Electronic Data Processing PLC. Annual Report and Accounts 30 September 2014

Transcription

1 2014 Electronic Data Processing PLC Annual Report and Accounts 30 September 2014

2 About EDP Electronic Data Processing PLC is a leading supplier of advanced technology Software Solutions. These include ERP solutions for the Merchanting/Wholesale Distribution Industry, e-business, application hosting and Sales Intelligence Solutions together with a comprehensive range of customer support and education services. Our values > We believe in conducting our business activities with integrity, building mutually beneficial long-term relationships with all our customers, providing the highest levels of professional service at every stage. > We are committed to delivering superior value in our products and services to our customers, on a continuing basis. > We respect the individuality of each member of our staff, fostering an environment where creativity and productivity are encouraged, valued and rewarded. > We are dedicated to creating value for shareholders by performing in a manner which will enhance return on investment. Electronic Data Processing PLC is incorporated in England and Wales under Registration Number Electronic Data Processing PLC annual report and accounts 2011

3 Key Highlights > Turnover 5.51 million (2013: 5.83 million) > First half revenues impacted by delays to a number of discrete customer orders; second half revenues were consistent with those experienced in the second half of the previous financial year > Contracted recurring revenues remain strong representing 80% of total revenue (2013: 77%) > Hosting revenues continue to increase and now represent 52% of total revenues (2013: 48%) demonstrating the success of our strategy to grow the hosting/cloud side of the business > Adjusted operating profit 553,000 (2013: 835,000) gives an operating margin of 10.0% (2013: 14.3%) > Pre-tax profit 401,000 (2013: 794,000) > Continuing commitment to R&D expenditure of 981,000 in the year (2013: 940,000) > Strong debt-free balance sheet; cash balances of 5.0 million at 30 September 2014 (2013: 5.7 million) will be used to further develop the business > 3p special interim dividend returned 379,000 to shareholders during the year > Final dividend maintained at 2.0p per share, making 5.0p for the full year (2013: 7.0p) > Future dividends will be reviewed according to acquisition opportunities and the overall cash position at the time. However, in view of the Company s relatively large cash balances and as reported at the half year results, it is the Board s current intention to pay an interim dividend of 2p per share and a final dividend of 3p per share in future years Strategic report Governance Financial statements Notice of meeting In this report Strategic report 1 Key Highlights 2 Chairman s Statement 3 Chief Executive s Statement 5 Key Performance Indicators 6 Principal Risks and Uncertainties 8 Environmental, Employee, Social, Community and Human Rights Matters Governance 9 Directors and Advisers 10 Directors Report 12 Corporate Governance 15 Audit Committee Report 16 Directors Remuneration Report 22 Statement of Directors Responsibilities Financial statements 23 Independent Auditor s Report 26 Consolidated Income Statement 26 Consolidated Statement of Comprehensive Income 27 Consolidated Balance Sheet 28 Consolidated Statement of Changes in Equity 29 Consolidated Cash Flow Statement 30 Notes to the Consolidated Financial Statements 47 Company Balance Sheet 48 Notes to the Company Financial Statements 56 Five Year Statistical Record Visit us online More information for investors, including reports, announcements and notices, at Electronic Data Processing PLC Annual Report and Accounts

4 Chairman s Statement Sir Michael Heller Summary Adjusted operating profit was 553,000, compared with 835,000, reflecting the reduced revenue in the first half Hosting revenues represented 52% of total revenues during the year under review. This is the first time they have exceeded half of our turnover The Board is proposing to maintain the final dividend at 2.0p per share giving a total for the year of 5.0p We have continued to move forwards our main products, Quantum VS and Vecta, in terms of their functionality, increasing R&D expenditure during the year to 981,000, up from 940,000 the previous year. Turnover for the year to 30 September 2014 was 5.51 million compared with 5.83 million the previous year. As we reported in May, sales during the first half of the year were impacted by delays to a number of discrete customer orders. However, sales in the second half returned to more normal levels in an environment which remains competitive. Adjusted operating profit was 553,000, compared with 835,000, reflecting the reduced revenue in the first half. This underlying cash-based measure of our performance excludes non-cash IFRS charges and credits and represents an operating margin of 10.0% (2013: 14.3%). Statutory pre-tax profit for the year was 401,000 (2013: 794,000). We have continued to move forwards our main products, Quantum VS and Vecta, in terms of their functionality, increasing R&D expenditure during the year to 981,000, up from 940,000 the previous year. Hosting revenues represented 52% of total revenues during the year under review. This is the first time they have exceeded half of our turnover. Contracted recurring revenues, which include annual software licence fees and hosting charges, amounted to 80% of total revenue compared with 77% in the previous year. We have previously reported that we had accepted an offer for our property in Milton Keynes which is surplus to requirements. Regrettably this sale is now looking unlikely to proceed. Whilst we are actively exploring other opportunities to dispose of this property it is appropriate to transfer it from current assets back into fixed assets. At 30 September 2014 it is included in the Group balance sheet at 1.39 million net of depreciation. We will report any further progress in due course. We have one further surplus freehold property in Sheffield which is also included in fixed assets in the Group balance sheet at 303,000 and which is currently being marketed for sale. Year-end cash balances were 5.0 million (2013: 5.7 million). This is after dividends paid during the year of 631,000. We continue to be interested in using our cash balances should opportunities to acquire similar software producing businesses arise. Net assets at 30 September 2014 were 5.3 million compared to 6.1 million. The difference principally reflects a 619,000 actuarial loss on the defined benefit pension scheme following a decrease in the discount rate used to value liabilities under IAS 19. This is explained more fully in the Chief Executive s Statement. The Board is proposing to maintain the final dividend at 2.0p per share giving a total for the year of 5.0p (2013: 7.0p). The total dividend paid to shareholders will therefore be 631,000. If approved by shareholders, the final dividend will be paid on 7 April 2015 to those shareholders on the register at 6 March The shares will be ex-dividend on 5 March We will review future dividends according to the acquisition opportunities that arise and our overall cash position at the time. However, in view of our relatively large cash balances and as reported at the time of our half year results, it is our current intention to pay an interim dividend of 2p per share and a final dividend of 3p per share in future years. I would like to thank all our members of staff and my colleagues on the Board for their contribution during the year. Whilst we expect to face a number of challenges in the coming year, which are addressed in the Chief Executive s Statement, we have made appropriate changes within the business in anticipation of this and I remain confident about the future. Sir Michael Heller Chairman 16 December Electronic Data Processing PLC Annual Report and Accounts 2014

5 Chief Executive s Statement Julian Wassell Summary Turnover in the first half was impacted by delays to a number of discrete customer orders during February and March. Second half revenues were consistent with those experienced in the second half of the previous financial year Contracted recurring revenues during the period under review represented 80% of our total revenues R&D expenditure increased to 981,000 from 940,000 Our cash balances at 30 September 2014 were 5.0 million (2013: 5.67 million) Our strategy is to deliver software solutions that offer clear business benefits, assisting our customers to generate sales growth or to create efficiencies and drive down costs in their business. Our turnover for the year to 30 September 2014 was 5.51 million, a 5% reduction from last year s 5.83 million. As we noted when we reported our interim results, turnover in the first half was impacted by delays to a number of discrete customer orders during February and March. Second half revenues were consistent with those experienced in the second half of the previous financial year. It is pleasing to note that the proportion of our revenues delivered through our hosting centre has exceeded 50% for the first time. This reflects our strategy to grow the hosting/cloud computing side of the business. The upgrade of our existing customers to Quantum VS, our latest ERP solution for distributors, has continued during the year under review. Pleasingly we have also signed a number of new business customers for Quantum. Whilst Quantum provides an excellent choice for the majority of the existing users of our legacy applications it is unrealistic to expect that all of them will migrate. We therefore expect to see higher churn of customers in coming years than has traditionally been the case. It is therefore important that we increase our new business sales efforts to address this. Accordingly we have recently strengthened our lead generation and new business sales teams. In common with many other software vendors, we continue to see a move away from upfront revenues towards stronger ongoing subscription revenues, particularly with Vecta, as the Cloud/SaaS business model continues to gain traction. Whilst the impact of this has again been modest during the year, we expect the trend to continue. We are continuing to see keen price competition in the markets for both Quantum VS and Vecta and it is important therefore that we continue to invest in R&D to ensure that our products remain attractive. During the year under review R&D expenditure increased to 981,000 from 940,000. We reported at the half year that one of our major customers acquired a competitor software business. They have recently completed their transition to that business s product which will impact our revenues in the current financial year by approximately 300,000. Whilst these factors combined will undoubtedly put some pressure on our revenues in the coming year, we have identified annual cost savings (after strengthening our new business sales team) within the business amounting to 200,000 which have already been implemented after the period end. These relate to personnel and property/establishment costs. We expect to achieve further annual cost savings of circa 75,000 in 12 to 24 months time as we reduce the property costs associated with operating our current satellite office locations. We will continue to manage our cost base prudently and seek opportunities to reduce costs wherever possible without affecting our ability to deliver our products and services to our customers. Business model Our business model revolves around supplying our software products under long-term contracts either in the form of traditional on-site licencing arrangements or cloud-based, hosted service level agreements. These long-term agreements provide us with good visibility of revenues from our existing customers for up to 5 years. Contracted recurring revenues during the period under review represented 80% of our total revenues. The rest of our revenues have traditionally been derived from our initial software licence fees, hosting joining fees and the provision of implementation, training and consultancy services. In addition, we supply a small amount of computer hardware and maintenance to certain customers which is generally low margin. Our business model is strong. We continue to manage our cost base prudently and monitor working capital carefully. Strategy Our strategy is to deliver software solutions that offer clear business benefits, assisting our customers to generate sales growth or to create efficiencies and drive down costs in their business. We have aimed to increase the number of customers who receive their software through the Cloud, and we have been doing so for 14 years from our hosting centre in Milton Keynes, thereby strengthening our commitment to our customers and vice versa. We have two main product groups software applications for distributors and merchants, where Quantum VS is our latest product; and Vecta, our award-winning CRM and Business Intelligence (BI) product. The products are complementary with many of our customers using both. Whilst Quantum focusses on a number of discrete sectors within distribution, Vecta has a wider target market across a broader range of verticals. Quantum VS provides the core of our customers business. The product and market are characterised by long relationships with customers but also lengthy sales cycles which typically, and in common with other suppliers of similar applications, can be over 12 months. Vecta balances this with much shorter sales cycles, sometimes measured in weeks, and shorter implementation times. Strategic report Governance Financial statements Notice of meeting Electronic Data Processing PLC Annual Report and Accounts

6 Chief Executive s Statement continued Julian Wassell We have significantly strengthened our development and product management resource during the year to further accelerate the delivery of new functionality. Quantum VS Quantum VS is a graphical software application focussed on a number of vertical markets within the distribution sector including: builders and timber merchants suppliers of fixings and fastenings industrial and security products electrical wholesalers food distributors Our strategy has been and remains to develop a single software application which provides: primarily, a clear upgrade path for our existing customers by bringing into this single product the key functionality from our established distribution applications Merchant, Charisma, Esprit and The Business Programme; a software application to exploit new business opportunities in the markets we address; and a platform for continued enhancements in functionality. We have significantly strengthened our development and product management resource during the year to further accelerate the delivery of new functionality. New functionality delivered during the year includes integrated telephony (TAPI), improved credit card handling, new signature pad functionality and the introduction of mega menus to improve navigation throughout the product. Quantum has also recently been released on an SQL database which will improve access to data and reporting capabilities. Looking ahead, in 2015 we will be releasing a new document scanning and archiving solution together with a completely new e-business solution for our customers. Vecta Vecta is a powerful, combined CRM and Business Intelligence (BI) product which assists businesses to drive sales. It is positioned between the major CRM products, which typically do not deliver sales analysis, and traditional BI tools. Our aim is to provide an essential tool that will fulfil all the CRM and sales intelligence requirements of a broad range of businesses without the need for a separate third-party CRM solution. Vecta is optimised for the latest internet browsers which facilitate its use on a wide range of devices whether desktop or mobile. Vecta is now exclusively delivered though the cloud. We have continued to add new features during the year and I am delighted to report that Vecta won the Software Innovation Solution of the Year and SME Solution of the Year categories at the industry renowned European IT & Software Excellence Awards for We have a major new release of Vecta planned for the first half of This will use the latest technologies to deliver an improved look and feel and provide a platform to ensure that Vecta remains an essential tool for our customers management and sales teams into the future. Hosting/cloud computing We have offered our customers the facility to have their software hosted at our own purpose-built facility in Milton Keynes for many years. This gives our customers a single IT provider for their software, hardware and operating system requirements. For the first time, hosting now represents more than half of our revenues, at 52% (2013: 48%). The number of hosted customers has also increased to 184 at 30 September 2014 from 172 a year earlier. The following graph illustrates the growth in recent years in the proportion of our revenues which are delivered in this way. Financial review Turnover for the year was 5.5 million compared with 5.8 million in the previous year. Revenues in the first and second halves were 2.6 million and 2.9 million respectively Hosted vs non-hosted revenues 100% 80% 60% 89% 84% 81% 77% (2013: 2.9 million and 2.9 million respectively). Recurring revenues increased to 80% of total revenues from 77% last year. Adjusted operating profit for the year was 553,000 compared with 835,000 last year. Our operating margin therefore was 10.0% compared with 14.3%. Adjusted operating profit is calculated after adding back a net charge of 198,000 (2013: 126,000) relating to a number of non-cash items which arise under IFRS, principally amortisation of intangible assets, defined benefit pension scheme charges and the capitalisation and amortisation of development costs. Statutory pre-tax profit was 401,000 compared to 794,000 last year. This reflects the impact of reduced turnover during the year together with a one-off IFRS charge of 60,000 resulting from our decision to close the defined benefit pension scheme to future accrual, and a 95,000 increase in the level of R&D charged in the income statement under IFRS. R&D expenditure, which relates principally to the continued enhancement of Quantum VS and Vecta, increased to 981,000 from 940,000 last year. Of this 79,000 (2013: 118,000) was capitalised as required by IAS 38. Amortisation of previously capitalised R&D amounted to 36,000 (2013: 21,000). The amount charged in the income statement in respect of the current year has therefore increased to 938,000 from 843,000 last year. As a result of lower interest rates available on our surplus cash balances our interest income during the year was 46,000 compared with 85,000 last year. The tax credit of 3,000 on pre-tax profit of 401,000 arises due to the receipt of additional tax relief on qualifying Research and Development expenditure. We expect 70% 66% 57% 52% 48% 40% 20% 0% 43% 48% 52% 30% 34% 11% 16% 19% 23% Hosted Non-hosted 4 Electronic Data Processing PLC Annual Report and Accounts 2014

7 Vecta won the Software Innovation Solution of the Year and SME Solution of the Year categories at the industry renowned European IT & Software Excellence Awards for to be able to continue to benefit from the Government s initiatives in this area in the coming year. Earnings per share was 3.21p or 3.16p on a fully diluted basis (2013: 4.68p and 4.63p). Cash balances at 30 September 2014 were 5.0 million (2013: 5.67 million). Operating cash flows were 336,000. In addition we received 48,000 in interest on our cash deposits. Dividends paid returned 631,000 to shareholders. Other significant cash outflows were 144,000 corporation tax and 176,000 of capital expenditure. Pension The liability relating to the Group s defined benefit pension scheme increased by 931,000 ( 745,000 net of deferred tax). The Group balance sheet reflects a gross liability in respect of this scheme of million ( million net of deferred tax). The increase in the liability arises mainly from an actuarial loss resulting from a significant reduction in the discount rate used to value the scheme liabilities. Under IAS 19 the discount rate is equivalent to the yield available on AA-rated corporate bonds. The most recent triennial actuarial valuation of the scheme at 31 July 2013 has recently been completed and this showed a small surplus on an ongoing funding basis. The defined benefit pension scheme comprises a grouped funding arrangement whose sole asset is a with-profits insurance policy backed by corporate bonds. Under the accounting rules prescribed by IAS 19 the scheme asset is valued at the insurance policy s discontinuance surrender value at the period end. This valuation does not take into account the guaranteed annuity rates which have been secured by the policy and which are included in the ongoing scheme funding valuation. We have previously reported that we were consulting with members regarding closing the scheme to future accrual. This was completed during the year effective from 31 August This closure to future accrual has given rise to a one-off curtailment charge in the income statement of 60,000. The three remaining affected members have transferred into our group money purchase pension scheme. As a result of the matters described above, net assets reduced to 5.34 million from 6.15 million. Net assets per share amounted to 42.4p (2013: 49.1p). Property In addition to the hosting centre in Milton Keynes we have two further freehold properties, both of which are surplus to operational requirements. We have previously reported that we had accepted an offer to sell one of these properties (which is in Milton Keynes) and, as a result, had categorised it in the Group balance sheet as an asset held for sale at its expected net sale proceeds of 1.42 million. Disappointingly, it now appears that the purchaser is unable to proceed with the transaction and accordingly we have transferred the property back into fixed assets in the Group balance sheet. At 30 September 2014 it is stated at 1.39 million net of depreciation. We are actively pursuing other opportunities to dispose of this property. In the short term we have let the property to a charitable organisation and, whilst this doesn t generate significant rental income, we are currently mitigating business rates of 52,000 per annum effective from July this year. An eventual disposal of this property will generate total annual cost savings of around 87,000. This includes, inter alia, the 52,000 business rates referred to above and 19,000 of depreciation. The remaining property, which is an industrial unit in Sheffield, is included in fixed assets at a value of 303,000. We have changed property agents during the year and continue to market the property. Annual cost savings of 35,000 (including 4,000 depreciation) would be achievable if we dispose of the property. Outlook We have a strong product and services offering, a robust business model and considerable financial strength which will enable us to meet the challenges we will face in the forthcoming year. Having strengthened our sales team we expect to be well positioned to take advantage of those new business opportunities which do arise. Finally, I would like to thank all of my colleagues throughout the business for their hard work and commitment during the year. Julian Wassell Chief Executive 16 December 2014 Key Performance Indicators The following financial KPIs are used by the Board to review the performance of the business: Level of software and service revenues Revenue from software and services reduced by 5% in FY14. Sales of software and services account for 97% of total Group revenues in FY14, with the remainder comprising low margin hardware sales and hardware maintenance. Adjusted operating profit margin Our adjusted operating margin was 10.0% in FY14 compared with 14.3% in FY13. Adjusted operating margin is calculated using operating profit excluding certain non-cash IFRS adjustments relating to amortisation of intangible assets, defined benefit pension scheme charges and capitalisation/amortisation of development costs. Level of contracted recurring revenues Recurring revenues represent 80% of total revenues in FY14 up from 77% in FY13. Recurring revenues underpin our business model and principally comprise contracted ongoing software licences and hosting fees. Level and growth of hosted revenues 52% of our revenues were delivered though our hosting centre in FY14 compared with 48% in FY13. Strategic report Governance Financial statements Notice of meeting Electronic Data Processing PLC Annual Report and Accounts

8 Principal Risks and Uncertainties We operate in a changing economic and technological environment that presents risks, many of which are driven by factors that we cannot control or predict. The key risks and uncertainties facing EDP and the measures taken to mitigate these risks are as follows: Risk Potential impact Mitigation Systems and networks EDP s business operations rely significantly on the efficient and uninterrupted operation of its information technology systems and networks. Any damage or interruption to EDP s networks, however caused, could have a material adverse effect on the delivery of our products and services. We continually review and test the security of internal systems and networks and have developed recovery plans in the event of systems disruption. Our computer network may be vulnerable to unauthorised access, viruses and other disruptive problems. A party that is able to override security measures could misappropriate proprietary information or cause disruption to our operations. Where reliance is placed upon externally provided systems and networks we undertake regular performance ability reviews and ensure that contracts provide for an appropriate level of service maintenance. Product technology advances The markets in which EDP operates are characterised by evolving technology, market practices and industry standards. Competitors could develop superior products or more cost-effective techniques which could render our products uncompetitive or less acceptable to the market. This could result in the loss of new revenue opportunities or the non-renewal of contracts by existing customers. We have an ongoing commitment to research and development which allows us to identify and adapt to any technological and market changes that do occur thereby ensuring that our products continue to meet the demands of our customers. During the year ended 30 September 2014 we strengthened our development and product management resource. External economic factors As with most other businesses in the UK, our operations can be adversely affected by a significant downturn in the economy. Restricted availability of finance for businesses and a stagnant or recessionary economy could have an adverse effect on the prospects for EDP, as potential customers, particularly in the builders and timber merchants sectors may scale back their IT plans in response to funding difficulties and/or reduced prospects for their businesses. We seek to ensure that a significant proportion of our revenues are derived from long-term contracts with our customers, that our products appeal to businesses operating in a range of business sectors and that payments for our recurring fees are received annually in advance. 6 Electronic Data Processing PLC Annual Report and Accounts 2014

9 Competitor activity Key employees Risk Potential impact Mitigation EDP operates in a competitive environment. In common with all people based businesses, our success will, to a significant extent, be dependent on the experience of the Board and senior management. The retention of the services of EDP s key employees cannot be guaranteed. New entrants to our marketplace and actions taken by existing competitors could have an impact on our levels of business activity and product pricing in the market generally. The loss of key employees could have a material adverse effect on EDP. The failure to retain and develop key technical skills and product knowledge could hinder EDP s future prospects. We endeavour to provide excellent customer support together with high quality products at a competitive price in order to develop and protect strong customer relationships. We are continually focused on the need to recruit, retain, reward and motivate staff with the appropriate skills. Strategic report Governance Financial statements Notice of meeting Electronic Data Processing PLC Annual Report and Accounts

10 Environmental, Employee, Social, Community and Human Rights Matters Environmental information The Group s operations, which are principally software development and hosting, by their nature have a minimal impact on the environment. Nevertheless, the Group is committed to minimising the impact of its activities on the environment through initiatives such as the provision of fuel-efficient cars to company car drivers and encouraging waste recycling at Group locations. Greenhouse gas emissions During the year ended 30 September 2014 the Group purchased 599,000 kwh (2013: 603,000 kwh) of electricity, the majority of which was used at the Group s hosting centre in Milton Keynes. Using the 2014 conversion factor for grid electricity published by Defra this equated to 296 tonnes (2013: 269 tonnes) of carbon dioxide equivalent emitted. This equated to approximately 4.4 tonnes (2013: 3.84 tonnes) per Group employee. The Group also operates a fleet of 26 cars. During the year ended 30 September 2014 the total carbon dioxide equivalent emitted by the vehicles, calculated from the manufacturers emissions rating for each car, was 107 tonnes (2013: 110 tonnes). This equated to an average of 4.1 tonnes per vehicle (2013: 4.2 tonnes). Employee information At the end of the financial year, the Group employed 67 people. This figure includes 5 Executive and 2 Non-Executive Directors, all of whom are male. There are 4 senior managers, three of whom are male and one female. Of the remaining 56 employees, 40 are male and 16 are female. Employee, social, community and human rights Our company values are long established having been set out at the head of our annual report for many years. They are set out below: We believe in conducting our business activities with integrity, building mutually beneficial long-term relationships with all our customers, providing the highest levels of professional service at every stage. We are committed to delivering superior value in our products and services to our customers, on a continuing basis. We respect the individuality of each member of our staff fostering an environment where creativity and productivity are encouraged, valued and rewarded. We are dedicated to creating value for shareholders by performing in a manner which will enhance return on investment. The Group does not have any other significant environmental, employee, social, community or human rights issues. Approval of Strategic Report The Strategic Report on pages 1 to 8 was approved by the Board on 16 December Julian Wassell Chief Executive 8 Electronic Data Processing PLC Annual Report and Accounts 2014

11 Directors and Advisers Directors Sir Michael Heller Chairman, Non-Executive J. H. Wassell Chief Executive P. A. Davey Sales P. J. Davies Application Software Products A. R. Heller Non-Executive C. R. Spicer Network Services Financial advisers BDO LLP Corporate Finance 125 Colmore Row Birmingham B3 3SD Stockbrokers Westhouse Securities Ltd Heron Tower 110 Bishopsgate London EC2N 4AY Financial Calendar Annual General Meeting 24 March 2015 Interim results May 2015 Strategic report Governance Financial statements J. M. Storey Finance Secretary J. M. Storey Registered office 4th Floor, Fountain Precinct Balm Green Sheffield S1 2JA Auditor KPMG LLP Chartered Accountants 1 The Embankment Neville Street Leeds LS1 4DW Bankers HSBC Bank plc Carmel House Fargate Sheffield S1 2HD Registrars and transfer office Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone (calls cost 10p per minute + network extras, lines are open 8.30am 5.30pm Mon Fri) for overseas callers Website shareholderenquiries@capita.co.uk Notice of meeting Solicitors Irwin Mitchell LLP Riverside East 2 Millsands Sheffield S3 8DT Wake Smith LLP 68 Clarkehouse Road Sheffield S10 2LJ Electronic Data Processing PLC Annual Report and Accounts

12 Directors Report The Directors present their annual report and financial statements for the year ended 30 September Future developments and going concern An indication of future developments in the Group s business is given in the Strategic Report and is incorporated in this Directors Report by reference. A review of the impact of the current economic environment on the going concern assumption is given in the Corporate Governance Report. Financial statements and results The Group financial statements for the period under review have been prepared under International Financial Reporting Standards as adopted by the EU. The Parent Company financial statements have been prepared under UK GAAP. The Group income statement for the year to 30 September 2014 is shown on page 26. The Group profit for the year before taxation amounted to 401,000 (2013: 794,000), with turnover of 5,508,000 (2013: 5,827,000). After a tax credit of 3,000 (2013: charge of 207,000), the profit for the year attributable to equity shareholders was 404,000 (2013: 587,000). Dividends A special interim dividend of 3.0p per share was paid on 1 August The Directors propose the payment of a final dividend of 2.0p per share, making a total of 5.0p per share (2013: 7.0p). Subject to shareholders approval, the final dividend will be paid on 7 April 2015 to shareholders whose names appear on the register at close of business on 6 March Share capital Details of the issued share capital and the rights attaching to those shares are contained in note 21 to the financial statements. The Company holds 1,173,097 ordinary shares in treasury which were purchased by the Company in a previous financial year and represent 9.3% of the called up share capital. At the forthcoming Annual General Meeting, further to the ordinary business to be dealt with, the following resolutions will be considered: An Ordinary Resolution will be proposed to give the Directors authority to allot ordinary shares representing 33 1/3% of the issued share capital of the Company. In addition a Special Resolution will be proposed to disapply the statutory pre-emption provisions of Section 561 of the Companies Act 2006 in respect of any rights issues and for cash issues up to an amount of 5% of the issued share capital of the Company. The Directors consider that it would be advantageous for the Company to be in a position to purchase its own ordinary shares. Accordingly, a Special Resolution will be proposed at the Annual General Meeting to renew the existing authority to purchase up to 10% of the issued share capital of the Company. The Directors intend to seek to renew the authority at each subsequent Annual General Meeting. Directors The Directors at the date of this report, all of whom served throughout the year, are shown on page 9. The Directors retiring by rotation are Mr A. R. Heller and Mr P. J. Davies and, being eligible, offer themselves for re-election. Paul Davies has a service contract with the Company, dated 13 May 2008, which operates on a continuous basis and is terminable on six months notice. Andrew Heller does not have a service contract with the Company. Andrew Heller was appointed to the Board as a Non-Executive Director in He is a Chartered Accountant and Managing Director of Bisichi Mining PLC, a listed mining company. Paul Davies has been a Director since He joined BML (Office Computers) Ltd in 1984, prior to its acquisition by the Group in Previously Paul worked in IT within the distribution sector for a number of years. Details of Directors interests in shares and share options are given in the Directors Remuneration Report on pages 16 to 21. There were no changes in the Directors interests in shares or share options up to 16 December There were no contracts of significance subsisting during or at the end of the financial year in which a Director of the Company is or was materially interested. 10 Electronic Data Processing PLC Annual Report and Accounts 2014

13 Strategic report Substantial shareholdings At 16 December 2014 the only institutions or persons to have notified the Company of holdings of 3% or more are Sir Michael Heller (28.30%), Boyles Fund I, LP (17.04%), Olesen Value Fund, LP (3.03%) and Ewing Morris & Co. Investment Partners Ltd (3.37%). Research and development Group policy is to invest in product innovation and improvement at a level designed to enable it to retain and enhance its market position. Greenhouse gas emissions Details of the Group s emissions of greenhouse gases are given in the Strategic Report on page 8. Governance Corporate governance Corporate governance disclosures required to be included in the Directors Report can be found in the Corporate Governance Report on pages 12 to 14. Auditor In accordance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of KPMG LLP as auditor of the Company is to be proposed at the forthcoming Annual General Meeting. Directors statement as to disclosure of information to auditor The Directors who were members of the Board on the date the Directors Report was approved have confirmed the following: to the best of each Director s knowledge and belief there is no information relevant to their report of which the auditor is unaware; and each Director has taken all the steps a Director might reasonably be expected to take to be aware of relevant audit information and to establish that it has been communicated to the auditor. Responsibility statement of the Directors in respect of the annual financial report We confirm that to the best of our knowledge: the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation as a whole; the annual report and financial statements, taken as a whole, provides the information necessary to assess the Company s performance, business model and strategy and is fair, balanced and understandable; and the Strategic Report includes a fair review of the development and performance of the business and the position of the Issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. The Directors are shown on page 9. By order of the Board Financial statements Notice of meeting J. M. Storey Director 16 December 2014 Electronic Data Processing PLC Annual Report and Accounts

14 Corporate Governance The Group is committed to high standards of corporate governance appropriate to its size and structure. The Board recognises its responsibility to the Company s shareholders for good corporate governance and in doing so has given careful consideration to the principles of the UK Corporate Governance Code (the Code ) (September 2012 edition) as set out below. The Board acknowledges its responsibility for ensuring that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company s performance, business model and strategy. Board structure and meetings During the year under review the Board of Directors comprised five Executive Directors and two Non-Executive Directors. The Non-Executive Chairman is responsible for the overall leadership of the Board and ensuring its effectiveness on all aspects of its role. The Board is responsible for overall strategy and consideration of significant financial and operational matters including the identification and assessment of the risks the Company faces. The Non-Executive Directors are encouraged to constructively challenge the Executive Directors and help develop proposals on strategy. In addition to his role as Non-Executive Chairman of the Company, Sir Michael Heller is Executive Chairman of London & Associated Properties PLC and Bisichi Mining PLC, both of which are listed on the London Stock Exchange. The Board met on five occasions during the year and has met on one occasion since the year end. All Directors attended the five Board meetings held during the year with the exception of A. R. Heller who attended four. In addition the Executive Directors met on five further occasions during the year. The meetings were attended by all Executive Directors. These meetings allow prompt decision making and assist in the control of strategic, financial and operational issues. To enable them to carry out their responsibilities, all Directors have full and timely access to all relevant information. Directors are able to seek independent advice at the expense of the Company. Internal control The Directors are responsible for establishing and maintaining the Group s system of internal control and have a process, which is updated when required, for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide reasonable, but not absolute, assurance against material misstatement or loss. There is an organisational structure in place, with clearly defined lines of responsibility and delegated authority, which is incorporated within the Group s policy and procedure directives. Board approval is required for a number of matters, the most significant of which are: published financial statements; acquisitions policy; and dividend policy. The following matters require the approval of the Executive Directors: capital expenditure and disposals; treasury procedures and investment policy; and banking arrangements. There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company, which has been in place for the year under review and up to the date of the approval of the annual report and accounts. This is regularly reviewed by the Board of Directors and accords with the revised Turnbull guidance. A detailed budget is prepared covering all of the Group s operations. This budget is reviewed and approved by the Board. Detailed monthly management accounts are prepared on a timely basis comparing actual performance of the Group with budget and prior year. Any significant variances are investigated and appropriate action taken. Management reports are produced regularly and include information on sales, gross profit, overheads, cumulative performance, cash flow and treasury matters. The Board has reviewed the effectiveness of the Group s system of internal controls during the period. Together with senior management, the Board has identified, evaluated and managed the significant risks facing the Group. The Board will amend the specific control procedures which are put in place to reduce these risks whenever appropriate in order to meet the demands imposed by the business sector in which the Group operates. 12 Electronic Data Processing PLC Annual Report and Accounts 2014

15 Strategic report Audit committee A description of the composition and activities of the audit committee is given in the Audit Committee Report on page 15. Remuneration committee The remuneration committee comprises Sir Michael Heller, Mr A. R. Heller and Mr J. H. Wassell. The Board considers the structure of the remuneration committee to be appropriate given the size of the Company. The remuneration committee is responsible for determining the remuneration packages and other terms and conditions for the Executive Directors. Mr J. H. Wassell is not involved in determining his own remuneration. The Non-Executive Directors serving on the remuneration committee are not involved in determining their own individual remuneration. Individual Director s remuneration is detailed in the Directors Remuneration Report. The remuneration committee held one meeting during the year and was attended by all members. Nomination committee The nomination committee comprises Sir Michael Heller, Mr A. R. Heller and Mr J. H. Wassell. The committee is responsible for proposing candidates for appointment to the Board, having regard to the balance of skills, experience and knowledge of the Company on the Board, how the Board works together as a unit and other factors relevant to its effectiveness. The committee did not formally meet during the year as the current composition of the Board is considered by the committee to be appropriate. The Board consider the structure of the committee to be appropriate given the size of the Company. All Directors are subject to re-election at a maximum of every three years. The Board does not have a formal policy on diversity. Appointments to the Board are recommended by the nomination committee on the basis of the experience and abilities of the candidate, regardless of gender or race. Going concern The Group s business activities, together with the factors likely to affect its future development, performance and position along with the financial position of the Group, its cash flows and liquidity position, are described in the Strategic Report on pages 1 to 8. In addition note 18 to the financial statements includes details of the Group s financial instruments and its exposures to credit risk and liquidity risk. The Group has considerable financial resources together with a significant proportion of the Group s revenues being derived from long-term contracts with established customers. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. Share capital Details of the Company s share capital structure are given in the Directors Report and in note 21 to these financial statements. Governance Financial statements Notice of meeting Internal audit The Board reviews from time to time whether there is a need for an internal audit function and on its last review concluded that, due to the size of the Group and the internal controls that are currently in place, no specific function is required at the present time. Investor relations The Group enters into dialogue with both institutional and private shareholders at the AGM and also on an ad-hoc basis during the year. All Directors are required to attend the AGM in order, among other things, to ensure they develop an understanding of the views of the Company s shareholders. A separate resolution is held for each issue at the AGM. It is the Directors intention that all shareholders will receive at least 20 working days notice of the AGM. The Group publishes its annual report and accounts and interim report along with other information on its website at Electronic Data Processing PLC Annual Report and Accounts

16 Corporate Governance continued Compliance The Group complied with the provisions of the Code throughout the period under review other than as detailed below: (a) The Group s Non-Executive Directors have not been appointed for specified terms. The Board considers that because of the requirement for the Non-Executive Directors to stand for re-election at least every three years, specified terms are not required. The Code prescribes that Non-Executive Directors should be appointed for specified terms (B.2.3). (b) The Board is aware that the two Non-Executive Directors are not regarded as independent for the purposes of the Code. As a result there is no senior independent Non-Executive Director and the Company therefore does not apply Code provisions A.4.1 and A.4.2. The Board considers that the structure of the Board is appropriate for the size and complexity of the Company. (c) The Board considers that it is appropriate to operate a continual, informal evaluation process given the size and complexity of the Company. The Code prescribes that the Board should state in the annual report how the performance evaluation of the Board, its committees and its individual Directors has been conducted (B.6.1). (d) The audit committee and remuneration committee are both chaired by the Non-Executive Chairman and as a result the Company does not fully comply with Code provisions C.3.1 and D.2.1. The nomination committee has no independent Non-Executive Directors serving on it and consequently the Company does not comply fully with provision B.2.1. The Board considers that the structure of the Board committees is appropriate for the size and complexity of the Company. (e) The Non-Executive Chairman, who has served on the Board for over nine years, stands for election every three years rather than every year as prescribed by provision B.7.1. The Board considers this is appropriate given the Company s size and complexity. By order of the Board J. M. Storey Director 16 December Electronic Data Processing PLC Annual Report and Accounts 2014

17 Audit Committee Report Strategic report The audit committee comprises the two Non-Executive Directors, Sir Michael Heller and Andrew Heller, both of whom are Chartered Accountants. The Board considers the structure of the audit committee to be appropriate considering the size and complexity of the Group. The committee s terms of reference, which have been approved by the Board, are available on request from the company secretary. The main responsibilities of the audit committee are: to monitor the adequacy of the Group s internal financial controls; to take primary responsibility for appointing and re-appointing auditors; to review and monitor the scope, results and cost effectiveness of the external audit process; to monitor the procedures in place to safeguard the objectivity of the auditor and its independence in relation to non-audit services; to review the key assumptions and estimates or judgements that have been applied by management in the published financial statements; and to consider the need for an internal audit function. The audit committee meets three times during the year. Meetings are held prior to publication of the annual results and half-year results. A meeting is also held just after the year end to review, among other things, the significant judgements and estimates made by management in preparing the financial statements. During this meeting the external auditor presents its strategy document. Both members of the committee, along with the Chief Executive and Finance Director, attended all meetings. The external auditor attended two meetings. The committee has concluded that given the size and complexity of the Group there is no current need for an internal audit function. The committee has considered the following significant accounting issues and areas of estimation and judgement in relation to these financial statements: We considered the accounting policy, as presented by the Finance Director in a paper prepared for the committee, relating to recognition of revenue and whether the established policy was still appropriate for the business. We were content that the current policy was still appropriate. We were satisfied that the Group s internal controls for ensuring that revenues were allocated to the correct period were effective. We considered the judgements made by management in the year end valuation of the Group s freehold properties, in particular those properties which were being marketed for sale. We were content that management s estimate of residual values reflected the currently available market evidence. We considered management s judgement that the property formerly held as a current asset no longer met the definition for classification as a current asset in the light of the current status of offers on the property. We considered the approach taken by management in updating the key assumptions used in the valuation of the Group s defined benefit pension scheme, following guidance from the independent scheme actuary, and were content that the approach was appropriate. We considered the processes put in place by management, as presented by the Finance Director in a paper prepared for the committee, for the identification and recording of expenditure on software development which is capitalised and amortised under IAS 38. We were satisfied that these processes were appropriate. The committee has considered the effectiveness and quality of the external audit process. A key element of this is a review of the auditor s formal Audit Strategy Document which is presented to the committee prior to the commencement of the annual audit. This document highlights to the committee the auditor s assessment of audit materiality and the key audit focus areas. It also includes a formal assessment of the auditor s independence. The Group s auditors, KPMG LLP, and their legacy predecessors, have been in place since In line with the audit profession s own ethical guidance the audit engagement partner is rotated every five years. The committee has considered whether it is appropriate to put the external audit contract out to tender. It has concluded that currently there is no requirement to conduct a tender process. The committee has also reviewed the procedures that are in place to safeguard the objectivity of the auditor and its independence in relation to non-audit services. The auditor is excluded from undertaking a range of work on behalf of the Group which includes appraisal or valuation services, management functions, litigation support and accounting and remuneration services. An analysis of the fees paid to the auditor in respect of non-audit work is shown in note 5, of which most relates to the preparation and submission of the Group s corporation tax computations. Auditor independence is safeguarded by ensuring that the auditor is not involved in the preparation of the current and deferred tax provisions for the financial statements. Governance Financial statements Notice of meeting Sir Michael Heller Chairman Audit Committee 16 December 2014 Electronic Data Processing PLC Annual Report and Accounts