TECHN O L O G Y PL C. Annual Report

Transcription

1 TECHN O L O G Y PL C Annual Report

2 Introduction and Performance The year has primarily been one of consolidation and we continue to see enormous potential to become the go-to supplier for software and it services in the social housing market. In This Report STRATEGIC REPORT 01 Operational Highlights 02 Chairman s Statement 04 Chief Executive s Review 08 Financial Review 12 Strategic Report GOVERNANCE 14 Board of Directors 15 Advisers 16 Corporate Governance Statement 18 Directors Remuneration Report 20 Directors Report 22 Statement of Directors Responsibilities 23 Independent Auditor s Report to the Members of Castleton Technology plc FINANCIAL STATEMENTS 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 56 Company Balance Sheet 57 Company Statement of Changes in Equity 58 Company Cash Flow Statement 59 Notes to the Company Financial Statements Castleton Technology plc Annual Report

3 Operational Highlights Strategic Report Governance Financial Statements Turnover of 20.3 million (: 18.0 million) Adjusted EBITDA of 4.4 million (: 3.6 million) Acquisition of mobile technology IP in the year Cash generated from operations of 4.6 million (: 0.6 million) Basic EPS up to 0.59p (: loss of 1.56p) Over 60% of revenue is recurring Castleton Technology plc Annual Report 01

4 Chairman s Statement David Payne Non-Executive Chairman There remain significant cross-selling opportunities within the customer base for us to provide our customers with the technology and services that they require. 02 Castleton Technology plc Annual Report

5 Strategic Report Governance Financial Statements Dear Shareholder I am pleased to be able to report on another year of solid progress for Castleton. Following the acquisitive growth of FY2015 and FY, FY has been a year of consolidation as we put in place firm foundations for the Group to build on its position as a successful niche player in software and IT managed services within the public sector market place. The acquisition of seven small companies brings great rewards but also significant integration efforts. Despite early teething issues previously noted, I m delighted to say that the business has now dealt with these and as we enter our fourth year, we fully expect the company to demonstrate its growth potential. With respect to the year under review, I am encouraged that we have demonstrated our ability to improve the mix of sales as the Company has successfully transitioned to targeting multiyear SaaS software revenues whilst continuing to grow our overall sales. A key success in the year has been clearly demonstrating the highly cash generative nature of our business model which facilitated a reduction in our net debt. The Board There have been changes at Board level as the Group puts in place our foundations for future growth. Dean Dickinson joined the Board as CEO on 31 October, replacing Ian Smith who became Executive Deputy Chairman. Dean was previously Managing Director of Advanced Business Solutions, part of Advanced Computer Software Group Limited (previously Advanced Computer Software plc ( ACS )), where he led the impressive growth of the Public Sector and Enterprise division following the acquisition of COA Solutions in Dean was part of the senior management team that sold ACS to Vista Private Equity for 725 million in March Caro Bell resigned from the Board as Operations Director on 30 August having joined in November 2015 and Davinder Sanghera resigned from the Board as Chief Operations Officer on 16th January having joined when Documotive was acquired by Castleton in November Davinder was appointed as Chief Operations Officer on 9 April I would like to thank them both for the hard work they have put in to help make Castleton the company it is today. Opportunity / Outlook The year has primarily been one of consolidation and we continue to see enormous potential to become the go-to supplier for software and IT services in the social housing market. There remain significant cross-selling opportunities within the customer base in order to provide our customers with the technology and services that they require. The low penetration of our comprehensive product and service set across our customer base combined with a healthy pipeline of new business gives me confidence for the year ahead. With the team currently in place, a broad customer base, a wide range of products and services and solid cash flows enabling repayment of debt, I am confident of our future success and I expect that the Group will show further growth when it next reports. David Payne Chairman 17 July Castleton Technology plc Annual Report 03

6 Chief Executive s Review Each of the acquisitions has brought best in class software solutions or managed services capability. The range of solutions provides customers with significant improvements in service, performance and insight. Dean Dickinson Chief Executive 04 Castleton Technology plc Annual Report

7 Strategic Report Governance Financial Statements Overview I am pleased to report the significant progress the Group has made during the financial year to 31 March. I arrived at the end of October with the Company having made multiple acquisitions in prior years and the start of the financial year saw Castleton improve the terms of its existing exclusive reseller agreement with 365 Agile Group plc ( Agile ) granting us an exclusive licence for Agile s suite of mobile working software solutions in relation to the social housing sector. Each of the acquisitions has brought best in class software solutions and managed services capability, so the foundations for a successful and scalable business were already in place. The focus during the year has also been on integrating the businesses acquired, and since my arrival in October, I have made further changes to the structure and organisation which strengthened our platform and which will allow the Group to grow and maximise the opportunities available in our chosen market. Our Market and What We Do The markets in which we operate are focused around public sector and not-for-profit social housing but also include the contractors who provide repairs services to the social housing providers. Castleton has six offices in the UK and a growing operation in Australia, demonstrating our ability to grow and scale our business in a new geography. The Group remains aligned along two divisions; Software Solutions and Managed Services, with each focusing on their separate yet complementary offerings. Our Software Solutions division provides all key business processes to social landlords covering everything from tenant engagement, rent collection, financial planning and control, document managing and repairs management. All key processes are available to be utilised on a mobile platform via apps or digital engagement. The range of solutions provides customers with significant improvements in service, performance and insight. Our Managed Services division offers a wide range of IT Infrastructure solutions which support an organisation s business objectives, including helping to drive efficiencies, manage legacy architectures or providing customers and staff with the latest social, mobile and cloud technologies. Trading Results Revenue for the year showed an increase of 13% to 20.3 million (: 18 million) with in excess of 60% of revenue being recurring in nature (: 58%). Adjusted EBITDA* showed a stronger performance, improving by 22% to 4.4 million (: 3.6 million), reflecting the Company s operational gearing and ability to scale profitably. The underlying metrics of the business were particularly encouraging. The Managed Services division s trading EBITDA** grew 32% year on year as we look to transition to more profitable deals. The Software Solutions division s trading EBITDA** grew 15%. Operating cash conversion was outstanding at 105% of adjusted EBITDA* pre exceptional costs and 86% of adjusted EBITDA* post exceptional costs, enabling a reduction in net debt*** and, pleasingly, earnings per share at a basic level were 0.59p, following a loss in the previous year of 1.56p per share. Operational Review Much of the focus this year has been on completing the integration of the companies acquired since June 2014, which I am pleased to say is largely done, and building a platform and infrastructure to enable continued profitable growth and take full advantage of the market opportunity. We have made improvements to the quality of the business processes, people, structure and control. The organic growth of the business is building on the back of the acquisitive growth. Our contracted backlog of revenue has grown by over 40%, which gives us good forward visibility of revenue. The increase in revenues was driven by the addition of new customers and through cross-selling of products and services into the Group s existing base. Castleton now supports over 750 customers and during the year the number of those who have two or more of our products increased to 35%. Not only does this show traction in our intention to cross-sell and our customers confidence in our product suite, but also means that 65% of our customer base still uses just one product, providing a very strong opportunity for further organic growth. *Earnings for the year from continuing operations before net finance costs, tax, depreciation, amortisation, exceptional costs and share based payment charges. ** Trading EBITDA before Group costs (i.e. the cost of the plc Board and its advisors) *** Net cash less borrowings, deferred consideration, contingent consideration and convertible loan notes. Castleton Technology plc Annual Report 05

8 Chief Executive s Review continued Castleton is well positioned to provide an eco-system of integrated modular solutions supported by scalable infrastructure platforms, helping organisations to operate more effectively and achieve their goals, whilst bringing visible recurring annuity revenues to the Group. As referred to above, the start of the year, in April, saw Castleton improve the terms of its existing exclusive reseller agreement with Agile by entering into a new perpetual licence agreement with the company whereby we were granted an exclusive licence for their suite of mobile working software solutions in relation to the social housing sector. New contracts signed during the year include a landmark agreement with Wentworth Community Housing in Australia, signed in November, for the provision of Kypera s housing system and three other products including Agile s mobile working solutions. This followed on from the installation of a local management team and is evidence of the opportunity available in the Australian market and the relevance of Castleton s product suite in that country. In January this year, two new contracts were announced, namely a tenyear agreement with Clúid Housing Association ( Clúid ) in Ireland and a five-year contract with Arcon Housing Association ( Arcon ) in Manchester. Both agreements were for multiple products and / or services, with Clúid being the first customer to take the complete suite of software products, validating the Group s intention of becoming a one stop shop serving the social housing sector and showing the Group s ability to cross-sell and upsell the product suite. Our success in winning these new contracts demonstrates the unique proposition that Castleton can bring to the market and we continue to seek to expand on this success by increasing the number of customers who take multiple products, which is a major focus going forwards. 06 Castleton Technology plc Annual Report

9 Strategic Report Governance Financial Statements At the end of the year, the Company had further success in signing two multiyear agreements, extending both the contract base and the level of recurring revenue. The first is a seven year contract with North Hertfordshire Homes and the second a three year contract with a community regeneration and housebuilding company. Post year end, a new operational structure has been put in place with clearly aligned objectives and sales teams have been tasked with defined territories and targets. The initial feedback has been positive, both internally and from customers. Outlook Castleton is well positioned to provide an eco-system of integrated modular solutions supported by scalable infrastructure platforms, helping organisations to operate more effectively and achieve their goals, whilst bringing visible recurring annuity revenues to the Group. The Group brings together trusted brands with a pedigree of delivering solutions that meet customer needs whilst offering a refreshing change of culture and approach, focusing on customer collaboration using modern technology. We see the public and not-for-profit sectors as attractive markets due to their niche requirements and we believe a significant opportunity exists to capitalise on the ability to address historic under-investment in IT infrastructure in those sectors. I am confident that the business is now in a position to maximise the opportunities that we see in our chosen markets by offering our customers an integrated suite of products, either on an installed or cloud delivery basis, in turn allowing them to increase efficiencies and lower their costs of operating. Post year-end we have had a number of successes selling our software products on a cloud basis. Combined with the general long term nature of the contracts entered into, selling our products on a hosted basis gives greater recurring revenue and greater visibility of earnings and cash flow as we move forward. The new financial year has started well and in line with expectations. The Company has good visibility of revenues, a strong and improving product suite combined with a defined roadmap for further development, and an improved structure to enable us to execute our strategy. The existing customer base provides a significant opportunity for cross-selling opportunities, adding further organic growth along with new customers. The Board continues to view the future with confidence. Dean Dickinson Chief Executive 17 July Castleton Technology plc Annual Report 07

10 Financial Review Haywood Chapman Chief Financial Officer m m 20.3m m m 5 6.1m 3.4m 3.6m 4.4m 0 ( 0.1m) Revenue Gross Profit Adjusted EBITDA 08 Castleton Technology plc Annual Report

11 Strategic Report Governance Financial Statements I am pleased to present this report as Chief Financial Officer. Principal events and overview Other than the new licence agreement with Agile, further details of which can be found below, the period since the last report has been one of consolidation compared to the previous two years of considerable acquisitive activity. As with the prior years, there has been a considerable amount of integration activity, partly contributing to the 0.7 million exceptional charge within the Income Statement. Agile s suite of solutions have been merged into Castleton Software Solutions Ltd, which, along with Castleton Managed Services Ltd, form the two divisions in the Group. Also during the year, we merged the offices acquired along with the acquisition of Impact Applications Limited into our Software Solutions headquarters in Sutton Coldfield. With the exception of Kypera, all acquired entities are on a common accounting platform across the Group, which brings a greater degree of process and visibility to our back office operations. We plan to bring Kypera onto our common accounting platform during the current year. Agile On 4 April, the Group improved its existing exclusive reseller agreement with Agile and entered into a new perpetual licence agreement whereby Castleton was granted an exclusive licence for Agile s suite of mobile working software solutions in relation to the social housing sector (the Agile Licence ). Agile s software solutions are complementary to Castleton s range of solutions which have been designed to enable social housing organisations to work more efficiently and effectively. Agile s software solutions allow field based and customer facing teams to securely access any system, data or document from any global location, allowing users to complete tasks in real time. To continue to support and develop the product, a number of staff members transferred from Agile to the Group, and as a result, the grant of the licence and the transfer of staff collectively meet the definition of a business combination under IFRS3 and consequently are recorded as a business combination in these accounts. Under the terms of the Agile Licence, Castleton will pay Agile 600,000 per year over a three year period with the potential for a further payment of at least 300,000 in the year to 31 March 2020 dependent on total sales during the first three years of the agreement. The Board of Castleton believes that the Agile Licence and staff transfer are strategically important as they secure the Group s use of Agile s software solutions going forward, whilst enhancing the margin, with an estimated payback period of two years. Goodwill A fair value reassessment of 0.9m was performed on Kypera, the majority of which relates to claims in relation to onerous contracts that were in place prior to acquisition together with the associated rectification costs. Discussions are currently ongoing; however, the resolution of such claims remains uncertain. Trading results The trading results for the year comprise a full year of trading for all entities acquired in the prior years and, from 4 April, a full year of trading from the updated Agile Licence Revenue and gross profit Revenue amounted to 20.3 million (: 18.0 million), of which 10.8 million was generated by the Software Solutions division (: 8.3 million) and 9.4 million (: 9.7 million) was generated by the Managed Services division. Recurring revenue is in excess of 60% of total revenues (: 58%). Gross profit amounted to 14.3 million (: 11.3 million), representing a gross margin of 70% (: 63%). The increase in overall gross margin is partly due to a full year of trading from the Kypera business which was acquired in the previous year (and sits in the Software Solutions division) and has a higher gross margin and also as a result of the new Agile Licence where there is no longer a 70% commission included in cost of sales. Gross margin for the Software Solutions division increased from 80% to 84% and for the Managed Services division it increased from 40% to 45%. Administrative expenses including exceptional items The administrative expenses were incurred in the running of all entities, and include the cost of the Board and its advisors, including the cost of occupancy, back office support services, and the fees associated with maintaining the AIM listing as well as amortisation of 3.0 million and exceptional items. Exceptional items of 0.7 million (: 2.2 million) include costs relating to restructuring activities undertaken in the year. Adjusted EBITDA* The adjusted EBITDA for the year amounts to 4.4 million (: 3.6 million). The cost in the year for the plc Board and its advisors was 1.3 million (: 1.2 million), and we continue to maintain tight controls on expenditure. Trading EBITDA was therefore 5.7 million (: 4.6 million). Finance income and costs Finance income represents the interest earned on deferred income from the sale of the consulting business sold in 2015, and finance costs comprise interest payable on bank borrowings and the interest and unwind of discount on the convertible loan notes issued in January to part fund the acquisition of Kypera ( Loan Notes ). Finance income and costs amounted to 0.02 million (: 0.3 million) and 0.7 million (: 0.7 million) respectively. *Earnings for the year from continuing operations before net finance costs, tax, depreciation, amortisation, exceptional costs and share based payment charges. Castleton Technology plc Annual Report 09

12 Financial Review continued Gross profit 14.3m Revenue 20.3m Gross margin 70% Cash generated from operations 4.6m Adjusted EBITDA 4.4m 10 Castleton Technology plc Annual Report

13 Strategic Report Governance Financial Statements Profit for the year attributable to the owners of the parent company The Group profit for the year to 31 March was 0.5 million (: loss of 1.1 million). This comprises the loss before tax of 0.5 million (: loss of 1.9 million), which includes the finance income of 0.02 million (: 0.3 million) and a tax credit of 1.0 million (: 0.8 million) arising from R&D tax credits, the unwind of deferred tax recognised on intangible assets and prior year adjustments. Cash flow Cash generated from operations during the year was 4.6 million (: 0.6 million) reflecting a decrease in working capital of approximately 0.1 million (: increase of 3.0 million). Net of cash acquired, 1.0 million of cash was used in business combinations ( 0.5 million for Brixx and 0.5 million for Agile) which was funded through cash generated by the business. This resulted in an overall increase in funds of 0.6 million, giving a net positive cash position at the balance sheet date of 0.3 million (: net negative cash position of 0.3 million). Deferred income Deferred income arises where revenue is invoiced ahead of delivery of performance obligations and therefore recognition of revenue. This is common in software maintenance, hosting, managed services and software subscription agreements. Invoicing is largely quarterly, half yearly or annually in advance and therefore deferred income levels fluctuate throughout the year. At 31 March deferred revenue of 8.4 million is 0.7 million higher than at the end of March due to growth in the above contracts. Funding and debt repayment During the year, the Group repaid 1.0 million of the Barclays term loan in line with the facility agreement. As at the balance sheet date, 4.3 million of term loan was outstanding. In addition, in March, the Group repaid 0.5 million of the 3.5 million Loan Notes issued to part fund the acquisition of Kypera. A further 0.5 million of the Loan Notes were repaid in April. The Loan Notes are capable of being converted into new ordinary shares at a price of 85.6 pence per ordinary share, which represented a 5% premium to the mid closing price on 28 January, the day immediately prior to completion of the acquisition of Kypera. Conversion is at the option of the holder at any time during the five year term. On 29 May, the final 0.5 million of deferred consideration for the acquisition of Brixx was paid and also during the year, 0.5 million of the 1.8 million due under the terms of the Agile Licence was paid. During the year, 0.15 million of the 0.45 million of convertible loan notes that were issued as part of the acquisition of Opus (the Opus Loan Notes ) were converted into shares. Post year-end, the remaining 0.3 million of the Opus Loan Notes were cancelled in agreement with the holders. Going Concern The Directors have prepared detailed cash flow projections including sensitivity analysis on key assumptions. The Group s forecasts and projections, taking account of reasonably possible changes in trading performance and the timing of key strategic events, show the Group will be able to operate within the level and conditions of available funding. Based on the funding available, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in preparing its consolidated financial statements. Haywood Chapman Chief Financial Officer 17 July Castleton Technology plc Annual Report 11

14 Strategic Report The Directors present their strategic report for the year ended 31 March. Review of the business and future developments A detailed review of the business is set out in the Chairman s Statement and in the Chief Executive s and Financial Reviews. Included in these reviews are comments on the key performance indicators that are used by the Board on a monthly basis to monitor and assess the performance of the business. These indicators include the level of turnover, gross profit, gross profit percentage, adjusted EBITDA* and costs. Future developments and current trading and prospects are set out in the Chairman s Statement and in the Chief Executive s and Financial reviews. These reports together with the Corporate Governance Statement, the remuneration Committee report and the Audit Committee report are incorporated into this report by reference and should be read as part of this report. The Group s strategy is focused on selling multi-year annuity deals across its customer base and increasing the number of products and services each customer takes. Principal risks and uncertainties Identifying, evaluating and managing the principal risks and uncertainties facing the Group is an integral part of the way we do business. We have policies and procedures in place throughout our operations that enable us to do so, embedded within our management structure and as part of our normal operating processes. Market and economic conditions are recognised as one of the principal risks in the current trading environment. This risk is mitigated by the monitoring of trading conditions and the constant search for ways to achieve new efficiencies in the businesses without impacting levels of service. Reliance on key personnel and management The success of the Group will be dependent on the services of key management and operating personnel. The Directors believe that the Group s future success will depend largely on its ability to attract and retain highly skilled and qualified personnel, and to expand, train and manage its employee base. There can be no guarantee that suitably skilled and qualified individuals will be retained or identified and employed. If the Group fails to retain or recruit the necessary personnel, or if the Group loses the services of any of its key executives, its business could be materially and adversely affected. Competition risk The Group operates in a highly competitive IT product, software and services marketplace and while the Directors believe the Group enjoys significant strengths and advantages in competing for business some of the competitors are much larger with considerable scale that could allow them to offer similar services for materially lower prices than the Group could match while maintaining a margin in the range targeted by the management of the Group. Therefore, competitors could materially adversely impact both the scale of the Group s revenues and its profitability. Technology The market for Castleton s products and services is in a state of constant innovation and change. The Group actively participates in a number of industry-wide forums, and devotes significant resource to the development of new products and services, ensuring new technologies can be incorporated and integrated with the Group s core services. Post-acquisition integration risk, and risks of an acquisition strategy The Directors recognise that the Group has been very acquisitive over the last three years, and that integrating these acquisitions and the associated change management can take a period of time. The Company may not be able to fully achieve its strategic objectives and operating efficiencies in an acquisition, or these may take longer than anticipated. Inherent uncertainties exist in integrating the operations of an acquired entity. * Earnings for the year from continuing operations before net finance costs, depreciation, amortisation, exceptional costs and share-based payment charges. 12 Castleton Technology plc Annual Report

15 Strategic Report Governance Financial Statements In addition, the markets and industries in which the Company and its potential acquisition targets operate, are highly competitive. The Company may lose existing customers or the customers of an acquired entity as a result of its acquisition. The Company also may lose key personnel, either from the acquired entity or from itself, as a result of an acquisition. These factors could contribute to the Company not achieving the expected benefits from its acquisitions within desired time frames, if at all. Future business acquisitions could be material to the Company and it may issue additional equity to pay for those acquisitions, which would dilute current shareholders ownership interest. Acquisitions could also require the Company to use substantial cash or other liquid assets or to incur debt. In such a case, it could become more susceptible to economic downturns and competitive pressures. Jenny Young Company Secretary On behalf of the Board 17 July Registered Office: 100 Fetter Lane London EC4A 1BN Castleton Technology plc Annual Report 13

16 Board of Directors Executive Directors 1. Ian Smith Executive Deputy Chairman A highly experienced IT and communications industry developer of new business, Ian has held senior sales positions with Dataworkforce, Cisco Systems, Foundry Networks and Cable & Wireless. Most recently, for seven years as CEO of Xploite plc, Ian was responsible for the buy, build and sell strategy that saw 26 corporate transactions including two substantial disposals and the creation and return of c. 20 million of cash to the company s shareholders. 2. Dean Dickinson Chief Executive Officer Dean joined Castleton in October. Dean was previously Managing Director of Advanced Business Solutions, part of Advanced Computer Software Group Limited (previously Advanced Computer Software plc ( ACS )), where he led the impressive growth of the Public Sector and Enterprise division following the acquisition of COA Solutions in Dean was part of the senior management team that sold ACS to Vista Private Equity for 725 million in March Haywood Chapman Chief Financial Officer Haywood Chapman joined Castleton on 1 December He has significant technology sector expertise in quoted and private equity backed companies. Prior to Castleton, Haywood held a number of senior finance positions at Northgate Information Solutions, Infinity SDC and Avnet Inc. Haywood is a Chartered Accountant, having trained at PwC, and gained M&A experience in their Transaction Services team. Non-Executive Directors 4. David Payne Non-Executive Chairman David Payne is Chair of the Remuneration Committee and a member of the Audit and Nomination Committees of the Board of Directors. David Payne has a varied background in the leisure, computer and property industries. For 20 years after leaving university he worked for Juliana s, a leisure company that floated on the London Stock Exchange in He was subsequently recruited, by a venture capital fund, to become Chairman of Virtuality, a company at the forefront of developing virtual reality. He oversaw the successful flotation of this company on the LSE in 1994 and then left to devote more time to the development of a quoted property company. 5. Phil Kelly Non-Executive Director Phil brings a 30 year track record of leading successful companies within the technology sector, having worked with both quoted and private equity backed businesses. Phil sits on both the Audit and Remuneration committees. 14 Castleton Technology plc Annual Report

17 Advisers Strategic Report Governance Financial Statements Company Secretary Jenny Young Registered Office 100 Fetter Lane London EC4A 1BN Financial Adviser and Broker finncap Limited 60 New Broad Street London EC2M 1JJ Independent Auditors RSM UK Audit LLP Portland, 25 High Street Crawley West Sussex RH10 1BG Solicitors Beachcroft, 100 Fetter Lane London EC4A 1BN Registrars Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield West Yorkshire HD8 0GA Principal Bankers Barclays Bank plc 54 Lombard Street London EC3V 9EX Company Number Further details can be found on the Castleton Technology website at the following address: Castleton Technology plc Annual Report 15

18 Corporate Governance Statement As an AIM quoted company Castleton is not required to comply with the principles and provisions of the 2012 UK Corporate Governance Code. The Directors have decided to adopt the Corporate Governance Code for small and mid-sized quoted companies, as published by the Quoted Companies Alliance, and have sought to meet its recommendations in so far as it considers them appropriate for a company of Castleton s size and nature. The Board of Directors At the financial year-end the Board comprised the Non-Executive Chairman (David Payne), the Executive Deputy Chairman (Ian Smith), the Chief Executive Officer (Dean Dickinson), the Chief Financial Officer (Haywood Chapman) and one Non-Executive Director (Phil Kelly). Davinder Sanghera, who was appointed to the Board as Chief Operating Officer on 9 April 2015 resigned from the Board on 16 January and Caro Bell who was appointed to the Board as Operations Director on 2 November 2015 resigned from the Board on 30 August. The business and management of the Company and its subsidiaries are the collective responsibility of the Board. At each meeting, the Board considers and reviews the trading performance of the Group. The Board has a formal written schedule of matters reserved for its review and approval. These include the approval of the annual budget, major capital expenditure, investment proposals, the interim and annual results, and a review of the overall system of internal control and risk management. There are three standing Board Committees: Audit, Nominations and Remuneration. Each of these Committees acts within defined terms of reference. Additional information is set out later in this report and also in the Directors Remuneration Report in respect of the Remuneration Committee. Authority for the execution of the approved policies, business plan and daily running of the business is delegated to the executive Directors. During the year, the Board met formally on ten occasions. Phil Kelly is the Senior Independent Non-Executive Director and has served throughout the year. The Company s Articles of Association require one-third of the Directors to stand for re-election each year at the Annual General Meeting and that each Director should seek re-election every 3 years. In addition, Directors appointed by the Board during the year must seek re-appointment at the next Annual General Meeting. Accordingly, Dean Dickinson and Phil Kelly will retire and offer themselves for re-election at the forthcoming Annual General Meeting. All Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. The Board has a procedure whereby any Director may seek, through the office of the Company Secretary, independent professional advice, at the Company s expense, in furtherance of his or her duties. Formal agendas and reports are provided to the Board on a timely basis for Board and Committee meetings and the Chairman ensures that all Directors are properly briefed on issues to be discussed at Board meetings. Directors are able to obtain further advice or seek clarity on issues raised at the meetings from within the Company or from external sources. All Directors are subject to appraisal by the Board. The non-executive Director is responsible for the evaluation of the Chairman. Nominations Committee The Nominations Committee consisted of David Payne (Chairman) and Phil Kelly throughout the year. For nominations, the Nominations Committee meets as and when necessary to consider the appointment of new executive and non-executive Directors. A process is in place for the appointment of new Directors involving the use of external consultants, where appropriate, followed by meetings with both the Nominations Committee and subsequently with the Board as a whole, together with the Company Secretary. This ensures that the selection process is both formal and objective. The Nominations Committee has formal terms of reference (available on request from the Company Secretary) and meets at least once a year to review succession planning at both Board and senior management level across the Group. During the year, the Nominations Committee met formally on two occasions and there were no absences from the meetings. Remuneration Committee The Remuneration Committee consisted of David Payne (Chairman) and Phil Kelly throughout the year. Details of the Remuneration Committee and its policies are set out in the Directors Remuneration Report. The Remuneration Committee has formal terms of reference (available on request from the Company Secretary). During the year, the Remuneration Committee met formally on three occasions. There were no absences from the formal meetings. 16 Castleton Technology plc Annual Report

19 Strategic Report Governance Financial Statements Audit Committee The Audit Committee consisted of Phil Kelly (Chairman) and David Payne throughout the year. The Audit Committee has formal terms of reference (available on request from the Company Secretary). These include the recommendation, appointment, re-appointment and removal of the external auditors, the review of the scope and results of the interim review and external annual audit by the auditors, their cost effectiveness, independence and objectivity. The Audit Committee also reviews the nature and extent of any non-audit services provided by the external auditors. In addition, the Audit Committee reviews the effectiveness of internal controls, considers the need for an internal audit function and considers any major accounting issues and reports on such matters to the Board. The Audit Committee reviews the integrity of the financial statements and formal announcements. A whistle-blowing arrangement exists whereby matters can be confidentially reported to the Audit Committee. The executive Directors are not members of the Audit Committee but attend the meetings by invitation, as necessary, to facilitate its business. The Chief Financial Officer monitors the level and nature of non-audit services and specific assignments are flagged for approval by the Audit Committee as appropriate. The Audit Committee reviews non-audit fees and considers implications for the objectivity and independence of the relationship with the external auditors. The Board is satisfied that the Chairman of the Audit Committee has recent and relevant financial experience. The Audit Committee met on three occasions during the year and there were no absences from the meetings. Internal control The Board has overall responsibility for the Group s system of internal control and for reviewing its effectiveness. The implementation and maintenance of the risk management and internal control systems are the responsibility of the executive Directors and senior management. The internal control system is designed to manage risk rather than eliminate it and can therefore only provide reasonable and not absolute assurance against material misstatement or loss. The Board confirms that there are on-going processes for identifying, evaluating and managing the significant risks faced by the Group. The Group is committed to maintaining high standards of business conduct and operates under an established internal control framework covering financial, operational and compliance controls. This is achieved through an organisational structure that has clear reporting lines and delegated authorities. The reporting lines and delegated authorities are clearly defined. Management monitors the risk and performance of the Group. In addition, the Group maintains written processes to control expenditure, authorisation limits, purchase ordering, sales order intake, project management, inventories and assets to the extent applicable given the changes in the Group s activities during the year. The Board receives monthly financial information which includes key performance and risk indicators and the Chief Executive Officer reports on significant changes in the business and the external marketplace to the extent they represent significant risk. There is an established budgetary system with an annual budget approved by the Board. The Board reviews the results monthly against budget and forecasts together with other business measures. The principal treasury related risks are documented and approved by the Board. Details of financial instruments are set out in notes 22 and 23 to the financial statements. Relations with shareholders and investors Copies of the Annual Report and Accounts are issued to all shareholders and copies are available on the Group s website The Half Year Report is also available on the Group s website. The Group makes full use of its website to provide information to shareholders and other interested parties. The Company Secretary also deals with a number of written or ed enquiries throughout the year. Shareholders are given the opportunity to raise questions at the Annual General Meeting and the Directors are available both prior to and after the meeting for further discussion with shareholders. During the year, the Executive Deputy Chairman, the Chief Executive Officer and the Chief Financial Officer met with institutional investors after the announcement of the interim and year-end results. Additional meetings were arranged during the year by the Group s brokers, finncap Limited. Feedback arising from these meetings was communicated to the Board and the Company Secretary also reported to the Board on feedback from shareholders. Phil Kelly, as Senior Independent Non-Executive Director, is available to shareholders if they wish to raise any matters that contact through the normal channels of Non-Executive Chairman, Executive Deputy Chairman, Chief Executive Officer, Chief Financial Officer or Company Secretary has failed to resolve or for which such contact is inappropriate. Phil Kelly Chairman, Audit Committee 17 July Castleton Technology plc Annual Report 17

20 Directors Remuneration Report Remuneration Committee The Remuneration Committee comprised David Payne (Chairman) and Phil Kelly. The Remuneration Committee makes recommendations to the Board, within agreed terms of reference, on the remuneration and other benefits, including bonuses and share options, of the executive Directors. In considering the remuneration for the year, the Remuneration Committee consulted with the executive Directors about its proposals. The Board sets the fees payable to the non-executive Directors. Remuneration policy The Remuneration Committee is aware that remuneration packages should be sufficiently competitive to attract, retain and motivate individuals capable of achieving the Group s objectives and thereby enhancing shareholder value. Basic salary and benefits Basic salaries are reviewed on a discretionary basis. Performance related bonus The Remuneration Committee determines the criteria for the award of performance bonuses for the executive Directors in advance of each year. The bonuses are non-pensionable. Non-executive Directors do not receive a bonus. No bonuses were paid for year ended 31 March. Fees The Board, within the limits stipulated by the Articles of Association and following recommendation by the executive Directors, determines non-executive Directors fees. The fees were 30,000 for non-executive Directors, and 30,000 for the non-executive Chairman, including, in both cases a fee of 5,000 for chairing a Board committee. Service contracts The Company s policy is for all executive Directors to have service contracts with provision for termination of no more than 12 months notice. Non-executive Directors have letters of appointment. Appointments can be terminated by the Company giving 6 months notice or the individual giving 1 months notice. The remuneration of the non-executive Directors takes the form solely of fees which are not pensionable. The details of the executive and non-executive Directors service contracts are summarised below: Date of contract Notice period (months) Executive Directors Ian Smith 8 September Dean Dickinson 31 October 6 Haywood Chapman 1 December Davinder Sanghera (resigned 16 January ) 9 April Carolyn Bell (resigned 30 August ) 1 November Non-executive Directors David Payne 23 July Phil Kelly 1 October The service contracts continue until notice on either side is given. Phil Kelly and Dean Dickinson retire in line with the terms of the Articles of Association of the Company, and being eligible, offer themselves for re-election at the forthcoming Annual General Meeting. 18 Castleton Technology plc Annual Report

21 Strategic Report Governance Financial Statements Directors remuneration Basic salary, allowances and fees Benefits Executive Dean Dickinson Ian Smith Haywood Chapman Davinder Sanghera Carolyn Bell Non-executive David Payne Phil Kelly Social security costs in respect of directors emoluments were 59,000 (: 52,000). Director s emoluments payable to Ian Smith were paid to MXC Capital Advisory Limited. Share options At 1 April Number Pension 2p options lapsed during the year Number Total 2p Options Granted during the year Number Total At 31 March Number Executive Dean Dickinson (a) 799, ,982 Haywood Chapman 1,692,301 1,692,301 Davinder Sanghera 846,151 (846,151) Carolyn Bell 331,125 (331,125) Non-executive David Payne 338, ,460 Phil Kelly 169, ,230 None of the directors made any gains on exercise of share options in or. a) On 2 December, EMI Share Options over 416,665 ordinary shares were awarded to Dean Dickinson. The options vest after three years at an exercise price of On 10 February options were awarded under a combination of unapproved share options and hurdle shares to increase overall options held by Dean Dickinson to 1.4%. The 1.4% of options held is evergreen in nature, meaning that the percentage of the fully diluted issued share capital held under option will remain constant, notwithstanding any further issues of ordinary shares in the capital of the Company. Within the 1.4% the number of EMI Share Options is a fixed number of 416,665. The options are being awarded under a variety of schemes, both approved and unapproved. All of the options are subject to vesting criteria with a compound share price growth rate of 12% per annum over 3 years. If the average price of an ordinary share does not reach or exceed the target above, then the options shall lapse. Share price The market price of the Company s shares on 31 March was 64.5p per share. The highest and lowest market prices during the year were 84.5 pence and 53.0 pence respectively. David Payne Chairman, Remuneration Committee On behalf of the Board 17 July Castleton Technology plc Annual Report 19

22 Directors Report The Directors present their report together with the audited financial statements for the year ended 31 March. Principal activity The principal activity of the Group during the year was the provision of software and managed services to the public and not- forprofit sectors, predominately the social housing sector. The Company is an investment holding company. Review of the business and future developments The review of the year and the directors strategy and objectives for the future are set out in the Strategic Report. Overseas Presence The company has one overseas business, being Kypera Australia Pty Limited. Income streams originating from this business amounted to 353,000 (: 38,000). Research and Development Castleton s research and development activities underpin its new Software Solutions offerings. During the year advancement of operational integration has resulted in such activity being reliably measured to meet the group s accounting policy for capitalising such costs. Capital expenditure on research and development in the year ended 31 March amounted to 0.3 million. The capitalisation rate was 23%. Dividends The Company did not pay a dividend during the year. The Directors do not recommend the payment of a dividend (: nil). Financial instruments The Group s financial instruments primarily comprise borrowings, loan notes and cash balances. In addition, various other financial instruments such as trade receivables and payables arise directly from its operations. To finance the acquisitions of Brixx and Impact during the prior year, the Group entered a new bank facility on 1 June 2015 with the Group s existing bankers, Barclays Bank Plc, comprising a term loan of 5.0 million together with an overdraft of up to 2.0 million. On 1 February, to finance the acquisition of Kypera, the Group extended this loan facility with Barclays by 1 million and increased the overdraft by 0.5 million. The loan is repayable at a rate of 250,000 per quarter commencing August 2015 and attracts interest of 3.0% above LIBOR. The overdraft is secured on the assets of the group by way of fixed and floating charges. 0.4 million of convertible loan notes were issued in the year ended 31 March to satisfy the contingent consideration for the acquisition of Opus Information Technology Limited ( Opus Loan Notes ). The Opus Loan Notes were redeemable in cash or convertible into new ordinary shares of 2 pence each in the capital of the Company ( Ordinary Shares ) at a price of 40 pence per Ordinary Share in various tranches: 0.15 million on 30 September, 0.15 million on 30 September and 0.1 million on 30 September On 21 June, it was agreed by the beneficiaries of the loan notes issued at the time of the Company s acquisition of Opus Information Technology Limited ( Opus ) that they would waive the remaining 0.25m of loan notes in lieu of surrendering any potential warranty claims under the sale and purchase agreement. In addition on 29 January, in order to fund the acquisition of Kypera, the Company issued 3.5 million of unsecured loan notes ( Kypera Loan Notes ), which have a term of 5 years and carry interest at a rate of 5% per annum, which is not cash paid. The Kypera Loan Notes can be converted into new Ordinary Shares at a price of 85.6 pence per Ordinary Share. Conversion is at the option of the holder at any time during the 5-year term. The Company can redeem the Kypera Loan Notes from the third anniversary of issue if not already converted and earlier by request. In March, the Group repaid 0.5 million of the 3.5 million Kypera Loan Notes and a further 0.5 million of the Loan Notes were repaid in April Further details of the Group s risks and policies regarding financial instruments are set out in notes 22 and 23. Subsequent events On 27 April, the Group repaid a further 0.5 million of the 3.5 million of unsecured convertible loan notes that were issued on 29 January to assist in the funding for the acquisition of Kypera ( Loan Notes ). This was in addition to the 0.5 million Loan Notes repaid on 29 March. On 21 June, it was agreed by the beneficiaries of the loan notes issued at the time of the Company s acquisition of Opus Information Technology Limited ( Opus ) that they would waive the remaining 0.25m of loan notes in consideration of surrendering any potential warranty claims under the sale and purchase agreement. 20 Castleton Technology plc Annual Report