receivables 16 Current tax receivable Cash and cash equivalents 17 Total assets 56,633 36,785 92,182 60,294 — (600) Non-current liabilities Long-term borrowings 20 9 (2,866) (1,476) 18 (53) (69) (2,919) (2,145) (17,539) (12,201) (860) (4,429) (4,441) (4,745) Deferred tax liabilities Provisions Current liabilities Trade and other payables 19 Short-term borrowings 20 Current tax payable Provisions 18 (154) (258) (22,994) (21,633) Total liabilities (25,913) (23,778) Net assets 66,269 36,516 Equity attributable to ordinary equity shareholders of the parent company Share capital 24 2,044 1,479 Share premium 26 32,044 9,437 Other reserves 26 2,247 1,042 Own shares 26 (173) (518) 24,731 Retained earnings 30,452 Total equity 66,269 36,516 Total equity and liabilities 92,182 60,294 The financial statements on pages 31 to 56 were approved and authorised for issue by the Board of Directors on 17 March 2015 and were signed on its behalf by: Ian Godden Andrew Howell DirectorDirector Registered number: 01357958 KBC Advanced Technologies plc Annual report 2014 33 GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2014 Note 2014 £000 2013 £000 6,671 7,121 5,691 4,414 647 (439) Net cash inflow from operating activities Profit before tax Adjustments for: Depreciation and amortisation 12, 13 Foreign exchange losses/(gains) Finance revenue 6 (86) (208) Finance cost 6 578 476 Share-based payment expense 25 Increase in trade and other receivables 17 Increase/(decrease) in trade and other payables 17 700 530 14,201 11,894 (19,233) (4,285) 2,370 (7,960) (351) Cash used in operations (2,662) Income taxes paid (3,369) (1,917) Net cash used in operating activities (6,031) (2,268) (9,885) — Investing activities Acquisition of subsidiary, net of cash acquired 22 Payment of deferred consideration — (1,900) Purchase of tangible non-current assets 12 (669) (195) Purchase of intangible non-current assets 13 (1,552) (1,334) Decrease in advance contract payments Finance revenue received 6 Net cash (used in)/generated from investing activities — 12,287 86 208 (12,020) 9,066 Financing activities Issue of ordinary shares 24,014 75 Issue cost of ordinary shares (867) — Payments to acquire treasury shares (196) — Purchase of non-controlling interest — Finance costs paid Dividends paid to equity holders of parent (2,400) 6 (578) (476) 11 (802) — Net cash generated from/(used in) financing activities 18,571 Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Exchange adjustments Cash and cash equivalents at 31 December 34 KBC Advanced Technologies plc Annual report 2014 (137) (3,000) Repayment of bank borrowings 17 (2,938) 520 3,860 9,931 6,384 572 (313) 11,023 9,931 NOTES TO THE GROUP FINANCIAL STATEMENTS OVERVIEW FOR THE YEAR ENDED 31 DECEMBER 2014 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 1. Accounting policies KBC Advanced Technologies plc is a public limited company incorporated and domiciled in England and Wales. The Company’s ordinary shares are traded on AIM, part of the London Stock Exchange. Basis of preparation The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. The Group financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. The principal accounting policies adopted by the Group are set out in note 1 and those adopted by the Company in note 31. The Group financial statements are presented in sterling, rounded to the nearest thousand pounds (£000) except where otherwise indicated. They are prepared on the historical cost basis except that certain financial instruments are stated at fair value. Changes in accounting policies a) New standards, interpretations and amendments effective from 1 January 2014 None of the new standards, interpretations and amendments, effective for the first time from 1 January 2014, have had a material effect on the financial statements. b) New standards, interpretations and amendments not yet effective Other than that listed below the Directors do not consider any new standards, interpretations and amendments that have been issued but are not yet effective to have a material impact on the Group’s financial statements in the period of initial application. »» IFRS 15 Revenue from contracts replaces both IAS 11 and IAS 19 as well as SIC 31, IFRIC 13, IFRIC 15 and IFRIC 18, establishing a single, comprehensive framework for revenue recognition. IFRS 15 is effective for annual periods beginning on or after 1 January 2017 and is yet to be endorsed by the European Union (“EU”) at the date of approval of these financial statements. The Group has begun a systematic review of all existing major consulting and software contracts to ensure that the impact and effect of the new standard is fully understood and changes to the current accounting procedures are highlighted and acted upon in advance of the effective date. Basis of consolidation The Group financial statements include the financial statements of the Company and all the subsidiaries drawn up to 31 December each year during the years reported for the periods during which they were members of the Group. On acquisition, assets and liabilities of subsidiaries are measured at their fair values at the date of acquisition with any excess of the cost of acquisition over this value being capitalised as goodwill. Revenue — Consulting Fixed price service contracts Revenue on fixed price service contracts is recognised using the percentage of completion method. Under this method revenues recorded represent the aggregate of costs incurred during the year and a portion of estimated profit on individual contracts based on the relationship of costs incurred to total estimated costs for each contract. Revisions in estimates are reflected in the accounting period when the revision becomes known. Anticipated losses on contracts are charged to income in their entirety when the losses become evident. Time and material contracts Revenue for time and materials contracts is recognised as services are performed, generally on the basis of contract allowable labour hours worked multiplied by the contract defined billing rates, plus allowable direct costs and expenses incurred in connection with the performance of the contract. Amounts received in excess of revenue recognised are shown as deferred revenue. Contract work in progress is included in trade and other receivables and represents revenue recognised in excess of payments on account. Revenue — Technology Software licences Revenue from licence sales is recognised once the software has been delivered and when no significant contractual obligations remain. Revenue from ongoing maintenance, support and upgrades is recognised over the contractually agreed period. Service consulting and software maintenance Revenue from service consulting and software maintenance is recognised over the period in which services are provided. Royalties Revenue from royalty contracts held with resellers is recognised when it becomes receivable from the resellers. KBC Advanced Technologies plc Annual report 2014 35 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 1. Accounting policies continued Revenue — Technology continued Bonuses and penalties Where some or all of a contract’s revenues are dependent on the impact of KBC’s performance (e.g. in identifying benefits of changes in a client’s operations), that element of revenue is only recognised once the contract is sufficiently advanced that it is probable that the performance target will be met and the bonus can be measured reliably. Penalties on contracts are provided for at the Directors’ best estimate of the expenditure required to settle the Group’s liability. Direct costs and operating charges Direct costs include costs of subcontractors. Operating charges include administrative overheads. Research and development Research costs are expensed as incurred. Development expenditure incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured and technical feasibility and commercial viability can be demonstrated. Where these criteria are not met the expenditure is expensed to the income statement. Following the initial recognition of development expenditure the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure carried forward is amortised over the period of expected future sales from the related project. The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use, or more frequently when an indicator of impairment arises during the reporting year indicating that the carrying value may not be recoverable. Goodwill Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment of assets The Group assesses at each reporting date whether there is an indication that goodwill, intangibles or property, plant and equipment may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the income statement in those expense categories consistent with the nature of the impaired asset. Foreign currencies Transactions in foreign currencies are recorded in the functional currency at the rate ruling at the date of the transaction. All monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Retranslation differences are recognised in the income statement. All goodwill arising is denominated in the functional currency of the foreign operation on which it arose. Profits, losses and cash flows of overseas branches and subsidiary undertakings are translated at the average rate of exchange ruling during the period as it is a reasonable approximation of the actual transaction rate. The balance sheets of overseas branches and subsidiaries are translated at the rate of exchange ruling at the balance sheet date. The exchange differences arising on the retranslation of opening net assets and of results for the year are taken directly to reserves until the disposal of the net investments, at which time they are recognised in the income statement. The cumulative translation differences for foreign subsidiaries were deemed to be zero at the transition date for the adoption of IFRSs. Financial instruments Financial assets and financial liabilities, in respect of financial instruments, are recognised on the Group balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial instruments are initially recorded at fair value. Subsequent valuation depends on the designation of the instrument. Non-derivative financial instruments The Group’s non-derivative financial instruments comprise trade receivables, trade payables, financial liabilities, cash and cash equivalents. Cash and cash equivalents comprise cash balances and deposits with maturities of three months or less at inception. Trade receivables and payables and financial liabilities are measured initially at fair value, and subsequently at amortised cost. Trade receivables are stated net of allowances for irrecoverable amounts. 36 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 1. Accounting policies continued Financial instruments continued Non-derivative financial instruments continued Trade receivables, which generally have 30–90 day terms, are recognised and carried at the lower of their original invoiced value and recoverable amount. Provision for potential bad debts is made when there is objective evidence that the Group will not be able to recover balances in full. The main factors used in assessing such impairment of trade receivables are the age of the balance and the circumstances of the individual customer. When the probability of recovery of a debtor balance is assessed as being remote, it is written off, together with any associated provision. The fair values of non-derivative financial instruments are approximately equal to their book values. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at banks and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the Group cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Retirement benefit costs The Group operates contributory pension schemes covering the majority of its permanent employees. The schemes’ funds are administered by trustees and are independent of the Group’s finances. The schemes are defined contribution schemes and there are no commitments other than the regular contributions which are charged against the income statement in the year in which they become payable. Provisions The Group has recognised a provision for liabilities of uncertain timing or amount for onerous leases. The provision is measured at the best estimate of the expected future rentals payable less expected future rentals receivable. The amount is discounted at a pre-tax rate which reflects the current market assessments of the time value of money and risks specific to the liability. Share-based payments The Group operates a number of executive and employee share schemes. The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant employee becomes fully entitled to the award. The cumulative expense recognised at each reporting date reflects the extent to which the vesting period has elapsed and the number of awards that, in the opinion of the Directors of the Group at that date, will vest and for which the market and/or non-market conditions will be met. At each balance sheet date before vesting, the cumulative expense is calculated and the movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. No expense is recognised for awards that do not ultimately vest. Leasing commitments – lessee Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases and are charged to the income statement on a straight-line basis over the lease term. Leasing commitments – lessor Where the Group has sublet part of its premises, income is taken to the income statement on a straight-line basis over the sublease term. Intangible assets Intangible assets are carried at cost less accumulated amortisation and accumulated impairment loss. Amortisation is provided on all intangibles at rates calculated to write off the cost of each asset over its expected useful life for a period of up to six years. Externally acquired intangible assets, acquired through business combinations, comprise intellectual property and other intangibles, which include purchased patents, know-how, trademarks, licences and distribution rights. These are capitalised at fair value and amortised on a straight-line basis over their estimated useful economic lives. Contract intangibles are capitalised at cost and amortised with respect to the percentage complete of the contracts that they relate to. Internally generated intangible assets comprise development costs. Current estimates of useful economic life of intangible assets are as follows: GoodwillIndefinite Intellectual property Five to six years Development costs (internally generated) One to five years Contract intangibles Life of contract to which they relate Other intangibles Five years KBC Advanced Technologies plc Annual report 2014 37 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 1. Accounting policies continued Current and deferred tax Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: »» w here the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; »» in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised; and »» d eferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income tax is recognised in the income statement. Property, plant and equipment Property, plant and equipment assets are stated at cost less accumulated depreciation. Such cost includes costs directly attributable to making the asset capable of operating as intended. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost, less estimated residual value, of each asset over its expected useful life as follows: Leasehold improvements The lease term or useful life if shorter Furniture, fixtures and fittings Five years Office equipment Five years Computer hardware Three years Useful lives and residual values are assessed annually. 2. Critical accounting judgements and estimates The preparation of the financial statements requires the use of estimates and judgements that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. These estimates are based on management’s best knowledge of the amount, events or actions and actual results may ultimately differ from those estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are addressed below. a) Impairment of goodwill The Group carries out an annual impairment review or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. An impairment loss is recognised when the recoverable amount of goodwill is less than the carrying amount. The impairment tests reflect the latest financial budgets, which are based on various assumptions relating to the Group’s businesses including resource utilisation, foreign exchange rates, contract awards and contract margins. There is an inherent risk in estimating financial budgets; however, the Board believes this has been performed on a fair basis. b) Revenue recognition Revenue on fixed price service contracts is recognised using the percentage-of-completion method by measuring the proportion of costs incurred for work performed to total estimated costs. These estimated costs are updated during the term of the contract and may result in revision by the Group of recognised revenue and estimated costs in the period in which they are identified. Profits on fixed price service contracts result from the difference between incurred costs and revenue earned. Contract accounting requires significant judgement relative to assessing risks, estimating contract revenue and costs, and making assumptions for scheduling and technical issues. Due to the size and nature of many of the Group’s contracts, developing total revenue and cost at completion estimates requires the use of significant judgement. In estimating the expected contract revenue and costs, historical performance gained from other such contracts and experience is used, which carries a risk that the judgements applied may not reflect the future outturn of the project. 38 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 2. Critical accounting judgements and estimates continued c) Development costs Development expenditure is capitalised when the Group considers its future recoverability can reasonably be regarded as assured and technical feasibility and commercial viability can be demonstrated. Any expenditure carried forward is amortised over the period of expected future sales from the related project. The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use, or more frequently when an indicator of impairment arises during the reporting year indicating that the carrying value may not be recoverable. The technical and market uncertainties inherent in the development of new products mean that internal development costs will not be capitalised as intangible fixed assets until commercial viability of a project is demonstrable and there is probable economic benefit. 3. Revenue Revenue arises from: 2014 £000 2013 £000 Fixed price service contracts 46,587 39,802 Time and material contracts 8,386 7,427 54,973 47,229 10,950 7,140 Consulting Technology Software licences Software maintenance 7,627 6,620 Service consulting 1,019 2,863 Royalties Total revenue 1,385 1,228 20,981 17,851 75,954 65,080 4. Segmental analysis With regard to the balance sheet, those elements of the balance sheet where segmental reporting is prepared have been disclosed. Those elements are trade receivables and provisions, amounts recoverable on contracts and deferred revenue. At the balance sheet date 39% of total trade receivables were concentrated with one of the Group’s customers (2013: 7%). The balance was spread over 123 (2013: 172) customers, none of whom comprised more than 5% (2013: 5%) of the total. An analysis of ageing of trade receivables and provisions is given in note 16. Consulting £000 Technology £000 Unallocated £000 Total £000 54,973 20,981 — 75,954 Operating profit 2,117 5,046 — 7,163 Finance revenue — — 86 86 Finance cost — — (578) (578) 2,117 5,046 (492) 6,671 — — (2,592) (2,592) 2,117 5,046 (3,084) 4,079 Consulting £000 Technology £000 10,410 4,635 (3) 15,042 (273) (270) — (543) Net carrying amount 10,137 4,365 Amounts recoverable on contracts 13,659 802 Year ended 31 December 2014 Revenue from external customers Profit/(loss) before tax Tax expense Profit/(loss) for the year As at 31 December 2014 Trade receivables Provisions Deferred revenue Unallocated £000 Total £000 (3) 14,499 12,377 — 26,036 4,471 — 5,273 KBC Advanced Technologies plc Annual report 2014 39 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 4. Segmental analysis continued Year ended 31 December 2013 Revenue from external customers Consulting £000 Technology £000 Unallocated £000 Total £000 47,229 17,851 — 65,080 Operating profit 1,251 6,138 — 7,389 Finance revenue — — 208 208 Finance cost — — (476) (476) 1,251 6,138 (268) 7,121 — — (1,584) (1,584) 1,251 6,138 (1,852) 5,537 Consulting £000 Technology £000 5,863 3,918 Profit/(loss) before tax Tax expense Profit/(loss) for the year As at 31 December 2013 Trade receivables Total £000 Unallocated £000 (48) 9,733 (647) (249) (13) (909) 5,216 3,669 (61) 8,824 Amounts recoverable on contracts 5,928 6,306 — 12,234 Deferred revenue 2,305 3,238 — 5,543 Provisions Net carrying amount Geographical segments Revenue from external customers Non-current assets 2014 £000 2013 £000 2014 £000 2013 £000 25,195 18,858 6 — United States of America 8,059 7,084 7,109 6,232 Thailand 3,738 2,196 — — Canada 3,196 4,597 13 11 Russia 2,862 1,726 — — Mexico 2,553 2,722 — — Japan 2,158 5,909 9 6 United Kingdom 2,062 1,613 27,515 16,732 26,131 20,375 111 81 75,954 65,080 34,763 23,062 Ecuador Other Revenues above are based on the location of the customer and non-current assets on the location of the assets. The countries listed represent those where the total revenue or assets are greater than 4% of the Group total. The following customer accounts for more than 10% of the Group’s revenue: Revenue Customer 1 The revenue generated from the major customer is derived from both Consulting and Technology. 40 KBC Advanced Technologies plc Annual report 2014 Percentage 2014 £000 2013 £000 2014 % 2013 % 25,195 18,858 33% 29% OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 5. Group operating profit This is stated after charging/(crediting) the following: 2014 £000 2013 £000 523 533 – intellectual property rights 1,527 1,042 – development costs carried forward 1,299 1,078 – contract-based intangibles 1,805 1,379 Depreciation and amortisation: Depreciation Amortisation of intangible assets: – other intangibles Total 537 382 5,691 4,414 2,335 2,597 Included in other operating charges: Operating lease rentals: – minimum lease payments – sublease rentals received Arbitration costs recoverable Share-based payments Net foreign exchange differences (151) (298) — (521) 700 530 70 77 a) Research and development costs During 2014 the Group incurred research and development costs of £3.7m (2013: £2.7m). Of this amount, £1.6m (2013: £1.3m) related to development expenditure for Petro-SIM and has been carried forward as an intangible asset to be amortised against expected future sales. The balance was charged directly to staff and associate costs and direct costs in the income statement. b) Adjusted profit before tax 2014 £000 2013 £000 Operating profit 7,163 7,389 Amortisation of acquisition intangibles 2,064 1,424 Development costs carried forward (1,552) (1,334) Amortisation of development costs carried forward 1,299 1,078 Exceptional amounts recoverable on contracts provision — 136 Arbitration costs recoverable — (521) Acquisition costs 352 — Redundancy and reorganisation income (38) (28) Share-based payments 700 530 9,988 8,674 86 208 Adjusted operating profit Finance revenue Finance cost Adjusted profit before tax Tax expense Adjusted profit after tax (578) (476) 9,496 8,406 (2,888) (2,876) 6,608 5,530 KBC Advanced Technologies plc Annual report 2014 41 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 6. Finance revenue/costs Bank interest receivable Bank interest payable 7. Auditors’ remuneration Current auditors Fees payable to the Group’s auditors for the audit of the Group financial statements 2014 £000 2013 £000 86 208 578 476 2014 £000 2013 £000 15 15 Fees payable to the Group’s auditors and their associates for other services: Audit of the accounts of the subsidiaries 91 136 – tax compliance services 142 202 – tax advisory services 142 122 – other assurance services 120 101 510 576 2014 £000 2013 £000 26,373 24,114 8. Staff and associate costs Staff costs (including Directors) comprise: – wages and salaries – defined contribution pension cost 1,782 1,667 – medical insurance costs 2,439 1,992 – share-based payments – social security contributions and similar taxes Associate costs 700 530 2,065 1,906 33,359 30,209 2,496 2,174 35,855 32,383 2014 Number 2013 Number Average monthly number of persons employed including Directors: – management – technical and sales – administration 42 KBC Advanced Technologies plc Annual report 2014 6 7 277 251 49 47 332 305 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 8. Staff and associate costs continued Key management personnel compensation Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group and comprise the Directors of the Company and the members of the Operating Board, as described on page 20. 2014 £000 2013 £000 Salary 954 893 Bonus — 134 Compensation for loss of office Other long-term benefits Fees 101 — 61 13 239 206 Total pension cost 38 38 Social security contributions and similar taxes 52 69 Share-based payment expense Number of key management personnel in defined contribution pension schemes 220 273 1,665 1,626 2014 Number 2013 Number 3 3 During the year a charge of £57,000 (2013: £239,000) was made in respect of consultancy services provided to the Group by Godden Associates Limited. There was no amount payable to Godden Associates Limited, of which Ian Godden is a director, at 31 December 2014 (2013: £23,000). Full details of Directors’ emoluments are given in the Remuneration Committee report on page 25. 9. Tax expense a) Tax on profit charged in the income statement 2014 £000 2013 £000 Income tax of UK and overseas operations 2,534 2,485 Withholding taxes payable 1,558 975 Current tax expense Withholding taxes recoverable (634) (603) Adjustment for over provision in prior periods (408) (778) 3,050 2,079 Deferred tax expense Deferred tax credit for the current period (438) Adjustment for (over)/under provision in prior periods Total tax expense (745) (20) 250 (458) (495) 2,592 1,584 Of the total tax expense, £0.2m (2013: £0.8m) relates to UK tax and £2.4m (2013: £0.8m) relates to foreign taxes. KBC Advanced Technologies plc Annual report 2014 43 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 9. Tax expense continued b) Reconciliation of the total tax expense The tax assessed on the profit for the year is higher (2013: lower) than the standard rate of corporation tax in the UK of 21.49% (2013: 23.25%). The differences are reconciled below: 2014 £000 2013 £000 Accounting profit before tax 6,671 7,121 Taxation at UK statutory income tax rate of 21.49% (2013: 23.25%) 1,434 1,656 Expenses not deductible for tax purposes 220 361 Income not taxable for tax purposes (72) (23) 30 (201) 563 Change in statutory tax rate Unrelieved tax losses carried forward against profits of future years 428 Tax losses brought forward set against current profits (95) Difference in tax rates on overseas earnings 786 172 Irrecoverable withholding taxes 924 372 Foreign tax costs deductible for tax purposes (126) (67) Tax overprovided in prior periods (428) (528) Other (509) (721) Tax on profit — 2,592 1,584 2014 £000 2013 £000 c) Deferred tax The movement on the deferred tax account is shown below: At 1 January (1,029) (1,507) Acquisition during the year (1,524) — Income statement credit Exchange differences At 31 December 458 495 15 (17) (2,080) (1,029) Deferred tax assets have been recognised in respect of all such tax losses and other temporary differences giving rise to deferred tax assets where the Directors believe it is probable that these assets will be recovered. Recognised deferred tax assets/(liabilities) Assets £000 Liabilities £000 Total £000 At 31 December 2014 Depreciation in advance of capital allowances Other temporary differences 10 (2,668) 776 (198) 786 (2,866) Assets £000 Liabilities £000 (2,658) 578 (2,080) Total £000 At 31 December 2013 Depreciation in advance of capital allowances Other temporary differences 44 KBC Advanced Technologies plc Annual report 2014 (232) (1,284) (1,516) 679 (192) 487 447 (1,476) (1,029) OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 9. Tax expense continued Recognised deferred tax assets/(liabilities) continued 2014 £000 2013 £000 2,459 2,411 Unrecognised deferred tax assets: – unrelieved tax losses carried forward against profits of future years Of the unused tax losses, £11.7m (2013: £11.4m) can be carried forward indefinitely. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries as the Group is in a position to control the timing of the reversal of temporary differences and it is probable that such differences will not reverse in the foreseeable future. The temporary differences associated with the investments in subsidiaries for which a deferred tax liability has not been recognised aggregate to £21.0m (2013: £15.4m). If the earnings were remitted, tax of £0.2m (2013: £0.1m) would be payable. There are no income tax consequences attaching to the payment of dividends by the Group to its shareholders. d) Tax on other comprehensive income The amount included in the foreign exchange reserve represents other comprehensive profit of £1.6m (2013: £0.9m loss) less tax of £nil (2013: £nil). 10. Earnings per share Basic earnings per share are calculated by dividing after tax net profit for the year attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares in issue during the year. 2014 £000 2013 £000 4,079 5,537 — — 4,079 5,537 Number 000s Number 000s Weighted average number of ordinary shares used in basic EPS 71,150 58,442 Number of shares used for basic and adjusted earnings per share 71,150 58,442 Numerator – earnings Earnings for the purpose of basic EPS Effect of dilutive potential ordinary shares Earnings for the purpose of diluted EPS Denominator – number of shares Effect of dilutive potential ordinary shares 2,559 1,532 73,709 59,974 Pence Pence Basic earnings per share 5.7p 9.5p Diluted earnings per share 5.5p 9.2p Basic adjusted earnings per share 9.3p 9.5p Diluted adjusted earnings per share 9.0p 9.2p Weighted average number of ordinary shares for the purposes of diluted EPS Basic adjusted earnings per share are based upon an after tax profit as shown in note 5b. The LTIP 2006, DSOP 2013 and USOP as detailed in the Remuneration Committee report on page 23 refer to performance criteria related to EPS growth. The basic earnings per share for adjusted profit as defined above are used for this purpose. KBC Advanced Technologies plc Annual report 2014 45 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 10. Earnings per share continued The dilution referred to above is shown below: Total share options outstanding Share options excluded (see below) 2014 Number 000s 2013 Number 000s 3,445 3,066 (885) Potentially exercisable share options 2,560 Fair value shares (1) Dilution 2,559 (1,534) 1,532 — 1,532 Share options excluded are those where the exercise price is greater than the share price at 31 December 2014, those with performance conditions that have not yet been met and those to be settled by the employee trusts. 11. Dividends 2014 £000 2013 £000 802 — 820 592 Leasehold improvements £000 Fixtures, fittings and office equipment £000 Computer hardware £000 Total £000 1,439 800 1,940 4,179 Final dividend of 1.0p (2013: nil p) per ordinary share proposed and paid during the period relating to the previous period’s results Proposed: Equity dividend proposed per share for 2014 – 1.1p per share (2013: 1.0p) 12. Property, plant and equipment Cost: At 1 January 2013 Additions 30 41 124 195 Disposals — (60) (282) (342) Foreign exchange rate movements At 31 December 2013 (1) (16) (7) (24) 1,468 765 1,775 4,008 6 41 622 669 Acquired through business combinations — 13 55 68 Disposals — (7) (163) (170) Additions (1) 18 57 74 1,473 830 2,346 4,649 At 1 January 2013 962 685 1,332 2,979 Depreciation charge for the year 107 92 334 533 — (56) (280) (336) 1 (16) (4) (19) 1,070 705 1,382 3,157 111 36 376 523 Foreign exchange rate movements At 31 December 2014 Accumulated depreciation: Disposals Foreign exchange rate movements At 31 December 2013 Depreciation charge for the year Acquired through business combinations — 7 43 50 Disposals — (7) (162) (169) — 17 45 62 1,181 758 1,684 3,623 Net book value at 31 December 2014 292 72 662 1,026 Net book value at 31 December 2013 398 60 393 851 Net book value at 1 January 2013 477 115 608 1,200 Foreign exchange rate movements At 31 December 2014 46 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE 13. Intangible assets FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Goodwill £000 Intellectual property £000 Development costs £000 Contract intangibles £000 Other intangibles £000 Total £000 10,263 8,747 5,036 4,614 2,655 31,315 Cost: At 1 January 2013 Additions Foreign exchange rate movements At 31 December 2013 Additions Acquired through business combinations — — 1,334 — — 1,334 (63) — — (30) (16) (109) 10,200 8,747 6,370 4,584 2,639 32,540 — — 1,552 2,173 — 3,725 4,994 5,411 — — 2,210 12,615 207 — — 147 54 408 15,401 14,158 7,922 6,904 4,903 49,288 At 1 January 2013 — 2,522 2,465 438 1,039 6,464 Amortisation charge for the year — 1,042 1,078 1,379 382 3,881 Foreign exchange rate movements — — — — (16) (16) At 31 December 2013 — 3,564 3,543 1,817 1,405 10,329 Amortisation charge for the year — 1,527 1,299 1,805 537 5,168 Foreign exchange rate movements — — — — 54 54 Foreign exchange rate movements At 31 December 2014 Accumulated amortisation: — 5,091 4,842 3,622 1,996 15,551 Net book value at 31 December 2014 15,401 9,067 3,080 3,282 2,907 33,737 Net book value at 31 December 2013 10,200 5,183 2,827 2,767 1,234 22,211 Net book value at 1 January 2013 10,263 6,225 2,571 4,176 1,616 24,851 At 31 December 2014 The remaining useful life of the unamortised intellectual property is five years (2013: five years). 14. Goodwill and impairment The acquired goodwill arose from two acquisitions made in 2002, Linnhoff March and Petroleum Economics, two acquisitions made in 2007, TTS Performance Systems and Veritech, 2013’s acquisition of Infochem and the acquisition of FEESA made in 2014. Each acquisition is considered by management to have the same risks associated with them as they undertake related activities for similar clients in the industry. The net carrying amount of the goodwill can be analysed between the acquisitions as follows: 2014 £000 2013 £000 Linnhoff March — 2,450 Petroleum Economics — 1,502 TTS Performance Systems — 2,624 Veritech — 710 Infochem — 2,914 Consulting 8,229 — Technology 7,172 — 15,401 10,200 Total During the year the Group, following a process of fully integrating previous acquisitions over a number of years, undertook an analysis of its operations. It was concluded that it is now appropriate to consider the Group’s operations as two cash-generating units (“CGUs”) which correspond to the operating segments identified in note 4. Following the acquisition of FEESA in July 2014, the Group immediately embarked on integrating its operations such that by the year end the operations were no longer distinct from the rest of the Group’s other operations. This resulted in the allocation of £1,248,000 of the goodwill to the Consulting CGU and £3,746,000 to the Technology CGU. KBC Advanced Technologies plc Annual report 2014 47 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 14. Goodwill and impairment continued The Group tests annually for impairment of goodwill or more frequently if there are indications that it might be impaired. The net carrying amount was measured against the recoverable amount, determined with reference to value in use expected to be generated by the Group. To estimate this, the Group prepares cash flow forecasts based upon the most recent financial results and budgets approved by management. For goodwill impairment test purposes a conservative assumption is applied to these cash flow forecasts which limit the future revenue and contribution growth to only 5% for both CGUs for the next five years. It is prudently assumed that the terminal growth rate is 2.5% for both the CGU’s. Financial budgets are based on historical performance of the Group. The Group has used 14% as its post tax discount rate when assessing acquisition opportunities and has therefore used this rate as the core calculation with sensitivities at lower and higher rates, consistent with the prior year. Alternative discount rates were considered and did not have a material impact on the value. The resulting value in use was higher than the net carrying value and therefore the conclusion was reached that no impairment has taken place. The same assumptions described above were used for each identified CGU in the prior year. 15. Subsidiaries The principal subsidiaries of KBC Advanced Technologies plc, all of which have been included in these consolidated financial statements, are as follows: Proportion of ownership interest at 31 December Name of subsidiary Country of incorporation 2014 2013 KBC Process Technology Limited England 100% 100% KBC Advanced Technologies, Inc. USA 100% 100% KBC Advanced Technology Pte Limited Singapore 100% 100% KBC Advanced Technologies Canada Limited Canada 100% 100% KBC Advanced Technologies (Beijing) Limited China 100% 100% Infochem Computer Services Limited England 100% 100% KBC Advanced Technologies Private Limited India 100% 100% KBC Advanced Technologies Sdn Bhd Malaysia 100% 100% KBC Advanced Technologies SL Spain 100% 100% KBC Process Technology (Middle East) Limited England 100% 100% KBC Advanced Technologies Pty Limited Australia 100% — FEESA Limited England 100% — KBC Advanced Technologies (Thailand) Limited Thailand 100% — KBC Advanced Technologies plc is the ultimate parent of the Group. On 16 January 2013 the non-controlling interest of 25% in KBC Environmental Limited was acquired at a cost of £137,000. 48 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 16. Trade and other receivables 2014 £000 2013 £000 12,147 7,052 Trade receivables: – not yet due – past due, zero to six months 2,415 1,617 – past due, beyond six months 480 1,064 15,042 9,733 – provision for impairment of trade receivables (see below) (543) (909) 14,499 8,824 1,690 1,234 87 886 26,036 12,234 42,312 23,178 2014 £000 2013 £000 At 1 January 909 2,138 Provided during the year 202 162 – net carrying amount Prepayments Other receivables Amounts recoverable on contracts Movements on the Group provision for impairment of trade receivables were as follows: Receivables written off during the year as uncollectible (568) At 31 December 17. Cash and cash equivalents Note Cash at bank and in hand Short-term deposits Cash and cash equivalents per the balance sheet Overdrafts 20 Revolving credit facility 20 Cash and cash equivalents per the cash flow statement (1,391) 543 909 2014 £000 2013 £000 9,729 11,912 2,154 48 11,883 11,960 (29) (860) — (2,000) 11,023 9,931 Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending upon the cash requirements of the Group and earn interest at the prevailing short-term deposit rates. Included in short-term deposits are cash deposits securing performance guarantees (see note 28). At 31 December 2014 the Group had undrawn committed facilities of £6,708,000 (2013: £7,081,000) which expire in July 2015. 2014 £000 2013 £000 Movement in working capital: – trade and other receivables – trade and other payables – exchange differences (19,233) (4,285) 2,370 (7,960) 647 (439) (16,216) KBC Advanced Technologies plc Annual report 2014 (12,684) 49 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 18. Provisions 2014 £000 2013 £000 327 330 28 — Onerous lease provision At 1 January Charge/(credit) to income statement: – unwinding of discount 131 79 (279) (82) At 31 December 207 327 Due within one year or less 154 258 53 69 207 327 – provided during the year – utilisation of provision Due after more than one year As a result of office rationalisation during 2013 a provision for future lease obligations was made based on the Directors’ best estimate of unavoidable costs associated with exit from the office space concerned. The lease to which this relates ends on 28 September 2018. 19. Trade and other payables Trade payables Other taxes and social security 2014 £000 2013 £000 2,955 2,265 139 192 Other payables and accruals 9,172 4,201 Deferred revenue 5,273 5,543 17,539 12,201 Trade payables are generally non-interest bearing and are normally settled within a 35-day period. Other taxes and social security costs payable are non-interest bearing and are remitted to the appropriate taxation authorities on a monthly or quarterly basis. 20. Loans and borrowings Book value 2014 £000 Book value 2013 £000 Fair value 2014 £000 Fair value 2013 £000 — 600 — 600 860 29 860 29 Non-current Bank loan – secured Current Overdrafts Revolving credit facility — 2,000 — 2,000 Bank loan – secured — 2,400 — 2,400 860 4,429 860 4,429 The bank loan and revolving credit facility were fully repaid during the year. The rate at which interest was payable on the bank loan is 1.75% above LIBOR. The rate at which interest is payable on the overdrafts is 2.275% above LIBOR. The Group’s bankers hold a cross-guarantee and debenture over all assets of KBC Advanced Technologies plc, KBC Process Technology Limited, KBC Environmental Limited, Infochem Computer Services Limited, KBC Advanced Technologies SL, KBC Advanced Technologies Inc, KBC Advanced Technology Pte Ltd, KBC Advanced Technologies Canada Ltd and KBC Advanced Technologies Sdn Bhd. 50 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 21. Obligations under leases The Group has entered into commercial leases on properties and items of office equipment. Land and buildings 2013 £000 Other 2013 £000 34 1,927 129 10 5,257 22 — — 151 — 5,747 44 7,335 151 Land and buildings 2014 £000 Other 2014 £000 – within one year 1,866 – within two to five years inclusive 3,881 Future minimum rentals payable under non-cancellable operating leases: – after five years Certain Group companies have sublet office space within properties. The future minimum sublease payments expected to be received under non-cancellable sublease agreements as at 31 December 2014 total £1,938,000 (2013: £1,354,000). The maturity of future minimum sublease payments expected is set out below: Within one year Within two to five years inclusive After five years 2014 £000 2013 £000 388 181 1,550 978 — 195 1,938 1,354 22. Acquisitions during the period On 21 July 2014 the Group acquired 100% of the voting equity instruments of FEESA, a group which is a supplier of oil and gas sector software and is incorporated in England and Wales. FEESA also owned a subsidiary incorporated in Australia. Following the acquisition of FEESA in July 2014, the Group immediately embarked on integrating its operations such that by the year end the operations were no longer distinct from the rest of the Group’s other operations. The contribution to revenue and operating profit during the period to 31 December 2014 was £1,264,000 and £305,000 respectively. Had the Group acquired FEESA on 1 January 2014, Group revenue for the year ended 31 December 2014 would have been £76,673,000 and Group operating profit would have been £6,687,000. In 2014 the Group incurred £352,000 of acquisition related costs, which were expensed in the Group income statement. The Directors have allocated fair values to the net assets of the acquisition. Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Property, plant and equipment Book value £000 Adjustment £000 Fair value £000 18 — 18 Other intangibles – intellectual property — 5,411 5,411 Other intangibles – NPV of customer relationships — 2,210 2,210 Other intangibles – goodwill on acquisition Receivables Cash Payables Deferred tax liability 9 — 9 670 — 670 1,397 — 1,397 (673) — (673) — (1,524) (1,524) 1,421 6,097 7,518 Consideration paid 11,282 Cash consideration 1,230 Shares issued 12,512 4,994 Goodwill The main factors leading to the recognition of goodwill are the future synergistic benefits from the integration of acquired software models with current KBC software models. KBC Advanced Technologies plc Annual report 2014 51 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 23. Financial instruments – risk management The Group’s principal financial instruments are trade receivables, trade payables, bank loans, cash and cash equivalents. The main purpose of these financial instruments is to finance the Group’s ongoing operational requirements. The Directors are responsible for considering all areas of risk that may affect the operations of the Group and for setting policies designed to minimise the impact the financial risk may have on the business. The major financial risks faced by the Group are interest rate risk and foreign currency risk. The Group does not consider that it has any significant credit risk with most of its customers due to their profile. However the current economic environment is giving reason to carry out more regular reviews of the financial strength of some of our customers and the imposition of tighter payment terms where appropriate. Further discussion of financial risk management is given on page 14. Policies for the management of these risks are shown below. a) Interest rate risk The Group has low interest rate risk from long-term borrowing at variable rate. At the year end, the Group was financed through 1% debt to 99% equity thus minimising the Group’s exposure to interest rate risk. Cash balances in excess of immediate needs are placed on short-term deposit in the money markets or managed by a third-party fund manager. Externally managed funds are invested in deposits with, or certificates of deposit issued by, approved banks or building societies. The Group’s present policy is to place not more than £1.0m for maturity in excess of three months. The use of the Group’s facilities is kept to a minimum (note 17) and repayments are made as soon as is practically possible. Interest charged on use of facilities is based on bank base rates and is negotiated annually. The effect of a 10% movement in the interest rate compared to 2013 would impact finance charges in the income statement by £34,000 (2013: £39,000) should the profile of use of facilities be similar to 2014. Within one year £000 Total £000 11,883 11,883 11,960 11,960 Interest rate risk At 31 December 2014 Floating rate: – cash and bank At 31 December 2013 Floating rate: – cash and bank b) Liquidity risk Customer payment terms vary from contract to contract and can involve extended periods of time before invoices are raised. The liquidity risk is managed through use of the overdraft facilities described in note 17. Regular cash flow forecasts are prepared for the Board and the Executive Committee which, together with information on cash balances, allow the Group to ensure that it will have sufficient cash to meet its liabilities when they become due and thus mitigate liquidity risk. The treasury function for the Group is managed centrally. The maturity of trade and other payables is set out below: 2014 £000 2013 £000 17,539 12,201 Current In six months or less 52 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 23. Financial instruments – risk management continued c) Foreign currency risk Foreign exchange risk arises when individual Group entities enter into transactions denominated in a currency other than their functional currency. The majority of transactions continue to be in US dollars, sterling and euro. The Group’s policy, where possible, is to sign contracts that are denominated in their functional currency (primarily US dollars or sterling) and to match the currency to which expenses have been incurred. The Group has a number of overseas subsidiaries and branches whose revenues and costs are denominated in currencies other than sterling, the most significant of which are in the USA. The effect of movements in the major currencies in which the Group’s operations are carried out and that are different to the operating unit’s functional currency based on balances at the balance sheet date is as follows: Currency Movement Trade receivables 2014 £000 Trade payables 2014 £000 Trade receivables 2013 £000 Trade payables 2013 £000 US dollar 10c 290 (7) 253 5 Euro 10c 94 38 122 10 Within trade and other receivables is £2,942,000 denominated in US dollars (2013: £4,448,000), £1,243,000 denominated in euro (2013: £1,590,000), £102,000 denominated in Qatari riyals (2013: £nil), £34,000 denominated in UAE dirham (2013: £34,000), £7,000 denominated in Japanese yen (2013: £30,000), £nil denominated in Australian dollars (2013: £326,000) and £nil denominated in UK sterling (2013: £9,000) that are not in the functional currency of the operating unit involved. d) Credit risk The Group’s principal financial assets are trade receivables, bank balances and cash. The main credit risk faced is attributable to the trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables which are made where there are circumstances which, based on experience, are evidence of a likely reduction in the recoverability of the receivable. As the majority of the Group’s customers are state-owned or very large oil companies, the risk of non-payment tends to be less of the traditional credit nature and more related to customer satisfaction. The minority of customers who are not state-owned or very large oil companies are generally non-asset owners and potential investors. For this minority of customers the credit risk is assessed using a number of methods and payment terms are tightened as appropriate. The Group does not prepare any formal analysis of the credit rating of its customers. e) Capital The Group considers its capital to comprise its ordinary share capital, share premium and accumulated retained earnings. Changes to equity during the year are detailed in the Group statement of changes in equity on page 32. The Group’s objective when managing capital is to ensure that funds are raised in an appropriate, cost-effective manner. The Group’s primary concern is to maintain its ability to continue as a going concern in order to provide returns for shareholders and stakeholders in the Company. It is the Board’s intention to pay dividends in the future commensurate with the Group’s overall profitability thereby reducing dividend cover. 24. Share capital 2014 Number 2013 Number 2014 £000 2013 £000 At 1 January 59,155,380 58,826,414 1,479 1,470 – issued for cash 20,869,565 — 522 — 1,000,000 — 25 — 726,608 328,966 18 9 81,751,553 59,155,380 2,044 1,479 Issued and fully paid Ordinary shares of 2.5p each: – issued as consideration – issued on exercise of share options At 31 December As at 31 December 2014, the Company held 214,000 treasury shares (2013: nil). KBC Advanced Technologies plc Annual report 2014 53 NOTES TO THE GROUP FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 25. Share-based payments The Group currently has three share schemes that give rise to share-based charges. These are the LTIP 2006, the DSOP 2013 and the USOP. Further details of these schemes are provided in the Remuneration Committee report on page 23. The expense recognised for equity-settled share-based payments in respect of employee services received during the year ended 31 December 2014 is £700,000 (2013: £530,000). The assumptions made in arriving at the charge for each scheme are detailed below. LTIP 2006 Executive Directors and other staff have been granted rights to acquire shares at nil cost under this plan introduced in 2006. Vesting is subject to performance criteria related to the Group’s EPS growth over a three year period. Failure to meet the performance criteria causes the awards to lapse. For options granted under the LTIP, the share price on the date of grant has been determined to be the fair value of the options. These options carry a right to accrued dividends during their lifetime, have nil cost to the recipient and are not subject to market conditions. No other features of option grants were incorporated into the measurement of fair value. DSOP 2013 The DSOP 2013 granted options to eligible employees with the right to acquire shares for the nominal value of ordinary shares. The options are exercisable between three months and ten years from the award date, subject to share price and time related performance conditions. For options granted under the DSOP 2013, the share price on the date of grant has been determined to be the fair value of the options. USOP The USOP granted options in 2013 to Godden Associates Limited with the right to acquire shares for nil cost. The options are exercisable between three months and five years from the award date, subject to share price and EPS related performance conditions. For options granted under the USOP, the share price on the date of grant has been determined to be the fair value of the options. The following table illustrates the number and weighted average exercise prices (“WAEP”) of, and movements in, share options during the year: 2014 Number 2014 WAEP 2013 Number 2013 WAEP Outstanding at 1 January 3,066,155 1.3p 2,182,341 3.7p Granted during the year 1,412,500 2.5p 2,000,000 2.0p Exercised during the year (773,108) 0.9p (343,966) 22.0p Lapsed during the year (260,754) 1.6p (772,220) 0.5p Outstanding at 31 December 3,444,793 1.9p 3,066,155 1.3p 999,120 2.5p 142,886 2.5p Exercisable at 31 December For the share options outstanding at 31 December 2014 the weighted average remaining contractual life is 6.81 years (2013: 5.95 years). The options outstanding at 31 December 2014 can be analysed as follows: Options over new shares 2014 Number 2013 Number 2,559,847 1,532,300 Options over shares held in trust 463,000 510,586 Other options (1) 421,946 1,023,269 3,444,793 3,066,155 Total options outstanding (1) At 31 December 2014 the Board had not decided whether these options would be satisfied by the issue of new shares or shares bought in the market The weighted average fair value of options granted at 31 December 2014 was £3,100,000 (2013: £2,233,000). The range of exercise prices for options outstanding at the end of the year was nil–2.5p (2013: nil–2.5p). 54 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 26. Reserves The following describes the nature and purpose of each reserve within equity: Share capital The balance classified as share capital comprises the nominal value received on issue of the Company’s equity share capital, comprising 2.5p ordinary shares. This balance excludes any treasury shares. Share premium The balance classified as share premium comprises the premium received on issue of the Company’s equity share capital. Other reserves Capital redemption reserve The balance classified as capital redemption reserve comprises a historic statutory reserve arising on the redemption of shares and is included in “other reserves” on the face of the balance sheet. Merger reserve The balance classified as merger reserve results from the Company having secured merger relief under Section 612 of the Companies Act 2006, when subsidiaries were acquired through the issue of the Company’s own equity shares. Own shares Own shares comprise 570,790 (2013: 617,290) 2.5p ordinary shares in the Company acquired at a weighted average cost of £0.57 (2013: £0.25) each held by the employee trusts. The market value of these shares at 31 December 2014 was £518,000 (2013: £725,000). Options over these shares have been granted to employees, exercisable at prices ranging from nil to 2.5p per share. The 570,790 (2013: 617,290) shares over which options remain exercisable relate to three year options which may not be exercised unless the performance criteria are met. These criteria are set out in note 25. Dividends on the shares owned by the employee trusts, the purchase of which was funded by interest free loans to the Trust from KBC Advanced Technologies plc, are waived. All expenses incurred by the Trust are settled directly by KBC Advanced Technologies plc and are charged in the accounts as incurred. Retained earnings Share-based payments The balance classified as share-based payments comprises the accumulated IFRS 2 fair value charge. Foreign exchange reserve The foreign exchange reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. 27. Capital commitments At 31 December 2014 the Group had no capital commitments (2013: £nil). 28. Contingent liabilities Performance guarantees Bank-backed performance guarantees given to third parties as at 31 December 2014 in respect of Group companies are detailed below: At 31 December 2014 UK Tender bonds £000 Advance payment and performance guarantees £000 Total £000 Cash cover £000 66 6,996 7,062 5 Singapore — 120 120 120 Total 66 7,116 7,182 125 The Directors consider that given the history of non-drawing on any guarantee that these guarantees will not be called upon in the future. KBC Advanced Technologies plc Annual report 2014 55 NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 28. Contingent liabilities continued Performance guarantees continued For those guarantees which are secured by cash, the use of the cash is restricted by the terms of the guarantees. At 31 December 2013 Tender bonds £000 Advance payment and performance guarantees £000 Total £000 Cash cover £000 63 3,544 3,607 5 UK Singapore Total 6 89 95 95 69 3,633 3,702 100 29. Pensions The Group contributes to defined contribution pension schemes for its Directors and employees. The assets of the schemes are held separately from those of the Group in independently administered funds. Amount recognised as an expense 2014 £000 2013 £000 1,782 1,667 30. Other related party transactions Other than compensation of key management personnel disclosed in note 8 there are no transactions with other related parties. Full details of Directors’ emoluments are given in the Remuneration Committee report on page 25. There were no other transactions with Directors of the Company. 56 KBC Advanced Technologies plc Annual report 2014 COMPANY BALANCE SHEET OVERVIEW AS AT 31 DECEMBER 2014 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Note 2014 £000 2013 £000 Intangible assets 34 3,080 2,827 Investments 35 40,924 27,822 44,004 30,649 20,632 13,591 824 366 Fixed assets Current assets Debtors 36 Cash and cash equivalents Creditors: amounts falling due within one year 37 21,456 13,957 (7,208) (10,214) Net current assets 14,248 3,743 Total assets less current liabilities 58,252 34,392 — (600) 58,252 33,792 Creditors: amounts falling due after one year Net assets Capital and reserves 38/39 2,044 1,479 Share premium account 39 32,044 9,437 Capital redemption account 39 113 113 Merger reserve 39 2,134 Reserve for own shares 39 Profit and loss account 39 Called up share capital Shareholders’ funds 929 (173) (518) 22,435 22,007 58,252 33,792 The financial statements on pages 57 to 61 were approved and authorised for issue by the Board of Directors on 17 March 2015 and were signed on its behalf by: Ian Godden Andrew Howell DirectorDirector KBC Advanced Technologies plc Annual report 2014 57 NOTES TO THE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 31. Accounting policies Basis of preparation The financial statements have been prepared under the historical cost convention as modified for certain items which have been measured at fair value, namely financial instruments, and in accordance with UK applicable accounting standards. No profit and loss account is presented for KBC Advanced Technologies plc, as permitted by Section 408 of the Companies Act 2006. Deferred tax Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax with the following exceptions: »» p rovision is made for tax on gains arising from gains on disposal of fixed assets that have been rolled over into replacement assets, only to the extent that at the balance sheet date there is a binding agreement to dispose of the assets concerned. However, no provision is made where, on the basis of all available evidence at the balance sheet date, it is more likely than not that the taxable gain will be rolled over into replacement assets and charged to tax only if the replacement assets are sold; »» p rovision is made for deferred tax that would arise on remittance of the retained earnings of overseas subsidiaries only to the extent that at the balance sheet date dividends have been accrued as receivable; and »» d eferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Foreign currencies Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the profit and loss account. Research and development Research costs are expensed as incurred. Development expenditure incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured and technical feasibility and commercial viability can be demonstrated. Where these criteria are not met the expenditure is expensed to the income statement. Following the initial recognition of development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure carried forward is amortised over the period of expected future sales from the related project. The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use or more frequently when an indicator of impairment arises during the reporting year indicating that the carrying value may not be recoverable. The technical and market uncertainties inherent in the development of new products mean that internal development costs will not be capitalised as intangible fixed assets until commercial viability of a project is demonstrable and there is probable economic benefit. Expenditure on product maintenance and support is expensed as incurred. Receivables Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available for sale. Such assets are carried at amortised cost. Related party transactions The Company has taken advantage of the exemption granted by FRS 8 from disclosing related party transactions with entities that are wholly owned by KBC Advanced Technologies plc. Investments Investments in subsidiaries are recorded at cost less provision for impairment. 58 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 31. Accounting policies continued Intangible assets Intangible assets are carried at cost less accumulated amortisation and accumulated impairment loss. Amortisation is provided on all intangibles at rates calculated to write off the cost of each asset over its expected useful life for a period of up to ten years as follows: Intellectual property Five to six years Capitalised development expenditure One to five years Own shares Own shares are recorded at cost. Options over some of these shares have been granted to employees of Group subsidiaries. 32. Profit attributable to members of the parent company The profit dealt with in the financial statements of the parent company was £381,000 (2013: £4,466,000). 33. Directors’ emoluments Full details of Directors’ emoluments are given in the Remuneration Committee report on page 25. The parent company has no employees excluding Directors (2013: nil). 34. Intangible fixed assets Intellectual property rights £000 Development £000 Total £000 1,835 6,370 8,205 — 1,552 1,552 1,835 7,922 9,757 1,835 3,543 5,378 Cost At 1 January 2014 Additions At 31 December 2014 Accumulated amortisation At 1 January 2014 Amortisation charge for the year At 31 December 2014 — 1,299 1,299 1,835 4,842 6,677 Net book value at 31 December 2014 — 3,080 3,080 Net book value at 31 December 2013 — 2,827 2,827 35. Investments 2014 £000 2013 £000 Cost and net book value at 1 January 27,822 27,057 Additions 12,512 235 590 530 40,924 27,822 Subsidiary undertakings: Capital contribution At 31 December In line with UITF 44 an investment of £590,000 (2013: £530,000) has been recognised in relation to the capital contribution made by the Company to its subsidiaries. KBC Advanced Technologies plc Annual report 2014 59 NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 35. Investments continued The Company directly holds equity in the following principal subsidiary undertakings: Proportion of voting rights and direct equity interest Name of subsidiary Country of registration (or incorporation) and operation 2014 2013 KBC Process Technology Limited England 100% 100% KBC Advanced Technologies, Inc. USA 100% 100% KBC Advanced Technology Pte Limited Singapore 100% 100% Infochem Computer Services Limited England 100% 100% KBC Advanced Technologies Sdn Bhd Malaysia 90% 90% KBC Advanced Technologies SL Spain 100% 100% KBC Advanced Technologies Pty Limited Australia 100% — FEESA Limited England 100% — KBC Advanced Technologies (Thailand) Limited Thailand 98% — The nature of business of these subsidiaries is consulting and technology services to the oil industry and other process industries. On 16 January 2013, the minority interest of 25% in KBC Environmental Limited was acquired at a cost of £137,000. 36. Debtors Amounts owed by subsidiary undertakings Other debtors and prepayments 2014 £000 2013 £000 20,310 13,575 322 16 20,632 13,591 Amounts owed by subsidiary undertakings are not considered to be impaired and are recoverable within six months. There has been no history of default by any subsidiary undertaking. 37. Creditors Amounts falling due within one year 2014 £000 2013 £000 Trade creditors 157 141 6,284 5,091 Amounts owed to subsidiary undertakings Revolving credit facility — 2,000 Bank loan – secured (see note 20) — 2,400 Current corporation tax 184 261 Deferred tax liability 498 155 Other creditors and accruals Amounts falling due after one year Bank loan – secured (see note 20) 60 KBC Advanced Technologies plc Annual report 2014 85 166 7,208 10,214 2014 £000 2013 £000 — 600 OVERVIEW STRATEGIC REPORT GOVERNANCE 38. Share capital FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 2014 Number 2013 Number 2014 £000 2013 £000 – at 1 January 59,155,380 58,826,414 1,479 1,470 – issued for cash 20,869,565 — 522 — 1,000,000 — 25 — 726,608 328,966 18 9 81,751,553 59,155,380 2,044 1,479 Issued and fully paid Ordinary shares of 2.5p each: – issued as consideration – issued on exercise of share options At 31 December Options to subscribe for new ordinary shares of 2.5p each, including LTIP awards and those noted in the Remuneration Committee report, at 31 December 2014 are as follows: Date granted Options outstanding Exercise price pence Exercise period June 2013 1,108,348 2.5 December 2014 – June 2023 October 2013 June 2014 75,000 2.5 October 2014 – September 2023 1,076,500 2.5 June 2017 – June 2024 249,999 2.5 October 2017 – October 2024 50,000 2.5 November 2017 – November 2024 October 2014 November 2014 2,559,847 39. Movements on reserves Profit and loss account £000 Total £000 (172) 17,011 28,721 — — 4,466 4,466 — — — 530 530 — — (1) — 75 113 929 (173) 22,007 33,792 — — — 381 381 Share capital £000 Share premium £000 Capital redemption reserve £000 Merger reserve £000 At 1 January 2013 1,470 9,370 113 929 Profit for the year — — — Share-based payments — — 9 67 At 1 January 2014 1,479 9,437 Profit for the year — — Shares issued Share-based payments Own shares £000 — — — — — 700 700 540 22,607 — — — — 23,147 Shares issued in business combination 25 — — 1,205 — — 1,230 Share buyback — — — — (196) — (196) Movement in own shares — — — — (149) 149 — Shares issued for cash, net of transaction costs Dividends At 31 December 2014 — — — — 2,044 32,044 113 2,134 — (518) (802) (802) 22,435 58,252 40. Contingent liabilities The Group’s bankers hold a cross-guarantee and debenture over all assets of KBC Advanced Technologies plc, KBC Process Technology Limited, KBC Environmental Limited, Infochem Computer Services Limited, KBC Advanced Technologies SL, KBC Advanced Technologies Inc, KBC Advanced Technology Pte Limited, KBC Advanced Technologies Canada Limited and KBC Advanced Technologies Sdn Bhd. This is in place as security for the overdraft, guarantee and forward exchange facility. 41. Capital commitments At 31 December 2014 and 2013 the Company had no capital commitments. KBC Advanced Technologies plc Annual report 2014 61 NOTICE OF THE ANNUAL GENERAL MEETING FOR THE YEAR ENDED 31 DECEMBER 2014 Notice is hereby given that the Annual General Meeting of KBC Advanced Technologies plc (the “Company”) will be held at Weber Shandwick, 2 Waterhouse Square, 140 Holborn, London EC1N 2AE at 3.00 pm on Wednesday 17 June 2015 for the purpose of transacting the following business: Ordinary business 1.To receive the audited financial statements of the Company for the year ended 31 December 2014 and the Directors’ and Auditors’ reports thereon. 2. To re-appoint BDO LLP as the Company’s auditors and to authorise the Directors to fix their remuneration. 3. To re-elect Ian Adam Godden as a Director of the Company. 4. To re-elect Oliver Rupert Andrew Scott as a Director of the Company. 5.To declare a final dividend for the year ended 31 December 2014 of 1.1p per Ordinary share payable on 22 July 2015 to the holders of Ordinary shares of the Company whose names appear on the register of members of the Company at the close of business on 10 July 2015. Special business To consider and, if thought fit, to pass the following resolutions which will be proposed, in the case of Resolution 6, as an ordinary resolution and, in the case of Resolutions 7 and 8, as special resolutions of the Company: 6. That the Directors be generally and unconditionally authorised pursuant to Section 551 of the Companies Act 2006 (the “Act”) to allot: (a)relevant securities (within the meaning of Section 551 of the Act) up to an aggregate nominal amount of £685,027 representing a number of Ordinary shares of 2.5p each (the “Shares”) equivalent to approximately one third of the issued share capital of the Company at the date of this Notice; and (b)equity securities (within the meaning of Section 560 of the Act) up to an aggregate nominal amount of £1,370,055 representing a number of Shares equivalent to approximately two thirds of the issued share capital of the Company at the date of this Notice (such an amount to be reduced by the aggregate nominal amount of relevant securities issued under paragraph (a) above), in connection with a rights issue to holders of Shares in proportion (as nearly as may be) to their holdings of such shares and so that the Directors may impose such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with equity securities representing fractional entitlements and with legal or practical problems under the laws of, or the requirements of, any regulatory body or any stock exchange in any territory or otherwise. The authorities referred to in this Resolution 6 shall be in substitution for all other existing authorities dealing with the subject matter of this Resolution 6 and shall expire (unless previously revoked or varied by the Company in general meeting) at the earlier of the conclusion of the Annual General Meeting of the Company to be held in 2016 and 30 June 2016. The Company may before such expiry make offers or agreements which would or might require such securities to be allotted after the expiry of the authority and the Directors are hereby authorised to allot such securities in pursuance of such offers or agreements as if the authority conferred hereby had not expired. This authority shall replace all existing authorities conferred on the Directors in respect of the allotment of such securities to the extent that the same have not been previously utilised. 7.That the Directors, pursuant to Section 570 of the Act, be empowered to allot equity securities (within the meaning of Section 560 of the Act) for cash pursuant to the authority conferred by Resolution 6 as if Section 561(1) of the Act did not apply to any such allotment, provided that this power shall be limited to: (a)the allotment of equity securities where such securities have been offered (whether by way of a rights issue, open offer or otherwise but in the case of the authority granted under paragraph (b) of Resolution 6 by way of rights issue only) to holders of Shares in proportion (as nearly as may be) to their holdings of Shares and so that the Directors may impose such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with equity securities representing fractional entitlements and with legal or practical problems under the laws of, or the requirements of, any regulatory body or any stock exchange in any territory or otherwise; and (b)the allotment of equity securities pursuant to the authority granted by paragraph (a) of Resolution 6 (other than pursuant to paragraph (a) of this Resolution 7) of equity securities (i) arising from the exercise of options outstanding at the date of this Resolution 7 and (ii) up to an aggregate nominal value of £205,528 or 10% of the issued share capital of the Company, whichever is the higher, and this power shall expire (unless previously revoked or varied by special resolution of the Company in general meeting) at the earlier of the conclusion of the Annual General Meeting of the Company to be held in 2016 and 30 June 2016. The Company may before such expiry make offers or agreements which would or might require equity securities to be allotted after the expiry of the authority and the Directors are hereby authorised to allot equity securities in pursuance of such offers or agreements as if the authority conferred hereby had not expired. This authority shall replace all existing authorities conferred on the Directors in respect of the allotment of relevant securities to the extent that the same have not been previously utilised. 62 KBC Advanced Technologies plc Annual report 2014 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Special business continued 8.That the Company be and is generally and unconditionally authorised to make market purchases, within the meaning of Section 693 of the Act, of Shares provided that: (a) the maximum aggregate number of Shares which may be purchased under this authority is 12,331,731 Shares; (b) the minimum price, exclusive of expenses, which may be paid for each Share is 2.5p; (c)the maximum price, exclusive of expenses, which may be paid for each Share shall be an amount equal to 105% of the average of the middle market quotations for the Shares taken from the listing of the AIM market of London Stock Exchange plc over the five business days immediately preceding the day on which the Shares are contracted to be purchased; (d)the authority to purchase conferred by this Resolution 8 shall expire at the earlier of the conclusion of the Annual General Meeting of the Company to be held in 2016 and 30 June 2016, unless the authority is extended before then by a resolution of the Company in general meeting; and (e)the Company may make a contract to purchase Shares under this authority before its expiry which would or might be executed wholly or partly after such expiry and in any such case the Company may make such a purchase under the contract after the expiry of this authority. By order of the Board Janet Ireland Company Secretary 17 March 2015 Registered Office 42–50 Hersham Road Walton on Thames KT12 1RZ Notes 1.A member entitled to attend and vote at the Annual General Meeting (“AGM”) convened by the Notice above is entitled to appoint one or more proxies to exercise all and any of his rights to attend, speak and vote in his place. You may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares and each such form of proxy shall specify the shares in respect of which each proxy is appointed. You may not appoint more than one proxy to exercise rights attached to any one share. A proxy need not be a member of the Company. Forms for the appointment of a proxy that can be used for this purpose have been provided to members with this Notice of Meeting. 2.To be valid, forms of proxy must be lodged with Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZY not later than 3.00 pm on Monday 15 June 2015. If the AGM is adjourned, the proxy must be received at the above address not less than 48 hours before the time of the adjourned AGM. In the case of a poll taken more than 48 hours after it was demanded, the proxy must be received at the above address not less than 24 hours before the time appointed for the taking of the poll. In the case of a poll taken not more than 48 hours after it was demanded, the proxy must be received at the above address at the time at which the poll was demanded. 3. Completion of a form of proxy does not prevent a holder of shares from attending and voting at the AGM should he or she so wish. 4.In order to have the right to attend and/or vote at the AGM, a person must be registered on the register of members of the Company not later than 6.00 pm on Monday 15 June 2015 or, in the case of an adjournment of the AGM, at the time which is 48 hours before the time appointed for the adjourned meeting. Changes to entries in the register of members of the Company after 6.00 pm on Monday 15 June 2015 shall be disregarded in determining the rights of any person to attend and/or vote at the AGM. 5.To appoint one or more proxies or to give an instruction to a proxy (whether previously appointed or otherwise) via the CREST system, CREST messages must be received by the issuer’s agent (ID number 3RA50) not later than 48 hours before the time appointed for holding the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp generated by the CREST system) from which the issuer’s agent is able to retrieve the message. The Company may treat as invalid a proxy appointment sent by CREST in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 6. In order to facilitate voting by corporate representatives at the AGM, arrangements will be put in place at the AGM so that: (a)if a corporate member has appointed the Chairman of the meeting as its corporate representative with instructions to vote on a poll in accordance with the directions of all the other corporate representatives for that member at the AGM, then, on a poll, those corporate representatives will give voting directions to the Chairman and the Chairman will vote (or withhold a vote) as corporate representative in accordance with those directions; and (b)if more than one corporate representative for the same corporate member attends the AGM but the corporate member has not appointed the Chairman of the meeting as its corporate representative, a designated corporate representative will be nominated from those corporate representatives who attend who will vote on a poll and the other corporate representatives will give voting directions to that designated corporate representative. A corporation which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers as a member provided that no more than one corporate representative exercises powers over the same share. 7.Copies of the contracts of the Directors with the Company and/or its subsidiaries are available for inspection at the registered office of the Company during normal business hours on any weekday (except Saturdays and public holidays). KBC Advanced Technologies plc Annual report 2014 63 NOTICE OF THE ANNUAL GENERAL MEETING CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2014 Explanation of Resolution 3 Following formal performance evaluation, Ian Godden continues to be an effective Director and Chairman and demonstrates commitment to the role. Mr Godden’s biographical details are set out on page 16. Explanation of Resolution 4 Following formal performance evaluation, Oliver Scott continues to be an effective Non-Executive Director and demonstrates commitment to the role. Mr Scott’s biographical details are set out on page 16. Explanation of Resolution 6 The Directors wish to renew at the forthcoming AGM the authority and power which were granted to them at the AGM held on 4 June 2014. Such authority and power are normally given on an annual basis to the Directors of a company that has its shares traded on AIM. The Act provides that the Directors may not issue new shares unless authorised to do so by the shareholders. In Resolution 6 authority is being sought to issue new Shares up to a maximum aggregate nominal amount of £685,027, representing a number of Shares equivalent to approximately one third of the issued share capital of the Company at the date of this Notice. Such authority will (except in relation to commitments which have been made but not fulfilled) lapse on 30 June 2016 or, if earlier, at the conclusion of the AGM of the Company to be held in 2016. In 2008 the Association of British Insurers (“ABI”) issued new guidance on the approval of authorities to allot shares in which it stated that, in addition to requests for authorisation to allot new shares in an amount up to one third of the existing issued ordinary share capital of a company, it would regard as routine requests to authorise the allotment of a further one third in connection with a rights issue. In light of this, paragraph (b) of Resolution 6 proposes that a further authority be conferred on the Directors to allot unissued Ordinary shares in connection with a rights issue in favour of holders of equity securities up to a maximum aggregate nominal amount of £1,370,055 (such amount to be reduced by the nominal amount of any relevant securities issued under the authority conferred by paragraph (a) of Resolution 6). The granting of this authority will ensure that the Directors are able to maintain a degree of flexibility for the issue of Shares without the need to obtain shareholders’ consent on each occasion. The Directors have no present intention to exercise this authority except in connection with the Company’s employee share incentive schemes. In the event that this further authority is exercised, the Directors intend to follow emerging best practice as regards its use (including as to the requirement for Directors to stand for re-election) as recommended by the ABI. Explanation of Resolution 7 If new Shares are to be allotted for cash, Section 561(1) of the Act requires the new Shares to be offered first to the existing holders of Shares on a proportionate basis. Resolution 7, which will be proposed as a special resolution, is in accordance with normal practice and, if passed, will give the Directors the power to allot Shares for cash without first offering those Shares to existing shareholders. This power will allow the Directors to implement rights issues, open offers or other similar such issues of Shares without complying fully with the pre-emption requirements of the Act, which can prove unduly burdensome in certain circumstances (for example, in the case of shareholders resident in certain overseas countries). Power is also being sought to enable the Directors to issue Shares for cash otherwise than on a pre-emptive basis in relation to outstanding share options and otherwise for new Shares up to an aggregate nominal amount of £205,528 which represents a number of Shares approximately equal to 10% of the Company’s issued share capital at the date of this Notice. If given, the power contained in this special resolution will (except in relation to commitments which have been made but not fulfilled) lapse on 30 June 2016 or, if earlier, at the conclusion of the AGM of the Company to be held in 2016. Explanation of Resolution 8 This Resolution, which will be proposed as a special resolution, will grant authority to the Company to purchase its Shares in the market up to a limit of 12,331,731 Shares, representing approximately 15% of the issued shares at the date of this Notice. The minimum and maximum prices to be paid for the Shares are detailed in this Resolution and the authority will (except in relation to commitments which have been made but not fulfilled) lapse on 30 June 2016 or, if earlier, at the conclusion of the AGM of the Company to be held in 2016. Although the Directors do not currently intend to exercise the authority being sought to make specific purchases of any Shares, they consider it to be beneficial to have the flexibility of such an authority to make purchases within the terms of the Resolution. The Directors would carefully consider any exercise of the authority being sought and would only make purchases provided that due consideration had been given to the overall financial position of the Company and if it was in the best interests of shareholders generally. Shareholders would be advised immediately after any repurchase of Shares as to whether such Shares had been cancelled or were held in treasury. As at 6 March 2015 options over 2,921,799 Shares were outstanding under the Company’s share option schemes, representing 3.55% of the Company’s issued share capital at that date. If the authority being sought by the Company to purchase its Shares were to be exercised in full, such options would represent 4.18% of the Company’s issued share capital at 6 March 2015. The performance targets of the share option schemes would be adjusted automatically in the event of any change in the Company’s capital structure. 64 KBC Advanced Technologies plc Annual report 2014 OVERVIEW FIVE-YEAR SUMMARY STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 2010 £000 2011 £000 2012 £000 2013 £000 2014 £000 39,248 42,733 44,320 47,229 54,973 Revenue – software 13,813 12,992 18,820 17,851 20,981 Revenue – total 53,061 55,725 63,140 65,080 75,954 3,776 5,011 3,860 7,389 7,163 (128) (81) (197) (268) Profit before tax 3,648 4,930 3,663 7,121 6,671 Adjusted operating profit 5,016 5,969 5,986 8,674 9,988 (128) (81) (197) (268) 4,888 5,888 5,789 8,406 9,496 4.0p 5.9p 9.5p 5.7p Revenue – consulting Operating profit Net interest Net interest Adjusted profit before tax EPS – basic EPS – diluted Contracted work Cash and cash equivalents as cash flow statement Borrowings 4.0p 5.9p 58,700 48,709 4,506 5,815 — — (2.9)p (2.9)p (492) (492) 9.2p 5.5p 78,203 87,987 6,384 9,931 11,023 (5,400) (3,000) — 82,864 SHAREHOLDER INFORMATION Company Secretary Janet Ireland Principal solicitors Shoosmiths Apex Plaza Forbury Road Reading RG1 1SH Registered office 42–50 Hersham Road Walton on Thames KT12 1RZ Nominated advisor and broker Cenkos Securities plc 6.7.8. Tokenhouse Yard London EC2R 7AS Registered number 01357958 Auditors BDO LLP 2 City Place Beehive Ring Road Gatwick RH6 0PA Principal bankers HSBC Bank plc HBEU City of London Corporate Banking Centre First Floor 60 Queen Victoria Street London EC4N 4TR Registrars Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS13 8AE Key dates Preliminary announcement of results Annual General Meeting Half year results (not confirmed) The Group’s commitment to environmental issues is reflected in this Annual Report which has been printed on Chorus Silk, made from FSC® using certified materials. The report was printed in the UK by environmental printing technology, and vegetable-based inks were used ® throughout. Pureprint is a CarbonNeutral company. Both the manufacturing mill and the printer are registered to the Environmental Management System ISO14001 and are Forest Stewardship Council ® (FSC) chain-of-custody certified. The unavoidable carbon emissions generated during the manufacture and delivery of this document have been reduced to net zero through a verified carbon offsetting project. 17 March 2015 17 June 2015 22 September 2015 KBC Advanced Technologies plc Annual report 2014 EUROPE, MIDDLE EAST AND NORTH AFRICA KBC OFFICES KBC Advanced Technologies plc 42–50 Hersham Road Walton on Thames KT12 1RZ UK Tel: +44 (0)1932 242 424 Email: [email protected] Website: www.kbcat.com KBC Process Technology Ltd 42–50 Hersham Road Walton on Thames KT12 1RZ UK Tel: +44 (0)1932 242 424 KBC Advanced Technologies S.L. Avenida Diagonal, 613 4B 08028 Barcelona Spain Tel: +34 (0)93 548 5000 KBC Process Technology Ltd 4 Cheshire Avenue Lostock Gralam Northwich CW9 7UA UK Tel: +44 (0)1606 815 100 KBC Process Technology Ltd Representative office in Russia 47 Bldg. 2, Office 302 Leningradskiy Prospekt 125167 Moscow Russia Tel: +7 495 980 8449 KBC Process Technology Ltd 93 Great Suffolk Street London SE1 0BX UK Tel: +44 (0)20 7357 0800 KBC Process Technology Ltd Westmead House Farnborough GU14 7LP UK Tel: +44 (0)1252 372 321 KBC Process Technology (Middle East) Ltd Abu Dhabi branch Office No 201 E, 2nd Floor Incubator Building P.O. Box 135079, Masdar City Abu Dhabi United Arab Emirates Tel: + 971 2 508 7300 KBC Process Technology Ltd Netherlands Branch Willemstraat 26 4811 AL Breda Netherlands Tel: +31 (0)76 531 6131 KBC Process Technology Ltd Bahrain branch Office 1144, Al Nakheel Tower 11th Floor, Bldg 1074 Road 3622, Block 436 Seef District, Manama Kingdom of Bahrain Tel: + 973 1365 0087 AMERICAS ASIA-PACIFIC KBC Advanced Technologies, Inc. 15021 Katy Freeway Suite 600 Houston, TX 77094 USA Tel: +1 281 293 8200 KBC Advanced Technology Pte Ltd 435 Orchard Road #16-02/03 Wisma Atria Singapore 238877 Tel: +65 6735 5488 KBC Advanced Technologies, Inc. 4 Campus Drive 2nd Floor South Parsippany, NJ 07054 USA Tel: +1 973 889 8922 KBC Advanced Technologies, Inc. 3131 South Vaughn Way Suite 300 Aurora, CO 80014 USA Tel: +1 303 368 0300 KBC Advanced Technologies Canada Ltd Suite 314 333 11th Avenue SW Calgary Alberta T2R 1L9 Canada Tel: +1 403 206 1533 KBC Advanced Technologies (Beijing) Co Ltd 1903 Tower A China International Science & Technology Convention Center No. 12 Yumin Road Chaoyang District Beijing 100029 People’s Republic of China Tel: +86 (0)10 8225 3838 KBC Advanced Technologies Sdn Bhd Level 15 Menara Darussalam No.12 Jalan Pinang 50450 Kuala Lumpur Malaysia Tel: +60 (3)2178 6344 KBC Advanced Technologies Private Ltd C-Wing, Unit No.304 Delphi CHS Hiranandani Gardens Powai, Mumbai 400076 India Tel: +91 (0)22 6156 1700 KBC Process Technology Ltd Japan Branch Nishi-Shimbashi YS Bldg 5F 2–19–2 Nishi-Shimbashi Minato-ku Tokyo 105-0003 Japan Tel: +81 (0)3 5777 6550 KBC Advanced Technologies Pty Ltd Level 29, The Forrest Centre 221 St George’s Terrace Perth WA 6000 Australia Tel: +61 894 80 3784
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