Half Year Report

28 August 2014

Servelec Group plc

Half year results for the six months to 30 June 2014

Growth continues across the Group, with the Board positive about the outlook for the full year.

Servelec Group plc ("Servelec" or the "Group") the UK-based technology group which provides software, hardware and services predominantly to the UK healthcare, oil & gas, nuclear, power, water, utilities and broadcast sectors, today announces its results for the six months ended 30 June 2014.

FINANCIAL HIGHLIGHTS

* after adding back amortisation and share based payments expense.

** order entry is the total contract value of revenue from an order received in the period.

*** after adding back amortisation, share based payments expense and the related tax adjustment.

§ Revenue increased 29% to £25.0m (H1 2013: £19.3m)

§ 12% growth in underlying operating profit to £5.0m (H1 2013: £4.5m)

§ Order entry up to £29.0m compared to £15.9m in 2013

§ Excellent cash generation of £8.9m (2013: £4.1m)

§ Adjusted EPS is 6p (H1 2013: 14p). The comparison to prior year is difficult, as 42.7m new shares, representing 63% of the company's share capital, were issued on 18 October 2013, prior to the IPO.

DIVIDEND

The Board is pleased to report that Servelec will be paying a maiden interim dividend of 1.5p per share on the 31 October 2014 to shareholders on the register at the close of business on 26 September 2014.

OPERATIONAL HIGHLIGHTS 

§ Healthcare division seeing good traction in the Mental Health and Community Health refresh programme

§ Successful integration of Semaphore drives strong performance for the Automation division

§ R&D investment increased to £2.2m (2013: £0.7m) due to the addition of Semaphore, further continued developments in Healthcare and pilot schemes being executed by Tynemarch

Alan Stubbs, Chief Executive Officer, commented:

"We are pleased with the progress made in the first half of 2014, which is in-line with our plans at the time of the IPO. The acquisition and successful integration of Semaphore has boosted the performance of our Automation division and its global distribution network has given us access to several new, attractive markets. The Healthcare division is performing particularly well both with the London Refresh and with more wins in the open market, reflecting our software product leadership and effective routes to market. Cash conversion has been significantly ahead of plan and puts the Group in a very strong financial position.

The Board is positive about the prospects of the Group and of its continued success in our first full year as a publically listed company."

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Notes to Editors

Servelec Group plc is a UK-based technology group, with significant intellectual property, providing software, hardware and services predominantly to the UK healthcare, oil & gas, nuclear, power, water, utilities and broadcast sectors.

Servelec Group has two operating segments; Servelec Healthcare and Servelec Automation:

- Servelec Healthcare specialises in the design, development and implementation of Electronic Patient Record and Patient Administration software within secondary care settings and is a market leader in the Mental Health and Community Health sectors in England

- Servelec Automation provides complex, mission-critical control systems to large blue-chip companies mainly in the UK, focusing on the oil & gas, nuclear, power, water, utilities and broadcast industries. Servelec Automation also provides services from consultancy through to design, implementation, delivery, installation and on-going customer support and maintenance.

CHIEF EXECUTIVE'S REVIEW

The six months to 30 June 2014 have been successful for Servelec Group, with both our Healthcare and Automation divisions performing well and delivering good growth.

Servelec Group revenue increased 29% to £25.0m (H1 2013: £19.3) with 12% growth in underlying operating profit to £5.0m (H1 2013: £4.5m). Order entry was up by 82% to £29.0m as compared to £15.9m in 2013. Cash generation from operations has been excellent at £8.9m (2013:£4.1m).

Healthcare

Our Healthcare division is moving through a critical inflexion point, changing from being a supplier of healthcare software to the National Programme via BT to supplying NHS Trusts directly. In the first half of 2013, 33% of Healthcare revenue was from outside of the BT contract. This has risen in the first half of 2014 to 46% and will continue to rise.

The completion of the National Programme delivers a number of opportunities for Servelec Healthcare:

§ The London Refresh (London Camden and London Other), where Servelec is incumbent - ends October 2015

§ North New, for Trusts who were not delivered a software system by the National Programme

§ The refresh of software systems in the North - ends July 2016

We have been very successful in converting opportunities from the London Refresh, which includes Mental Health and Community Trusts in the South of England and from those Trusts that did not have a system delivered by the National Programme. Of the London Refresh, we have been awarded 'preferred bidder status' on a total of twelve of the fifteen Trusts which are using the Camden Framework to procure a new system and have announced their selected supplier.

Whilst Servelec Healthcare has a desire to win all of the Trusts coming up for 'Refresh', we will focus our efforts on bidding for Trusts where we have the greatest chance of success and to date we are ahead of our plans of converting Trusts to direct Servelec Healthcare customers.

This theme continues outside of the National Programme (North New) where, in open competition, in 2014, we have won preferred bidder status on three Mental Health Trusts. Our hosting offering has currently been taken up by eleven Trusts and this is additive to the profitability of the Healthcare business.

Of the Trusts won in H1 2014, four have been entered into the order book in the first half. The remaining seven will be added in the third quarter, together with any contract wins in the second half of the year. Despite the lag of moving from preferred bidder to contract award our order entry was up 87% to £9.5m, revenue through this inflexion period was up 5% to £7.4m, and R&D investment in RiO, RiO Mobile and Oceano returned to normal levels of £0.8m (2013: £0.3m) leading to a 1% increase in Operating Profit at £3.3m.

Automation

Automation reported a strong performance, helped by a full contribution from the Semaphore acquisition through this financial period. Revenues increased by 43% to £17.6m and operating profit grew by 31% to £3.1m.

Since joining the group, the performance of Semaphore has improved year-on-year. Order entry is up by 19% to £5.0m, revenues increased by 26% to £5.1m and operating profit by 91% to £538k. The Board is optimistic about the potential which Semaphore has to deliver further growth opportunities for Automation through the second half of 2014 and beyond.

The underlying Automation businesses grew organic operating profit by 9%, to £2.3m. This is a particularly encouraging performance given the investment of £0.3m in the period in two large, important and exciting pilot schemes for Severn Trent and Wessex Water. Once completed, these pilots will lead to increased business opportunities during 2015 and beyond.

Whilst we have previously announced a slight delay in the commencement of the high material content North Sea Platform refurbishment projects, this has had two positive knock-on effects. The first is that we have diversified and won business with new clients and, secondly, we have maintained our net margins at a similar level of 18% versus 19% in 2013. This is despite the inclusion of the Semaphore business, which tends to be lower net margin, but is also partly because we have not had the volume of lower margin materials passing through.

The organic growth comparison for Automation, excluding Semaphore, shows Order Entry growing by 34% to £14.5m, revenue by 1% to £12.5m and operating profit growing by the aforementioned 9%. The Order Bank, including Semaphore, grew by 26% to £18.5m (19% organic growth); giving a firm base for the second half and we are well placed to win major orders towards the end of 2014 which will act to underpin 2015 results.

Outlook

Servelec Group enters the second half of 2014 in a strong position. Healthcare, with an excellent record in winning preferred supplier status, has already underpinned the second half and a strong start to 2015. Automation is moving ahead with the Technologies division providing the balance against the delayed projects in the Controls division.

The developments in Healthcare, RiO Mobile, Oceano and optimisation trials in UK water together with the new products in Technologies provide a promising outlook for the future of the Servelec Group and we are confident of achieving expectations for the full year whilst positioning of the business with an improved order book for 2015.

OPERATIONAL REVIEW

Servelec Healthcare

Servelec Healthcare operates exclusively in the UK healthcare sector, with the majority of our business conducted in England. The business delivers and supports proprietary Patient Administration Software (PAS) and Electronic Patient Record (EPR) software products RiO and Oceano which are designed for secondary care providers with a high level of recurring revenues.

Servelec Healthcare has reported a very strong performance in terms of project wins through the first half of the year, with excellent momentum across the Camden Refresh (London Camden), the Trusts in the South of England which are not part of the Camden Refresh (London Other) and the North of England.

The financial results are in line with expectations, driven by the wind down of the BT contract and subsequent conversion of Trusts carrying out their software refresh tender processes. We continue to make important investments in R&D, including developing our mobile offering which is a key part of our comprehensive product portfolio. We are also making good progress on hosting across our framework, which is important both for revenue growth and customer retention.

With regard to the Camden Refresh, fifteen Trusts have now completed their tender process. Servelec Healthcare tendered for fourteen of the mandates and won twelve of them.

The refresh process in the South of England is happening slightly quicker than anticipated, and we are very pleased with our market share of tenders won to date. This strong performance illustrates the seriousness with which we take these opportunities, and the confidence and support our incumbent Trusts have in our RiO v7 product.

With regard to the greenfield opportunities in the North, four Trusts have announced the results of their tender process and we have won three of them. We are pleased with this performance, which illustrates our ability to win Trusts where we are not the incumbent through the quality of our current product suite, our track record of delivery, our plans for future product development, and our best in class customer support post integration.

Of the contracts won, there is a good mix of Community Care mandates, Mental Health mandates and combined Community Care & Mental Health mandates proving our ability to deliver solutions in line with Trusts' requirements. Across our user base, new and current, we are seeing strong levels of migration to RiO v7 with the users embracing its broader interoperability to help deliver converged care. In total, we have won 14 tenders out of the 18 we participated in outside of the National Programme refresh in the last three years.

As anticipated, Acute remains a medium term opportunity with the Trusts expected to start their tender processes in 2015. Our project with University Hospitals Birmingham is still on track to go live in 2014 and this will be an important reference point as we look to capitalise on this promising opportunity. The opportunity with PICS is materialising slightly slower than anticipated, but we have the product set and routes to market in place for when this opportunity arrives.

To facilitate the further expansion of the Healthcare business the team will be relocated to an office facility close to the centre of Sheffield during the second half of 2014. The space vacated by Servelec Healthcare will be occupied by Servelec Automation allowing the sale of our Dinnington site.

Servelec Automation

Servelec Automation delivers complex, mission critical control systems to major clients in UK Utilities, Oil & Gas, Power and Nuclear markets together with a global RTU (Remote Telemetry Unit) manufacturing and product distribution business. The acquisition of Semaphore has made an immediate, positive impact on the performance of Servelec Automation and with the products developments and changes that are in our plans there is a lot more to come.

Servelec Automation has made an impressive start to 2014 with Revenue up 43% to 17.6m, Operating Profit up 31% to £3.1m, Order Entry up 80% to 19.5m and Order Bank improving by 26% to 18.5m. This is a positive performance despite the known delays in the placement of orders from the North Sea refurbishment process.

The underlying Automation businesses grew organic operating profit by 9%, to £2.3m. This is a particularly encouraging performance given the investment of £0.3m in the period in two large, important and exciting pilot schemes for Severn Trent and Wessex Water. Once completed, these pilots will lead to increased business opportunities during 2015 and beyond.

If we look a little deeper into our Automation business we can see both divisions have moved ahead of 2013.

Servelec Controls

Performance in H1 2014:

Servelec Controls performed well during the first half of the year. As previously mentioned, two large capital projects have been slightly delayed to the fourth quarter of the year. However, we have had great success winning a number of other interesting projects in the oil & gas and nuclear verticals, ensuring good levels of labour utilisation. The change in revenue mix has meant we reported profits in line with expectations, with a stronger gross margin performance, despite the slight drop in revenue.

These projects have come from both established, long term customers, illustrating the strength of our relationships and levels of repeat business we have with those customers and from new companies in the oil & gas and nuclear verticals. Examples of projects won include nuclear power station system refurbishments, an updated Production Control System (PCS) for a Combined Heat and Power ("CHP") Plant that is relocating from the UK to Turkey and system upgrade projects for leading E&P and EPC companies.

As part of the expansion plans for Servelec Controls the business will relocate from its current premises into the space vacated by Servelec Healthcare, providing both the necessary additional office space and workshop facilities.

Servelec Technologies

The business delivered a strong operational and financial performance, driven both by acquisitive and organic growth. The focus for the financial period has been on integrating the Tynemarch and Semaphore acquisitions smoothly and continuing to generate good levels of repeat business from our established customer base. The integration process has been very successful and initial feedback from customers has been encouraging. We now have a single, co-ordinated strategy from product development through to global sales across all verticals.

As well as identifying additional cost savings to those originally budgeted, this co-ordinated approach with global distribution channels has introduced a good number of new long term growth opportunities. We have already seen some early traction with wins in China, the Middle East and Australia.

The high level of repeat business from our customer base is a function of the strength of our long term relationships, the quality of our product portfolio and our customer service excellence. We have won projects with a number of the leading water companies in England and Wales, the Met Office and Heathrow. We are particularly excited about two trials which are currently being run with Severn Trent and Wessex Water that, while they have required some short term investment, offer promising long term returns.

FINANCIAL REVIEW

The Group has traded well in the first half of 2014 with continued growth in both revenue and underlying operating profit.

The acquisition of Semaphore just prior to the IPO added £5.1m of revenue in H1, which when combined with 3% organic growth resulted in revenue up 29% to £25.0m.

Administration and other expenses have increased to £6.0m (2013: £2.5m). This is principally due to the Semaphore acquisition and a full six months share based payment charge.

Underlying operating profit increased 12% to £5.0m, which includes increased R&D costs expensed of £2.2m (H1 2013: £0.7m).

After accounting for a full six months of the amortisation of acquired intangibles and the additional charge due to share based payments, overall operating profit was slightly up on prior year at £4.4m (2013: £4.3m).

The effective tax rate for the period is 23.6% (2013: 22.8%) due to the higher tax rates in the Semaphore jurisdictions, resulting in a profit for the financial period from continuing operations of £3.4m (2013: £3.4m).

Adjusted EPS was 6p which cannot be compared to the prior year (2013: 14p) as 42,738,889 shares were issued prior to the IPO on 18 October 2013.

The excellent cashflow from operating activities was £8.9m (H1 2013: £4.1m), which benefited from the unwinding of the NPfIT work in progress in line with the roll out of R2 across the Southern Trusts. The Servelec Group has no debt and has cash balances of £14.6m (2013: £4.9m).

Capital expenditure of £0.4m (2013: £0.1m) includes investment in the IT infrastructure for the provision of hosting services via third party data centres in the Healthcare segment.

RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. The directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 31 December 2013. A detailed explanation of the risks summarised below, and how the Group seeks to mitigate the risks, can be found on page 26 to 27 of the annual report which is available at www.servelec-group.com

Regulatory

Changes to legislation may cause customers to divert their spending on the Group's products.

Public Sector Healthcare Spending

A key driver of the Group's business is the level of UK Government spending on IT relating to healthcare delivery. The rate of growth in expenditure on healthcare related IT may reduce significantly.

Competitor Activity

The Group may face significant competition from both domestic and overseas competitors.

Operational

The Group's business involves providing customers with highly reliable software and hardware. If the software or hardware contains undetected defects the Group may fail to meet its customers' performance requirements or otherwise satisfy the contract specifications.

Accounting Controls

The Group recognises revenue on projects based on the percentage complete of the individual project. A key element of this calculation is the estimation of the costs to complete on contracts.

People

The ability of the Group to retain and attract appropriately qualified and experienced staff is a key component to the continued success of the business.

Currency

The Group is exposed to translation and transactional foreign exchange risk.

Information Technology

Loss of data from failure of systems or cyber-attack.

Going concern

As stated in note 2 to the condensed financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

Servelec Group plc

Statement of directors' responsibilities

The directors confirm that to the best of their knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

· the interim management report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of interim financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last annual report that could do so.

The directors of Servelec Group plc are listed in the Annual Report for the year ended 31 December 2013. A list of current directors is maintained on the Group website at www.servelec-group.com

By order of the Board

Alan Stubbs Mike Cane

Chief Executive Chief Financial Officer

Servelec Group plc

Independent Review Report to Servelec Group plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 which comprises the condensed Group income statement, the condensed Group statement of comprehensive income, the condensed Group statement of financial position, the condensed Group statement of changes in equity, the condensed Group cash flow statement and the related notes 1 to 12. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

Leeds

28 August 2014

Servelec Group plc

Condensed Group income statement

For the six months ended 30 June

Servelec Group plc

Condensed Group statement of comprehensive income

For the six months ended 30 June

Servelec Group plc

Condensed Group statement of financial position

Approved by the Board on 27 August 2014.

Servelec Group plc

Condensed Group statement of changes in equity

Servelec Group plc

Condensed Group Cash flow statement

For the six months ended 30 June

Servelec Group plc

Notes to the financial statements

1. Corporate Information

Servelec Group plc is a limited liability company, incorporated and registered under the laws of England and Wales, whose shares are publicly traded.

The condensed consolidated interim financial statements of the Company for the six months ended 30 June 2014 comprise the Company and its subsidiaries (together referred to as the "Group") were approved by the Board on 27 August 2014. These statements have not been audited but have been reviewed by the Group's auditor pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information.

These interim condensed consolidated financial statements do not constitute statutory accounts of the Group within the meaning of Section 434 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2013 have been filed with the Registrar of Companies. The auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

New standards and interpretations

The following new standards, new interpretations and amendments to standards and interpretations have been issued and were effective from 1 January 2014. 

The adoption of the above standards and interpretations did not have a material impact on the Group's Financial Statements, other than additional disclosures, in the period of initial application. 

2. Accounting policies

Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2014 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34 "Interim Financial Reporting" as adopted by the European Union. It does not include all the information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2013.

The accounting policies, presentation and methods of computation applied by the Group in these interim condensed consolidated financial statements are the same as those applied in the Group's latest audited annual consolidated financial statements for the year ended 31 December 2013.

Servelec Group plc

Notes to the financial statements

2. Accounting policies (continued)

Going Concern

The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the condensed financial statements.

3. Segment information

For management purposes, the Group is organised into business units according to the nature of the products and services, and has two reportable segments as follows:

· The Healthcare segment develops high quality, enterprise-wide systems for implementation across community, mental health, child health and hospital based services. The segment supplies software and IT solutions and services into the healthcare and social services markets.

· The Automation segment is engaged in the provision of complex, mission critical systems to the oil & gas, power, nuclear and water industries. The segment specialises in safety systems, protection systems, control systems and wide area telemetry control systems. The segment also offers business optimisation consultancy and remote telemetry units, which are designed and manufactured in house.

The Automation reporting segment is made up of two operating segments, Controls and Technologies, which have been aggregated as the Board considers that they have similar economic characteristics.

Management monitors the operating results of its business units separately for the purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss, which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the consolidated financial statements. This measurement basis excludes the effect of central services, non-recurring expenditure, amortisation, share based payments and group financing costs which are not allocated to operating segments.

Transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.

The following tables present revenue and profit information for continuing operations regarding the Group's business segments for the six months ended 30 June 2014, 30 June 2013 and the year ended 31 December 2013.

Servelec Group plc

Notes to the financial statements

Operating assets and liability information are measured on a Group basis and so have not been disclosed at segment level.

Adjustments and eliminations

Segment profit for each operating segment excludes net finance costs.

4. Research and Development costs

5. Property, Plant and Equipment

During the six months ended 30 June 2014, the Group acquired assets with a cost of £396,000 (six months to 30 June 2013: £116,000). £296,000 relates to computer equipment in the healthcare segment.

Servelec Group plc

Notes to the financial statements

6. Earnings per share

Basic earnings per share amounts are calculated by dividing profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

The following reflects the income and share data used in the basic earnings per share computation:

The weighted average number of shares has been calculated assuming all shares were converted from £1 to 18p shares as from 1 January 2013 in line with IAS.33.27.

Adjusted earnings per share

Servelec Group plc

Notes to the financial statements

7. Dividends paid and proposed

Based on weighted average number of shares converted to 18p shares.

* Paid to former parent, CSE Global Limited.

The proposed interim dividend of 1.5p was approved by the Board on 27 August 2014 and has not been included as a liability as at 30 June 2014.

8. Income tax expense

The tax charge on continuing operations for the period is based on an effective rate of 23.6% (2013: 22.8%).

Tax rate changes that were substantially enacted at the balance sheet date have been factored into the calculation of the effective tax rates.

Servelec Group plc

Notes to the financial statements

9. Financial instruments and financial risk management objectives and policies

There are no material differences between fair value and the book value of any of the financial instruments.

The fair value of contingent consideration, which is classified as a level 3 financial instrument, has been estimated based on management's profit projections.

Contingent consideration

The consideration has been assumed at the maximum amount of £300,000 (£450,000 at 30 June 2013 and 31 December 2013 and discounted at the market interest rate.

Sensitivity

Should profit projections for the 3 year earn out period fall by 15% the fair value of contingent consideration would reduce to nil. Should profit projections fall by 5% then the fair value of contingent consideration would reduce by 50%.

Should profit projections increase then the fair value of contingent consideration will increase only by the timing of payments which would be a maximum of 9%.

Servelec Group plc

Notes to the financial statements

10. Issued capital and reserves

Authorised shares

Ordinary shares issued and fully paid

On 18 October 2013, the Group issued 7,093,000 £1 shares at par to CSE Global Limited for the purchase of the Semaphore Group of Companies.

On 18 October 2013, the Group issued 600,000 £1 shares at par to CSE Global Limited for the purchase of the Intellectual Property Rights relating to the Semaphore Group Kingfisher products.

On 2 December 2013, the 12,271,500 £1 shares were converted into 68,175,000 18 pence shares.

On 2 December 2013 156,911 18 pence shares were issued to employees of the Servelec Group at the strike price of £1.79.

Servelec Group plc

Notes to the financial statements

11. Share based payments

Group executive share option plan (ESOP)

Share options were granted to employees, as determined by the Remuneration Committee. The exercise price of the options is equal to the market price of the shares on the date of grant. The options only vest in accordance with the performance conditions for each executive as determined by the Remuneration Committee. Conditions are based on order entry and profit targets for the year to 31 December 2014, provided the employee remains in the group's employment for 3 years. The options cannot be exercised within 3 years and have a maximum life of 10 years. The option will be settled by the issue of new shares and there are no cash settlement alternatives.

Save-as-you-earn (SAYE) scheme

In November 2013 Servelec Group plc introduced a SAYE scheme. Under the scheme employees may elect to save between £5 and £250 per month.

Long term incentive plan (LTIP)

Share options were granted to senior executives, as determined by the Remuneration. The exercise price of the options is nil. The options only vest in accordance with the performance conditions for each executive as determined by the Remuneration Committee for the year ending 31 December 2014 provided the employee remains in in the group's employment for 3 years. The options cannot be exercised within 3 years and have a maximum life of 10 years. The option will be settled by the issue of new shares and there are no cash settlement alternatives.

Further details of the vesting conditions are in the Remuneration Committee report on pages 37 to 47 of the Annual Report for the year ending 31 December 2013.

The following tables summarise the number and weighted average exercise prices (WAEP) of and movements in, share options during the period.

Servelec Group plc

Notes to the financial statements

11. Share based payments (continued)

There are no options exercisable at the period end.

The fair value of the options granted and the assumptions used in the model are set out below.

The fair value of the share options is measured at the grant date taking into account the terms and conditions upon which the instruments were granted. The cost of the options is recognised over expected vesting period. Until the liability is settled it is re-measured at each reporting date with changes in fair value recognised in profit or loss.

The expense recognised during the six months to 30 June 2014 is £203,000 (year to 31 December 2013: £41,000).

Servelec Group plc

Notes to the financial statements

12. Related party disclosures

Identity of related parties

Servelec Group plc is the ultimate parent company.

The consolidated financial statements of the Group include: