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CGL
Specialist software and services company that
manages information in complex
environments
3
Financial results from continuing operations for the full-year
ended 30 June 2018 relative to Previous Corresponding Period
(PCP)
$108.5 total revenue
10%
$34.0m EBITDA
13%
$25.3m profit before income tax
19%
$19.4m net profit
26%
32.5¢ earnings per share
35%
12.8¢/share dividends paid
(note 25)
$15.8m net profit attributable to
members
39%
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Contents
Chairman’s report ......................................................................................................................................... 5
Operating and financial review .....................................................................................................................7
Board of Directors ....................................................................................................................................... 12
Key management personnel ........................................................................................................................ 15
Directors’ report .......................................................................................................................................... 17
Remuneration report (audited) ................................................................................................................. 22
Auditor’s independence declaration .......................................................................................................... 35
Corporate directory .................................................................................................................................... 36
Annual financial report .............................................................................................................................. 37
Notes to the financial statements .............................................................................................................. 45
Directors’ declaration ................................................................................................................................. 90
Auditor’s report ........................................................................................................................................... 91
Shareholder information ............................................................................................................................ 98
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Chairman’s report
Dear Shareholder,
ANOTHER YEAR OF STRONG PERFORMANCE
I am pleased to report another strong financial performance by The Citadel Group Limited (Citadel) for the year ended 30 June 2018:
Statutory total revenues from continuing operations were $108.5 million compared with $98.8 million in FY17;
Citadel’s gross profit has increased to $54.3 million from $46.1 million in FY17;
Profit before income tax from continuing operations has increased to $25.3 million, compared with $21.3 million in FY17;
Net Profit After Tax (NPAT) from continuing operations was $19.4 million compared with a FY17 result of $15.4 million;
Net Profit After Tax (NPAT) from continuing operations attributable to members is $15.8m (2017: $11.4m), after minority interests of $3.6m (2017: $4.0m).
Cash and cash equivalent reserves remain strong at $24.9 million, down from $29.8 million in FY17 due to acquisitions; and,
There was an increase in net assets of $11.5 million to $87.0 million compared to $75.5 million at 30 June 2017.
DIVIDENDS
Reflecting Citadel’s growth profile, ongoing investment in growth initiatives, and strong cash flows and balance sheet, the Directors of Citadel declared a final dividend of 9.0 cents per share, fully franked. The record and payment dates for this dividend are 24 August 2018 and 28 September 2018, respectively.
This brings the total FY18 dividend to 13.8 cents per share, fully franked.
OPERATING HIGHLIGHTS FOR THE YEAR
Highlights for the year were:
Retention of core managed services contracts;
Continued pivot towards successful software and services delivery;
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Multiple long term contracts signed with government agencies for the new cloud Software-as-a-Service platform, Citadel Information Exchange (Citadel-IX);
Acquisition of Charm Health International and Anaesthetic Private Practice, both of which continue to expand the capacity of Citadel in e-health information management;
Development of a national security platform to mobilise citizen’s smartphones as critical incident data sources, in line with our strategic focus on National Security and Defence; and,
Secured a number of new significant projects due to the quality of work delivered and referenceability on existing client engagements.
BOARD AND MANAGEMENT
It has been a pleasure to work with my colleagues on the Citadel Board and I appreciate all their efforts during the year. I would also like to thank Darren, his executive team and all the staff for their efforts in what has been another very busy and successful year.
Ms Anne Templeman-Jones was appointed to the Board of Directors effective 8 September 2017 by the directors. The appointment was subsequently endorsed through a shareholder vote at the Annual General Meeting on 24 October 2017.
Ms Deena Shiff retired from the Board of Directors effective 31 January 2018. Deena was a strong contributor to the Board through the listing process and then subsequently as the Chair of the Audit, Risk and Compliance Committee. We wish Deena the best in her future endeavours.
OUTLOOK
There are many opportunities to continue growing Citadel’s businesses in both public and private markets, particularly with Citadel’s unique technology and health offerings. Growth will be organic and from selected merger and acquisition opportunities.
Finally, thanks to our shareholders for their support during the year.
Yours sincerely,
Mr Kevin McCann, AM
Chairman
20 August 2018
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Operating and financial review
I am very pleased to present this full year Operating and Financial Review for Citadel.
OVERVIEW OF THE BUSINESS
Citadel is a specialist software and services company that manages information in complex environments. The key industry vectors of the business are in eHealth, National Security/Defence, all levels of Government and the Tertiary Education sector. For these clients, Citadel provides software platforms and digital services that integrate know-how, systems and people to provide information on an anywhere-anytime basis.
The majority of Citadel’s revenues are derived from long term managed services, software-as-a-service, and high quality strategic advisory services.
During the period, Citadel has successfully met or exceeded all if its service level agreements and maintained the highest level of delivery quality to our clients which has added to the already impressive reputation of Citadel. During the period the company has also continued to invest in scalable software solutions that are increasing the addressable market of the Group.
OPERATIONAL HIGHLIGHTS
Following a very successful FY17, I am again pleased to advise that FY18 has been another excellent year. Key operational highlights include:
Retaining all core managed services contracts, including those with Defence;
Continuing our pivot towards successful software and services delivery, and supporting our clients with their move to secure cloud environments;
Having our Citadel Information Exchange (Citadel-IX) become Australia’s first Content Manager cloud hosted solution certified to run in Microsoft’s new Azure AU Central at Protected level;
Selling Citadel-IX into new state government clients in New South Wales, Victoria and Queensland supporting over 24,000 new users;
Developing a new mobile phone app linked with sophisticated analytics and digital workflow systems that enables emergency services to respond immediately to citizen needs, whether these be reporting a local crime, calling for an ambulance or reporting a terrorist incident. The platform has been cleverly designed to support a range of industries including emergency services, national security, insurance, health and education;
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Becoming the first enterprise laboratory information system vendor to receive certification for our interface to the award-winning BloodNet online blood ordering and inventory management system from the National Blood Authority (NBA);
Signing new long term Software-as-a-Service (SaaS) contracts for information management with Brisbane City Council (BCC), and Queensland Department of Transport & Main Roads, NSW Department of Finance Services & Innovation, and the Victorian Department of Treasury & Finance;
Being appointed by Deakin University as its core content and collaboration supplier, replicating the success of our Monash University contract;
A number of new projects won due to continued quality of delivery in existing client engagements;
Acquiring Charm Health International Pty Ltd and subsidiaries (Charm) on 15 September 2017, which owned Australia’s leading supplier of specialist oncology e-health systems. The acquisition required an upfront payment of $8.2m. Refer to Note 30 for further detail;
Acquiring the business assets of Anaesthetic Private Practice Pty Ltd (APP) on 4 May 2018, which owned a cloud based practice management tool for the Australian Anaesthetics sector. The acquisition cost $2.1m. Refer to Note 30 for further detail;
Delivering another year of record growth with strong margins and a pipeline which will support strong organic growth in following years;
Maintaining strong operational cash flows from ordinary activities with 60% of EBITDA converted to cash; and,
Continuing our investments in broadening and deepening of the technical and business development skills across the Group.
STATUTORY RESULTS
Statutory Group Results from Continuing Operations Summary
Citadel achieved total revenues of $108.5 million for FY18, up from $98.8 million in FY17. The increase was derived through a combination of internal growth strategies, including success on the signing and progress of new contracts, acquisition activities and execution on existing contracts.
2018 2017 Variance Variance
($m) ($m) ($m) (%)
Total revenue and other income 108.5 98.8 9.7 9.8%
Gross Profit on the sale of goods and rendering of services 54.3 46.1 8.2 17.8%
EBITDA 34.0 30.1 3.9 13.0%
Depreciation and amortisation (7.3) (5.8) (1.5) 25.9%
Finance costs (1.4) (3.0) 1.6 (53.3)%
Tax expense (5.9) (5.9) (0.0) 0.0%
NPAT 19.4 15.4 4.0 26.0%
Non-controlling interests (3.6) (4.0) 0.4 (10.0)%
NPAT attributable to members of the parent entity 15.8 11.4 4.4 38.6%
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Cost management continued to remain a focus in FY18 (continuing trends from half year accounts) in order to maintain strong gross profit margins and to execute on Citadel’s strategy of scalable software solutions.
Depreciation and amortisation in FY18 was $7.3 million compared with $5.8 million in FY17 (an increase of 25.9%) with the increase relating predominantly to continued capital investment in internal product development and assets acquired through business combinations.
Capital Expenditure
Furniture & office
equipment
Plant & equipment
Computer equipment
Leasehold improve-
ments
Motor vehicles
Make good
ICT Software
Total
($m) ($m) ($m) ($m) ($m) ($m) ($m) ($m)
2017 Additions 0.2 0.0 0.0 0.2 0.0 0.0 2.8 3.2
2018 Additions 0.0 0.1 0.3 0.5 0.0 0.0 2.8 3.7
Group capital expenditure increased during the year to $3.7 million from $3.2 million. Capital is related to expenditure on office fit-outs, demonstration equipment, and IT requirements (in support of both internal product development and client requirements). ICT Software included purchases for whole of Group ICT Infrastructure and completion of developed IP.
Cash Flows
Cash and cash equivalents for cash flow purposes decreased by $5.9 million during the year to $23.9 million. This decrease relates predominantly to the use of cash reserves as consideration for acquisitions during the year. Within the continuing business, the significant cash flows generated from operations have been invested in growth assets like internally developed IP. The operating cash flows were $20.4 million, reflective of solid collections from customers.
($m)
Net cash inflow from operating activities 20.4
Net cash (outflow) from investing activities (24.0)
Net cash (outflow) from financing activities (1.2)
Net (decrease) in cash and cash equivalents (4.8)
Cash flows from discontinued operations (1.1)
Cash and cash equivalents at the beginning of the year 29.8
Cash and cash equivalents at the end of the year for cash flow purposes 23.9
BUSINESS STRATEGY AND PROSPECTS
The purpose of Citadel is to ‘keep information and people safe’. Citadel will continue to develop and deliver leading secure enterprise information management products and services in our key growth vectors of eHealth, National Security/Defence, all levels of Government and Tertiary Education where information security and trust is paramount. The Group will increase the investments in cloud-enabled software such that we are able to deploy our solutions to Australian and international markets more rapidly than previously possible. Growth will be underpinned by new contract wins and scalable cloud-enabled software sales.
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Citadel will continue to solve complex information management problems for its clients, manage these systems over a multi-year period, and expand these offerings to a broader client base within Australia and internationally with a focus on the private sector as it looks to diversify its client base. It will execute this strategy through a mix of organic growth and acquisition opportunities.
The pipeline of work for Citadel will increasingly be developed around cloud-based software information management solutions which are not geographically constrained however the company will continue to provide high level technology advisory, integration and on-premise or hybrid solutions to our clients where required.
RISK MANAGEMENT
In accordance with board policies, Citadel manages risk at Group level. The major risk events, together with possible reasons for their occurrence, are identified and recorded in risk registers in accordance with AS/NZS ISO31000:2009. Those rated as unacceptable, plus what is being done to manage these, are reported to the Board on a regular basis. Principle 7 of The Corporate Governance Statement (available on the Citadel website) outlines the process of managing risk and the engagement of the Audit, Risk and Compliance Committee.
As required by Section 299A(1) of the Corporations Act 2001, and in accordance with ASIC Regulatory Guide 247 Effective Disclosure in an Operating and Financial Review (RG 247) issued in March 2013, material business risks that could adversely affect financial performance include:
Loss of key contracts or failure to win new contracts;
Claims for indemnities or damages which may arise in connection with Citadel's key contracts;
Failure to commercialise R&D expenditure;
Disruption through technological advances or product failures; and,
Loss of key personnel & management and/or an inability to attract new talent in line with the increase in operational scale.
REGULATORY AND ENVIRONMENTAL MATTERS
Citadel is required to carry out its activities in accordance with applicable regulations in each of the jurisdictions in which it undertakes business. Citadel is not aware of any matter that requires disclosure with respect to any significant regulations in respect of its operating activities, and there were no issues of non-compliance during the period.
Citadel operations are subject to a range of environmental regulations under the law of the Commonwealth of Australia and its States and Territories. Citadel has not incurred any liabilities under any environmental legislation.
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OUR PEOPLE
The ongoing success of Citadel relies on the quality and performance of our staff. The purpose of Citadel is to ‘keep information and people safe’, and that purpose is reflected throughout the Group and ensures total alignment in all that we do. The purpose of the Group is supported by the core values (Collaborate and Celebrate, Autonomy with Accountability, Respect for Others, and Empowerment) of the Group which set the standard by which all employees operate. The development of staff is a priority and the company will continue to invest in graduate recruitment programs, Future Leader programs and associated reward and recognition programs necessary to build a dynamic and innovative workforce required for ongoing success.
In closing, I would like to recognise the ongoing support of our shareholders and send a vote of thanks to all of Citadel’s loyal staff, partners and clients who have significantly contributed to another year of strong growth.
Yours sincerely,
Mr Darren Stanley
Chief Executive Officer
20 August 2018
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Board of Directors
The Directors bring to the Board relevant experience and skills, including industry and business knowledge, financial management and corporate governance.
DIRECTOR AND POSITION EXPERIENCE
Mr H Kevin McCann, AM
Independent non-executive Chairman and Director
Kevin is a Chairman with extensive experience in corporate governance and financing. He is Chairman of Telix Pharmaceuticals Limited and the Menzies Research Centre. He is a Presiding Pro Chancellor of the University of Sydney, Co-Vice Chair of the New Colombo Plan Reference Group, as well as a member of the Male Champions of Change. He is a director of the United States Studies Centre at the University of Sydney and a Governor of Queenwood School in Sydney. Kevin has held the role of Chairman and Director of ASX listed companies including Macquarie Group Limited and Macquarie Bank Limited, Origin Energy Limited, and is a former Chairman of ING Management Limited, Healthscope Limited and the Sydney Harbour Federation Trust, an Australian Government agency.
Kevin practised as a commercial lawyer as a partner of Allens Arthur Robinson from 1970 to 2004 and was Chairman of Partners from 1995 to 2004.
Kevin has a Bachelor of Arts and Law (Honours) from Sydney University and a Master of Law from Harvard University. Kevin is also a Life Fellow of the Australian Institute of Company Directors.
He was made a Member of the Order of Australia for services to the Law, Business and the Community in 2005.
Dr Miles Jakeman
Executive Director and Deputy Chairman
Miles is a successful company founder with skills in business development, program delivery, notably in complex and secure environments and general management including staff development. He was Citadel’s Managing Director from inception until transitioning into his current role effective 16 November 2016. He is also Chairman of AIM-listed GetBusy plc and for over 30 years, has advised senior business leaders and government officials, including representing countries in ministerial level forums.
Miles has significant overseas working experience with multinational companies in sales, marketing and business development capacities with full profit and loss responsibilities.
Miles has a Bachelor of Science (Hons), a Graduate Diploma in Asian Studies, a Doctorate of Philosophy (PhD) in Asian Studies and a PhD in Business Leadership. He has also completed the AICD Advanced Diploma Mastering the Boardroom and the AICD Diploma of International Company Directors, plus holds an Advanced Diploma of Project Management.
Miles is a visiting Fellow at the Australian National University and a member of the Australian Institute of Company Directors. He is also a member of the not-for-profit Strategic Forum.
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DIRECTOR AND POSITION EXPERIENCE
Ms Anne Templeman-Jones Independent non-executive
Director
Anne has over 25 years’ experience in institutional and commercial banking, wealth management and insurance, having previously held a number of senior executive roles within Westpac Banking Corporation and ANZ Banking Group. Anne also has significant experience as a Chair and non-executive director of listed and unlisted entities. She has a strong audit background and is currently a director of GUD Holdings Limited, WorleyParsons Limited and the Commonwealth Bank of Australia. In addition, Anne is a member of the Cyber Security Research Institute.
Anne is a Chartered Accountant with a BComm (UWA), Executive MBA (AGSM), and a Post Graduate Masters in Risk Management (UNSW).
Lieutenant-General Peter Leahy,
AC Independent non-executive
Director
Peter brings to the board deep knowledge of defence strategy and requirements having had oversight of significant budgets and personnel. He retired from the Army in July 2008 after a 37 year career as a soldier. He concluded his career in the Army with the rank of Lieutenant General after a six year appointment as the Chief of Army. In this appointment he was directly responsible for Army’s $6bn annual budget. His responsibilities included the detailed management of personnel, operating and capital cost centres and the direct responsibility to raise, train and sustain the Army. He was the principle adviser to the Chief of the Defence Force on strategic matters related to the deployment of the Army on global combat operations.
Since leaving the Army, Peter has joined the University of Canberra as a Professor and Foundation Director of the National Security Institute where he teaches, writes and commentates on defence and security matters. He is a graduate of the Australian Institute of Company Directors and has been appointed to the Boards of Codan Limited and Electro Optic Systems Holdings Limited. He is the Chief Defence Advisor to the Queensland Government and a Technical advisor to WarpForge Limited. He is also involved in charities as the Chairman of Soldier On, the Salvation Army Red Shield Appeal Committee for the Australian Capital Territory and is Chairman of the Australian International Military Games (Invictus). He is also a Trustee of the Prince’s Charities Australia. In 2014 he was appointed by the Minister for Defence as a member of the First Principles Review of the Department of Defence.
Peter was awarded the Companion of the Order of Australia in 2007 for eminent service to the Australian Defence Force in command of the Australian Army and strategic staff appointments.
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DIRECTOR AND POSITION EXPERIENCE
Mr Mark McConnell
Non-Executive Director
Mark is a successful business developer whose skills cover the areas of business strategy, investor relations, capital raising and innovation. After serving as an officer in the Royal Australian Air Force for 8 years, Mark moved into the corporate world and has spent the last 21 years in a range of executive roles in the fields of aviation, technology and investment finance. He has been a director of Citadel since its formation in 2007.
Mark has founded several private companies and has been recognised with a number of entrepreneurial awards. In 2007, he founded and ran New Territories Investments, a private equity fund that has assisted the growth strategies of multiple technology businesses in Australia, including Citadel.
Mark has a Bachelor of Science, a Graduate Diploma of Employment Relations, a Graduate Diploma of Logistics Management, and a Masters of Business Administration. He is also a Fellow of the Australian Institute of Company Directors (FAICD). Mark was awarded the ACT Young Entrepreneur of the Year in 2003 and 2006.
Mark serves as a Director on the boards of several private companies in addition to charities and sporting organisations.
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Key management personnel
NAME AND POSITION EXPERIENCE
Dr Miles Jakeman
Executive Director and Deputy Chairman
Please refer to profile under the Board of Directors Section.
Mr Darren Stanley
Chief Executive Officer
Darren is an experienced senior executive with experience in the leadership of software and services companies. Darren joined Citadel in September 2015 and was appointed Chief Executive Officer on 16 November 2016. Prior to joining Citadel Darren was MD Consulting at SMS Management and Technology Limited where he also fulfilled a number of leadership and delivery roles including Regional Director QLD, Regional Director NSW and Chairman of the Offshore Development Centre.
Darren has previously held a number of senior leadership roles including GMAC, Suncorp and Defence and he has significant international experience, including starting businesses in the UK. Darren is a Duntroon Graduate and was previously an Officer in the Royal Australian Engineer Corps. Darren has a background in project and program management with a particular strength in large scale complex programs and integration/merger of companies. Darren has a particular interest in growing Australian technology companies to be internationally recognised.
Darren has a Bachelor of Science (Honours), an MBA (Technology), Graduate Diploma of Human Resource Management and is an alumni member of Harvard University.
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NAME AND POSITION EXPERIENCE
Mr Robert (Andrew) Burns
Chief Financial Officer
Andrew is a proven leader of change with technically strong competencies in financial management, accounting, and process improvement techniques.
Andrew has been Citadel’s CFO and Company Secretary since January 2008. Prior to joining Citadel, Andrew spent 10 years with General Electric in various senior leadership roles including Finance Manager of GE Healthcare ANZ and Six Sigma Quality Leader for GE Healthcare Financial Services globally.
Andrew is a Chartered Accountant, graduate of the Australian Institute of Company Directors, as well as a Six Sigma Master Black Belt and a graduate of the Australian Graduate School of Management’s Executive MBA Program.
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Directors’ report
DIRECTORS’ REPORT
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Directors’ report
The Directors present their report on the consolidated entity (Citadel) consisting of The Citadel Group Limited and the entities it controlled at the end of, or during the year ended 30 June 2018.
CONSOLIDATED RESULTS AND REVIEW OF THE OPERATIONS
Citadel’s statutory performance remains strong with total revenue from continuing operations increasing to $108.5 million (2017: $98.8 million) and achieving net profit before income tax from continuing operations of $25.3 million (2017: $21.3 million).
A review of the operations of the consolidated entity and its principle businesses during the financial period and the results of the operations are set out in the Chairman’s Report and the Operational and Financial Review by the Chief Executive Officer from pages 5 to 11 inclusive.
DIVIDENDS
The amounts set out below have been paid by Citadel during the financial period, or have been declared by the Directors of Citadel, by way of the dividend, but not paid during the financial period up to the date of this report. All dividends were fully franked at the tax rate indicated:
Franking tax rate %
Dividend cents per
share
Total paid / payable
$m
Dividend paid 29 September 2017 (100% franked) 30 8.0 3.9
Dividend paid 31 March 2018 (100% franked) 30 4.8 2.4
Dividend declared 20 August 2018 (100% franked) 30 9.0 4.4
PRINCIPAL ACTIVITIES
During the year the principal continuing activities of Citadel consisted of provision of software and managed services in the technology sector throughout Australia.
DIRECTORS
The following persons were directors of Citadel during the whole of the financial year and up to the date of this report unless noted: Mr Kevin McCann, AM; Dr Miles Jakeman; Lieutenant-General Peter Leahy AC; Mr Mark McConnell; Ms Anne Templeman-Jones (appointed 8 September 2017); and, Ms Deena Shiff (resigned 31 January 2018).
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DIRECTORS’ MEETINGS
The number of directors’ meetings of Citadel, and of meetings of the board committees held, and the number of those meetings attended by each of the Directors of the company during the financial year were:
Board meetings Audit, Risk and Compliance
Committee Nominations and
Remuneration Committee
Director A B A B A B
Mr K McCann AM 10 10 6 6 3 3
Dr M Jakeman 9 10 - - - -
Ms D Shiff 4 4 3 3 1 1
Ms A Templeman-Jones 6 7 3 3 - -
Lieutenant-General P Leahy AC 10 10 6 6 3 3
Mr M McConnell 10 10 - - - -
A – Number of meetings attended B – Number of meetings eligible to attend, including any unscheduled meetings called
SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
Significant changes in the state of affairs of Citadel during the financial period are as follows:
Citadel acquired Charm Health International Pty Ltd and its subsidiaries (Charm) on 15 September 2017, which owned Australia’s leading supplier of specialist oncology e-health systems;
Citadel acquired the business and assets of Anaesthetic Private Practice Pty Ltd (APP) on 4 May 2018, which owned a cloud based practice management tool for the Australian Anaesthetics sector;
Ms Anne Templeman-Jones was appointed to the Board of Directors effective 8 September 2017 by the directors. The appointment was subsequently endorsed through a shareholder vote at the Annual General Meeting on 24 October 2017; and
Ms Deena Shiff resigned from the Board of Directors effective 31 January 2018.
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MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR
In the opinion of the Directors, no other matter or circumstance has arisen since 30 June 2018 that has significantly affected, or may significantly affect:
Citadel’s operations in future financial years;
Results of those operations in future financial years; or,
Citadel’s state of affairs in future financial years.
COMPLIANCE WITH REGULATIONS AND ENVIRONMENTAL MATTERS
Given its client base and sensitive information under management, compliance with legislative and regulatory matters is critical for Citadel and is managed closely. As noted in the Operational and Financial Review by the Chief Executive Officer from pages 7 to 11 inclusive, Citadel is not aware of any matter that requires disclosure with respect to its operating activities and there have been no issues of non-compliance during the period.
DIRECTORS’ AND OFFICERS’ INDEMNITY/INSURANCE
The Constitution of the Company provides that the Company may indemnify (to the maximum extent permitted by law) in favour of each Director of the Company, the Company Secretary, Directors and secretaries of related bodies corporate of the Company, and previous directors and secretaries of the Company and its related bodies corporate (Officers), against any liability to third parties (other than related Citadel Group companies) incurred by such Officers unless the liability arises out of conduct involving a lack of good faith. The indemnity includes costs or expenses incurred by an Officer in successfully defending proceedings or in connection with an application in which the court grants relief to the specified persons under the Corporations Act 2001.
Each Director has entered into a Deed of Indemnity and Access that provides for indemnity against liability as a Director, except to the extent of indemnity under an insurance policy or where prohibited by statute. The Deed also entitles the Director to access Company documents and records, subject to undertakings as to confidentiality.
During the financial period, the Company paid a premium in respect of a contract of insurance insuring Officers (and any persons who are Officers in the future and employees of the Company or its subsidiaries) against certain liabilities incurred in that capacity. Disclosure of the total amount of the premiums and the nature of the liabilities in respect of such insurance is prohibited by the contract of insurance.
COMPANY SECRETARY
Mr Robert (Andrew) Burns is the Joint Company Secretary and Group CFO. Mr Burns was appointed to the position of Company Secretary in 2008.
Ms Leanne Ralph was appointed as joint Company Secretary on 5 April 2016. Ms Ralph has over 20 years’ experience in Chief Financial Officer and Company Secretarial roles for various ASX listed entities. Ms Ralph is a Fellow of the Governance Institute of Australia and a Graduate member of the Australian Institute of Company Directors.
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NON-AUDIT SERVICES
Citadel may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the subsidiary companies and/or Citadel are important and there is no conflict of interest.
Details of the amounts paid or payable to the auditor, PricewaterhouseCoopers (PwC), for audit services provided during the year are set out in note 36 in the financial statements.
If non-audit services by the auditor are required, the Chair of the Audit and Risk Committee considers the position and ensures they are satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. During the financial year ended 30 June 2018 Citadel did engage other PwC staff (separate to those of the PwC audit team) to provide non-audit services, including the provision of taxation advice. The Directors are satisfied that the provision of these non-audit services by PwC did not compromise the auditor independence requirements of the Corporations Act 2001 based on the following:
All non-audit services were reviewed by the Audit and Risk Committee to ensure they did not impact the impartiality and objectivity of the auditor in accordance with APES 110 Code of Ethics for Professional Accountants); and,
None of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants.
AUDITOR’S INDEPENDENCE DECLARATION
A copy of the auditors’ independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 35.
CORPORATE GOVERNANCE STATEMENT
Citadel and the Board are committed to achieving and demonstrating the highest standards of corporate governance. Citadel has reviewed its corporate governance practices against the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council.
The Corporate Governance Statement reflects the corporate governance practices in place throughout the 2018 financial year. The current version of the Corporate Governance Statement was approved by the Board on 16 August 2018. A description of Citadel’s current corporate governance practices is set out in Citadel’s corporate governance statement which can be viewed at http://investors.citadelgroup.com.au/investors/?page=Corporate-Governance.
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Remuneration report (audited)
The Directors present Citadel’s 2018 remuneration report outlining key aspects of the remuneration policy and framework, and remuneration awarded for the 2018 financial year.
During the financial period the Nominations and Remuneration Committee (NRC) benchmarked the remuneration policy and incentive plans of proxy companies to ensure alignment of the key management personnel (KMP) remuneration packages. The KMP remuneration packages are developed to link directly with the performance of the company and the interests of the shareholders.
The report is structured as follows:
a) KMP covered in this report
b) Remuneration policy and link to performance
c) Elements of remuneration
d) Link between remuneration and performance
e) Remuneration expenses for non-executive and executive KMP
f) Contractual arrangements for non-executive and executive KMP
g) Remuneration consultant
h) Other statutory information
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a) KMP covered in this report
Name Position
H K McCann
M Jakeman
D Shiff
A Templeman-Jones
P Leahy
M McConnell
D Stanley
R Burns
Chairman
Executive Director and Deputy Chairman (ED)
Non-executive Director (resigned effective 31 January 2018)
Non-executive Director (appointed 8 September 2017)
Non-executive Director
Non-executive Director
Chief Executive Officer (CEO)
Chief Financial Officer/Joint Company Secretary (CFO)
b) Remuneration policy and link to performance
Citadel’s executive remuneration philosophy is to align executive remuneration with shareholder interests by:
Providing levels of Fixed Remuneration (FR) and incentive pay sufficient to attract and retain individuals with the skills and experience required to build on and execute Citadel’s business strategy;
Focusing executives on what is important by ensuring incentive remuneration is contingent on outcomes that grow and/or protect shareholder value, and can be directly influenced by Executive action;
Balancing the mix of Short Term Incentives (STI) and Long Term Incentives (LTI) to ensure any focus on annual results does not offset the need to invest and nurture the business for longer term success as a sustainable and growing business;
Managing risk by deferring a proportion of incentive payments and reserving the right to exercise discretion in the event that excessive risk taking or inappropriate outcomes are discovered after performance has initially been assessed;
Aligning the interests of executives and shareholders by ensuring a suitable proportion of remuneration is received as a share-based payment; and,
Combining earnings growth performance targets and share-based payments (inclusive of dividends) that balance the goals of achieving both sustainable growth and yield.
Citadel’s NRC consists solely of independent non-executive directors. The NRC reviews and makes recommendations to the Board on remuneration packages and policies related to the directors, KMP and senior executives, to ensure that the remuneration policies and practices are consistent with Citadel’s strategic goals and human resources objectives. Based on Citadel’s philosophy and benchmarking with proxy companies, the remuneration program for KMP is practically applied as follows:
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The table below represents a summary of the existing Executive KMP remuneration elements as well as the proposed changes in FY19
Element Purpose Performance metrics Potential value for FY18 Changes in FY19
FR – not at risk
Provide competitive market salary including superannuation
Nil Positioned at median rate for similar listed entities
KMP FR will remain at FY18 levels with greater focus on rewarding performance in FY19 through an increased proportion of STI in the total package.
STI - all at risk Achieve budgeted growth across the business
Budgeted Group EBITDA and non-financial measures. The relevant split for determining STIs is shown below: 50% EBITDA 25% Profitable growth in Managed
Services 25% Employee satisfaction 50% of the STI award vests immediately and is payable in cash. The remaining 50% is payable 12 months post award.
CEO: target of 55% of FR (Max of 73%) ED: target of 40% of FR (Max of 53%) CFO: target of 40% of FR (Max of 53%)
CEO: target of 60% of FR (Max of 80%) ED: target of 45% of FR (Max of 60%) CFO: target of 45% of FR (Max of 60%) FY19 STI value target has increased by 5% (max 7%) in line with the Board’s focus on rewarding performance No change in the performance criteria No change to vesting
LTI - all at risk Achieve long term sustainable growth and return for shareholders
The performance criteria is: 50% Revenue and EBITDA Growth Matrix
over 3 years 50% Underlying Cash EPS over 3 years All share rights vest at the end of the 3 year performance period at which time they convert to ordinary shares.
CEO: target of 45% of FR (max of 60%) ED: target of 30% of FR (max of 40%) CFO: target of 30% of FR (max of 40%)
No change in the proportion of LTI to FR No change in the performance criteria No change to vesting
Note the performance measures are described in more detail on page 26-29.
The NRC reviews current market conditions and the approaches to STI and LTI plans for listed entities to ensure that our plans reflect a fair and reasonable approach that offers value to shareholders as well as employees. The remuneration packages of the Executive KMP are benchmarked annually with proxy companies to ensure they represent value to the Executive and the Shareholders. For FY19 the Board have approved a 5% increase in the target STI (7% of max) for the ED, CEO and CFO; this increase is 100% at risk. There has been no increase in their underlying FR.
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Balancing short-term and long-term performance
In FY19, the STI plan is set at a maximum of 80% (FY18: 73%) of FR for the CEO and 60% (FY18: 53%) of FR for the ED and CFO. The LTI plan remains a set maximum of 60% (FY18: 60%) of FR for the CEO and 40% (FY18: 40%) of FR for the ED and CFO. The STI and LTI target and maximum values are determined in order to drive performance without encouraging excessive risk-taking.
Both STI and LTI plans incorporate vesting periods to align KMP interests with shareholder interests and to retain talented employees.
Assessing performance
CEO – The Board formally assesses the CEO’s performance. All Key Performance Indicators (KPIs) are carefully considered by the NRC, which evaluates the CEO’s performance and makes recommendations to the Board.
Senior Executives – The CEO reviews the performance of the senior executives on an annual basis. Individuals perform self-assessments using pre-determined ratings and evaluation criteria, including the business performance of the Group, whether strategic objectives are being achieved, and the development of management and personnel. The CEO then provides feedback on that person’s performance using the same format. A meeting is subsequently held between the CEO and the individual to discuss issues raised and any discrepancies between the self-assessment and CEO review. The CEO discusses the results of the review with the NRC, which evaluates performance and makes recommendations to the Board.
In an event of unacceptable performance, including but not limited to, serious misconduct, misalignment with Citadel values, excessive risk taking or a material misstatement in Citadel’s financial statements, the NRC can cancel or defer all performance-based remuneration.
c) Elements of remuneration
(i) Fixed annual remuneration (FR)
Executives may receive their FR as cash, or cash with non-monetary benefits such as car allowances. FR is reviewed annually, or on promotion. It is benchmarked against market data for comparable roles in companies in a similar industry and with similar market capitalisation. This ensures that executives are fairly remunerated while taking into account their experience and performance. Superannuation is included in FR.
In FY18, there were no changes to the FR of the executive team.
(ii) Short-term incentives (STI)
Participants in the STI Plan have a target and maximum cash payment which is set as a percentage of their FR. Actual STI payments in any given year may be at, above, or below target depending on the achievement of financial and non-financial criteria as set by the Board, in accordance with the terms of the STI Plan, which may be varied from time-to-time by the Board. The current STI Plan provides for financial and non-financial components of the incentive, each weighted at 75% and 25%, respectively.
In FY18 there were three separate STI performance conditions with:
50% of the STI tested against an EBITDA performance condition;
25% tested against a growth of profitable multi-year managed services performance condition; and,
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25% tested against an employee satisfaction performance condition.
These measures have been selected as a reasonable representation of a balanced scorecard approach for the KMP. There is no change to the STI performance conditions for FY19.
These measures are tested annually after the end of the relevant financial year.
Payments under the STI Plan are phased evenly over two years, with payments made after the release of full year financial results to the ASX. Half of all STI payments are deferred for 12 months and subject to a final review by the NRC and the Board, which retains the right to exercise discretion to forfeit some or all payments if the employee has not remained in service, a material misstatement is identified, results were obtained with excessive risk taking, or in cases of employee underperformance or misconduct.
All payments under the STI Plan are determined by the Board, in their absolute discretion.
(ii) Long-term incentives (LTI) The LTI consists of a share rights plan provided to key management personnel and eligible senior leadership members with certain vesting conditions attached to the rights. Citadel introduced annual grants of LTI with:
An initial performance period of three years; and, Vesting contingent upon specified performance requirements, including a 3 Year Revenue and EBITDA
Growth Matrix and underlying cash earnings per share over the 3 year performance period.
There is no change to the LTI performance conditions in FY19.
Key terms of the share rights plan for FY18 were as follows:
Award A share right will vest and become exercisable to the extent that the applicable performance conditions detailed below are satisfied at the end of the relevant performance period (being 1 July 2017 to 30 June 2020 for both the Revenue and EBITDA Growth Matrix and Underlying Cash EPS Performance Condition).
Performance conditions
The Share Rights are subject to the following Performance Conditions:
50% of the total Share Rights granted will be based on growth in Citadel’s relative Revenue and EBITDA Growth over the 3 year performance period which is equally weighted between the two metrics (Revenue and EBITDA Growth Condition); and,
50% of the total Share Rights granted will be tested based on growth in Citadel’s earnings per share (Underlying Cash EPS Performance Condition).
The Relative Revenue and EBITDA Growth Performance Condition and the Underlying Cash EPS Performance Condition are independent of each other and are assessed separately.
Each Performance Condition is tested after the end of the relevant Performance Period after audited financial statements are available and reviewed by the Board.
Revenue and EBITDA Growth Condition
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50% of the Share Rights in the FY18 LTI grant will be tested against the Revenue and EBITDA Growth Matrix which is directly linked to the objective of sustained profitable growth.
The table below reflects the assessment of this Performance Condition, adjusted for discontinued operations, with Revenue and EBITDA being the total of these measures over the 3-year performance period;
The 3 year target for both Revenue and EBITDA is established based on the business strategy, existing growth profiles and expected growth rates;
The 3 year target for both Revenue and EBITDA approved by the board reflects a compound annual growth rate of greater than or equal to 15%;
The 3 year target is to be modified for the expected Revenue and EBITDA of any major acquisitions over the remaining proportion of the Performance Period from the date of completion for the acquisition; and,
The Board in its absolute discretion may adjust the achieved revenue growth down to a maximum of 15% change if the Board determines the quality of the revenue or EBITDA is lower than expectation.
Underlying Cash EPS Performance Condition
50% of the Share Rights in the FY18 LTI grant will be tested against the Underlying Cash EPS Performance Condition.
The definition used for Underlying Cash EPS is basic EPS per Australian Accounting Standards adjusted for Non-Cash accounting adjustments and discontinued operations:
The tax adjusted amortisation of acquired intangible assets;
The tax adjusted finance expense relating to deferred consideration; and,
The Underlying EPS measure is calculated inclusive of any asset impairment or accelerated amortization in relation to the acquired intangible assets.
%of LTI Award 90% 95% 100% 105% 110% 115% 120% 125% 130%
90% 55% 60% 65% 70% 75% 80% 85% 90% 95%
95% 60% 65% 70% 75% 80% 85% 90% 95% 100%
100% 65% 70% 75% 80% 85% 90% 95% 100% 100%
105% 70% 75% 80% 85% 90% 95% 100% 100% 100%
110% 75% 80% 85% 90% 95% 100% 100% 100% 100%
115% 80% 85% 90% 95% 100% 100% 100% 100% 100%
120% 85% 90% 95% 100% 100% 100% 100% 100% 100%
125% 90% 95% 100% 100% 100% 100% 100% 100% 100%
130% 95% 100% 100% 100% 100% 100% 100% 100% 100%
3 Year
Total
Revenue
as a % of
Target
3 Year Total EBITDA as a % of Target
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The Underlying Cash EPS Performance Condition requires the compound annual growth rate (CAGR) in Citadel’s basic EPS over the period 1 July 2017 to 30 June 2020 (the Underlying EPS Performance Period) to meet or exceed 10% before any of the share rights subject to the condition vest.
The EPS Performance Condition is measured on a sliding scale of relative targets set by the NRC:
No Share Rights will be awarded for an EPS CAGR of less than 10%;
50% of Share Rights will be awarded for an EPS CAGR of 10%;
75% of Share Rights will be awarded for an EPS CAGR of 15%; or,
100% of Share Rights will be awarded for an EPS CAGR of 20% or greater.
Share Rights Upon satisfaction of any performance and vesting conditions, each Share Right will, at the Company’s election, convert to a share on a one-for-one basis or entitle the participant to receive cash to the value of a share. Each vested share right also entitles a participant to receive a cash amount or share equivalent to the value of any dividend or distribution paid on a share on or after the date of grant. Share rights do not carry any voting rights. For accounting purposes, the value of these share rights are expensed on a straight line basis over the vesting period. In the event of a takeover of Citadel or the sale of its main undertaking, or that of a business unit, the pro-rata Share Rights shall be allocated to the holder with no further performance or vesting conditions on the date the takeover, merger or sale is completed.
Shares Shares issued under the plan will rank equally with the other issued shares. Depending on the terms of issue, the shares may be subject to disposal restrictions, which means the shares may not be disposed of or dealt with for a period of time. Shares allocated on vesting or exercise of a share right carry the same rights and entitlements as other issued shares, including dividend and voting rights.
Restrictions Under the FY18 LTI offer, shares allocated on vesting of share rights will not be subject to any further dealing restrictions. Therefore, participants may immediately deal with shares allocated, subject to complying with the Citadel Share Trading Policy.
Dilution Any new shares issued on vesting of share rights will be restricted to a maximum of 5% of total issued shares over the previous five years.
Amendments To the extent permitted by the ASX Listing Rules, the Board retains the discretion to vary the terms and conditions of the share rights plan. This includes varying the number of share rights or the number of shares to which a participant is entitled upon a reorganisation of capital of Citadel, takeover or a change of control.
d) Link between remuneration and performance
Citadel has performed well in FY18 with management delivering an EBITDA result of $34.0m from continuing operations. As a result, the Board awarded key management personnel 82% of the target STI. As detailed in
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the STI plan, 50% of the award will be paid in cash and 50% will be deferred for 12 months and subject to a final review by the NRC.
Metric Target Performance Impact on incentive award
EBITDA Budgeted EBITDA $34.0m continued operations
Above target
Managed Services Growth
10% Annual Growth - Below target
Employee Satisfaction 82% 84% Above target
Statutory performance indicators
Citadel aims to align executive remuneration to its strategic and business objectives and the creation of shareholder wealth. The table below shows measures of Citadel’s financial performance over the last five years as required by the Corporations Act 2001. However, these are not necessarily consistent with the measures used in determining the variable amounts of remuneration to be awarded to KMP. As a consequence, there may not always be a direct correlation between the statutory key performance measures and the variable remuneration awarded.
Statutory Results (inclusive of Discontinued Operations):
Metric 2018 2017 2016 2015 2014
Revenue ($’000) 108,517 100,862 85,143 72,970 49,927
Net profit attributable to members ($’000)
14,300 8,643 8,230 6,525 4,134
Dividends paid to members ($’000) 6,213 4,541 4,949 4,110 1,277
Basic earnings per share (cents) 29.4 18.2 17.6 16.1 12.4
Share price as at 30 June 6.57 5.09 5.40 3.88 NA
KMP STI as a % percent of net profit attributable to members
3.00% 4.17% 4.33% 7.61% NA
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e) Remuneration expenses for non-executive and executive KMP
The following table details the actual remuneration expense for Citadel’s KMP for the current and previous financial year measured in accordance with the requirements of the accounting standards. The remuneration expense by Citadel’s KMP reflects the remuneration plan approved at the October 2017 AGM.
Name Year Short-term employee benefits Post-employment
benefits
Long-term employee benefits
Share-based
payments (amount expensed
in the period)
Total
Cash salary & fees
Cash bonus
ETP & Other
Super Long service leave
Options & rights
Non-executive directors
K McCann 2018 122,315 - - 9,685 - 12,641 144,641
2017 120,548 - - 11,452 - 33,390 165,390
A Templeman-Jones2 2018 56,393 - - 5,357 - - 61,750
2017 - - - - - - -
D Shiff3 2018 44,333 - - - - 6,321 50,654
2017 76,000 - - - - 16,695 92,695
P Leahy 2018 76,000 - - - - 6,321 82,321
2017 76,000 - - - - 16,695 92,695
M McConnell 2018 60,274 - - 5,726 - - 66,000
2017 61,935 - 195,0001 4,405 - - 261,340
Executive directors
M Jakeman 2018 356,000 93,314 - - - 118,250 567,564
2017 391,250 148,785 - - - 89,250 629,285
Other key management personnel
D Stanley 2018 425,561 225,074 - 25,000 4,570 210,713 890,918
2017 383,895 131,041 - 30,215 2,420 179,501 727,072
R Burns 2018 281,089 111,312 - 25,000 6,076 81,655 505,132
2017 302,664 80,402 - 13,657 10,554 96,828 504,105
Total KMP remuneration expensed
2018 1,421,965 429,700 - 70,768 10,646 435,901 2,368,980
2017 1,412,292 360,228 195,000 59,729 12,974 432,359 2,472,582
1 Represents eligible termination payments paid on 1 July 2016 due to move from executive to non-executive director. 2 Anne Templeman-Jones appointed 8 September 2017. 3 Deena Shiff resigned 31 January 2018.
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f) Contractual arrangements for non-executive and executive KMP
All Executive KMP (these being Mr Darren Stanley, Dr Miles Jakeman and Mr Robert (Andrew) Burns) are bound by their employment or contractor agreement as detailed below: Mr Darren Stanley CEO Terms of Agreement: Employment agreement commencing 16/11/2016 (continuing service since 21/9/2015) Base Package: (FR) $450,000 STI: target of 60% of FR (max of 80%) LTI: target of 45% of FR (max of 60%) Termination: either party may terminate the agreement by giving six months’ written notice. Dr Miles Jakeman Executive Director and Deputy Chairman Terms of Agreement: Services contract commencing 16/11/2016 (continuing service since 6/9/2002) Base Fee: (FR) $290,000 Director’s Fees: $66,000 STI: target of 45% of FR (max of 60%) LTI: target of 30% of FR (max of 40%) Termination: either party may terminate the agreement by giving six month’s written notice. Mr Robert (Andrew) Burns Terms of Agreement: CFO employment agreement commencing 1/7/2016 (continuing service since 8/1/2008) Base Package: (FR) $306,600 STI: target of 45% of FR (max of 60%) LTI: target of 30% of FR (max of 40%) Termination: either party may terminate the agreement by giving three month’s written notice.
Non-executive Directors
All non-executive directors enter into a letter of appointment, which includes fees for chairing or participating on board committees as detailed below. The letter summarises the board policies and terms, including remuneration, relevant to the office of director with the company.
The maximum annual aggregate non-executive directors’ fee pool is $0.5 million (2017: $0.5 million), which includes $10,000 paid to the Chairs of the ARCC and the NRC. This does not include ETP payments made to an Executive Director on transition to non-Executive Director.
During FY18 the following changes occurred
On 31 January 2018, Ms Deena Shiff resigned as a member of the Board of Directors and the Chair of the Audit Risk and Compliance Committee; and
Ms Anne Templeman-Jones was appointed to the Board of Directors and Chair of the Audit Risk and Compliance Committee effective 8 September 2017 by the directors. The appointment was subsequently endorsed through a shareholder vote at the Annual General Meeting on 24 October 2017.
From 1 July 2018 to 30 June 2019
$’000
Base fees (per position)
Chair 152
Other non-executive directors 76
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g) Remuneration consultant
When required the NRC engages Guerdon Associates as remuneration consultants to review specific aspects of existing remuneration policies and to provide recommendations on incentive plan design; payment for remuneration services in the current year was $900 (2017: $11,565). During FY18 the NRC did not require a formal review of remuneration.
Citadel has confirmed that any remuneration recommendations have been made free from undue influence by members of key management personnel.
The following arrangements were made to ensure that the remuneration recommendations were free from undue influence:
Guerdon Associates was engaged by, and reported directly to, the Chair of the NRC with the agreement for the provision of remuneration consulting services being executed by the Chair under delegated authority on behalf of the Board;
Guerdon Associates was asked to present directly to the NRC on developing trends in STI and LTI arrangements for Australian listed entities.
h) Other statutory information
The following table shows the relative proportions of actual remuneration earnt by Citadel’s KMP in the current and prior financial year that are linked to performance and those that are fixed, based on the amounts disclosed as statutory remuneration expense on page 30:
(i) Relative proportions of fixed vs variable remuneration expense Fixed remuneration Remuneration linked to performance
Name 2018 2017 2018 2017
Non-executive directors
K McCann 100% 100% - -
A Templeman-Jones - - - -
D Shiff 100% 100% - -
P Leahy 100% 100% - -
M McConnell 100% 100% - -
Executive directors
M Jakeman 63% 61% 37% 39%
Other key management personnel
D Stanley 51% 64% 49% 36%
R Burns 61% 63% 39% 37%
(ii) Share-based payments granted as incentive compensation Share Options On 13 November 2017, 500,000 of the options issued to the independent non-executive directors on 1 November 2014 were exercised into ordinary shares (FY17: 100,000). The exercise price of the options was $2.70 and the market price $6.00 per share. There are no share options remaining on issue as at 30 June 2018. Share rights: On 16 November 2016, share rights were granted to the Executive KMP for nil consideration in relation to the FY17 LTI. These share rights have a vesting period of 3 years.
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On 6 November 2017, share rights were granted to the Executive KMP for nil consideration in relation to the FY18 LTI. These share rights have a vesting period of 3 years.
On 16 November 2017, share rights granted to Darren Stanley on 16 November 2016 were exercised into ordinary shares. Refer below for details on the number of ordinary shares that were granted on exercise of the rights. The consideration paid for the share rights was nil and the market price at the time of exercise was $5.96 per share.
Shares:
There was no direct issue of shares to KMP in FY18 (FY17 Nil).
(iii) Key management personnel equity holdings
Name1 Held at 1 July 2017
Granted or purchased during year
Share rights in lieu of dividends
Vested, exercised and
sold
Held at 30 June 2018
K McCann Options 250,000 - - (250,000) -
Rights - - - - -
Shares 108,000 250,000 (75,000) 283,000
A Templeman-Jones Options - - - - -
Rights - - - - -
Shares - 4,256 - - 4,256
D Shiff Options 125,000 - - (125,000) -
Rights - - - - -
Shares 10,000 125,000 - (60,000) 75,000
P Leahy Options 125,000 - - (125,000) -
Rights - - - - -
Shares 6,000 125,000 - (81,000) 50,000
M Jakeman Options - - - - -
Rights 81,902 21,150 - - 103,052
Shares 8,399,5071 - - - 8,399,507
M McConnell Options - - - - -
Rights - - - - -
Shares 6,626,306 - - - 6,626,306
R Burns Options - - - - -
Rights 48,066 22,360 - - 70,426
Shares 107,157 - - (1,657) 105,500
D Stanley Options - - - - -
Rights 112,534 49,977 - (30,579) 131,932
Shares 32,051 30,579 - - 62,630
1 Figures represented in the table above include shares owned by superannuation funds to which the KMP is a beneficiary.
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DIRECTORS’ DECLARATION
This report is made in accordance with a resolution of Directors.
Mr Kevin McCann, AM
Chairman
20 August 2018
PricewaterhouseCoopers, ABN 52 780 433 757 28 Sydney Avenue, FORREST ACT 2603, GPO Box 447, CANBERRA CITY ACT 2601 T: + 61 2 6271 3000, F: + 61 2 6271 3999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
Auditor’s Independence Declaration
As lead auditor for the audit of The Citadel Group Limited for the year ended 30 June 2018, I declare that to the best of my knowledge and belief, there have been:
(a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
(b) no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of The Citadel Group Limited and the entities it controlled during the period.
David Murphy Canberra Partner PricewaterhouseCoopers
20 August 2018
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Corporate directory
DIRECTORS Mr Kevin McCann, AM (Chairman)
Dr Miles Jakeman (Deputy Chairman)
Ms Deena Shiff (resigned 31 January 2018)
Ms Anne Templeman-Jones (appointed on 8 September 2017)
Lieutenant-General Peter Leahy, AC (Retd)
Mr Mark McConnell
SECRETARY Mr Robert Andrew Burns
Ms Leanne Ralph
PRINCIPAL PLACE OF BUSINESS
11 Faulding Street
SYMONSTON ACT 2609 AUSTRALIA
Telephone: (02) 6124 0800
Fax: (02) 6201 0550
REGISTERED OFFICE 11 Faulding Street
SYMONSTON ACT 2609 AUSTRALIA
Telephone: (02) 6124 0800
Fax: (02) 6201 0550
STOCK EXCHANGE LISTING Australian Securities Exchange
SHARE REGISTRY Link Market Services Limited
Level 12, 680 George Street
SYDNEY NSW 2000 AUSTRALIA
Telephone: 1300 554 474
AUDITOR PricewaterhouseCoopers
28 Sydney Ave
FORREST ACT 2603 AUSTRALIA
Telephone: (02) 6271 3000
WEBSITE ADDRESS www.citadelgroup.com.au
The company is limited by shares, incorporated and domiciled in Australia.
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Annual financial report
ANNUAL FINANCIAL REPORT YEAR ENDED 30 JUNE 2018
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Annual financial report
The Citadel Group Limited (Citadel) statements are the consolidated statements consisting of Citadel and its subsidiaries.
The financial report is presented in Australian Dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated.
Citadel is a company limited by shares, incorporated and domiciled in Australia. Its registered office is:
11 Faulding Street
SYMONSTON ACT 2609 AUSTRALIA
Telephone: (02) 6124 0800
Fax: (02) 6201 0550
A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ report on page 18, which is not part of this financial report.
The financial statements were authorised for issue by the Directors on 20 August 2018. The Directors have the power to amend and reissue the financial statements.
Through the use of the internet, we have ensured that corporate reporting is timely, complete, and available globally at minimum cost to Citadel. All press releases and other information are available on Citadel’s website: www.citadelgroup.com.au
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Contents Consolidated statement of profit or loss and other comprehensive income ........................................... 40 Consolidated statement of financial position ............................................................................................ 41 Consolidated statement of changes in equity............................................................................................ 43 Consolidated statement of cash flows ....................................................................................................... 44 Notes to the financial statements .............................................................................................................. 45 Note 1 – Significant accounting policies ................................................................................................... 45 Note 2 – Revenues ...................................................................................................................................... 50 Note 3 – Individually significant expense items ....................................................................................... 52 Note 4 – Expense items .............................................................................................................................. 52 Note 5 – Income tax expense ..................................................................................................................... 53 Note 6 – Earnings per share ...................................................................................................................... 56 Note 7 – Cash and cash equivalents ........................................................................................................... 57 Note 8 – Trade and other receivables ....................................................................................................... 58 Note 9 – Inventories ................................................................................................................................... 59 Note 10 – Other current assets .................................................................................................................. 59 Note 11 – Plant and equipment .................................................................................................................. 60 Note 12 – Intangible assets ........................................................................................................................ 62 Note 13 – Subsidiaries ................................................................................................................................ 66 Note 14 – Trade and other payables .......................................................................................................... 68 Note 15 – Interest bearing liabilities: current ........................................................................................... 68 Note 16 – Interest bearing liabilities: non current ................................................................................... 69 Note 17 – Other payables: non current ..................................................................................................... 69 Note 18 – Obligations under finance leases .............................................................................................. 69 Note 19 – Provisions ................................................................................................................................... 70 Note 20 – Make good provision ................................................................................................................. 71 Note 21 – Other liabilities: current ............................................................................................................. 72 Note 22 – Contributed equity ..................................................................................................................... 72 Note 23 – Reserves (net of income tax) ..................................................................................................... 73 Note 24 – Retained earnings ...................................................................................................................... 73 Note 25 – Dividends .................................................................................................................................... 73 Note 26 – Capital management ..................................................................................................................74 Note 27 – Financial risk management ....................................................................................................... 75 Note 28 – Share-based payments .............................................................................................................. 80 Note 29 – Related party transactions ........................................................................................................ 82 Note 30 – Business combinations ............................................................................................................. 82 Note 31 – Discontinued operations ........................................................................................................... 85 Note 32 – Reconciliation of the net profit after tax to the net cash flow from continuing operations .. 86 Note 33 – Reconciliation of liabilities arising from financing activities ................................................. 86 Note 34 – Operating lease arrangements.................................................................................................. 87 Note 35 – Commitments and contingencies ............................................................................................. 87 Note 36 – Remuneration of auditors......................................................................................................... 87 Note 37 – Parent entity financial information .......................................................................................... 88 Note 38 – Events occurring after the balance sheet date ......................................................................... 89
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CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
NOTES 2018
$’000
2017
$’000
Sale of goods and rendering of services 2(a) 107,487 97,125
Other income 2(b) 1,030 1,720
108,517 98,845
Cost of sale of goods and rendering of services (53,172) (51,036)
Distribution, sales and marketing (861) (1,265)
Occupancy (1,709) (1,391)
Administration (26,014) (20,775)
Finance costs 4(b) (1,438) (3,066)
Profit before income tax 25,323 21,312
Income tax expense 5 (5,905) (5,906)
Net profit for the year from continuing operations 19,418 15,406
Net (loss)/profit from the year from discontinued operations 31 (1,492) (2,781)
Net profit for the year 17,926 12,625
Other comprehensive income, net of tax - -
Total comprehensive income for the year 17,926 12,625
Profit attributable to:
Owners of The Citadel Group Limited 14,300 8,643
Non-controlling interests 3,626 3,982
Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the parent entity:
Notes Cents Cents
Basic earnings per share 6 32.5 24.0
Diluted earnings per share 6 32.1 23.7
Earnings per share for profit attributable to the ordinary equity holders of the parent entity:
Notes Cents Cents
Basic earnings per share 29.4 18.2
Diluted earnings per share 29.1 17.9
The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.
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CONSOLIDATED STATEMENT OF FINANCIAL POSITION
NOTES
2018 $’000
2017 $’000
ASSETS
Current assets
Cash and cash equivalents 7(a) 24,911 29,822
Trade and other receivables 8 15,150 17,077
Inventories 9 2,029 2,027
Income accrual 10 19,502 6,828
Other current assets 10 1,302 415
TOTAL CURRENT ASSETS 62,894 56,169
Non – current assets
Plant and equipment 11 7,897 6,211
Intangible assets 12 73,867 68,358
Income accrual 279 -
Investments at cost 14 14
TOTAL NON – CURRENT ASSETS 82,057 74,583
TOTAL ASSETS
144,951 130,752
LIABILITIES
Current liabilities
Trade and other payables 14 20,971 16,839
Interest bearing liabilities 15 5,898 3,714
Provisions 19 2,484 1,691
Current tax liabilities 19 1,052 2,030
Other current liabilities 21 7,196 19,185
TOTAL CURRENT LIABILITIES
37,601 43,459
Non – current liabilities
Other payables 17 820 337
Interest bearing liabilities 16 11,904 5,148
Deferred tax liabilities 5(d) 6,387 5,987
Provisions 19 1,203 370
TOTAL NON – CURRENT LIABILITIES 20,314 11,842
TOTAL LIABILITIES
57,915 55,301
NET ASSETS
87,036 75,451
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NOTES
2018 $’000
2017 $’000
EQUITY Equity attributable to owners of the parent entity
Contributed equity 22 58,172 53,722
Reserves (net of income tax) 23 1,135 1,413
Retained earnings 24 23,959 15,872
Capital and reserves attributable to owners of The Citadel Group Limited 83,266 71,007
Non-controlling interests 13(b) 3,770 4,444
TOTAL EQUITY 87,036 75,451
The above consolidated statement of financial position should be read in conjunction with the accompanying notes.
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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
Attributable to owners of The Citadel Group Limited
Notes Contributed Equity
Reserves (net of income tax)
Retained Earnings Non-controlling
interests Total Equity
$’000 $’000 $’000 $’000 $’000
Balance at 30 June 2016 48,172 1,004 11,770 3,612 64,558
Total comprehensive income for the year - - 8,643 3,982 12,625
Transactions with owners in their capacity as owners, net of income tax:
Shares issued to satisfy deferred consideration 5,000 - - - 5,000
Dividends paid 25 & 13(b) - - (4,541) (3,150) (7,691)
Contributions of equity, net of income tax 268 - - - 268
Share based payments 28(c) - 691 - - 691
Exercise of share rights and options 282 (282) - - -
Balance at 30 June 2017 53,722 1,413 15,872 4,444 75,451
Total comprehensive income for the year - - 14,300 3,626 17,926
Transactions with owners in their capacity as owners, net of income tax:
Shares granted as consideration 2,000 - - - 2,000
Contributions of equity, net of income tax 1,350 - - - 1,350
Dividends paid 25 & 13(b) - - (6,213) (4,300) (10,513)
Share based payments 28(c) - 822 - - 822
Exercise of share rights and options 1,100 (1,100) - - -
Balance at 30 June 2018 58,172 1,135 23,959 3,770 87,036
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CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES 2018
$’000
2017
$’000
Cash flows from operating activities
Receipts from customers 95,518 98,110
Payments to suppliers and employees (68,400) (67,234)
Income taxes paid (5,942) (5,421)
Interest & borrowing costs paid (1,004) (727)
Interest & other income received 184 206
Net cash inflow from operating activities 32 20,356 24,934
Cash flows from investing activities
Payments for plant & equipment (3,718) (1,891)
Payment for business combinations, net of cash acquired 30(d) (20,237) (23,196)
Net cash (outflow) from investing activities (23,955) (25,087)
Cash flows from financing activities
Proceeds from issuance of shares 1,427 321
Dividends paid (10,513) (7,691)
Proceeds from loans 12,800 10,000
Repayment of loans (4,577) (2,107)
Repayment of lease liabilities (287) (124)
Net cash (outflow)/inflow from financing activities (1,150) 399
Net (decrease)/increase in cash and cash equivalents (4,749) 246
Cash flows of discontinued operations 31 (1,154) (4,998)
Cash and cash equivalents at the beginning of financial year 29,822 34,574
Cash and cash equivalents at the end of the year 7(b) 23,919 29,822
The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
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Notes to the financial statements
Statement of compliance
These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board, and comply with other requirements of the law.
The financial statements comprise the consolidated financial statements of The Citadel Group Limited (Citadel). For the purposes of preparing the consolidated financial statements, Citadel is a for-profit entity.
Basis of preparation
The consolidated financial statements have been prepared on the basis of historical cost, except for certain financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. All amounts are presented in Australian dollars, unless otherwise noted.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, Citadel takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of AASB 2 Share-based payments, leasing transactions that are within the scope of AASB 117 Leases, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in AASB 2 or value in use in AASB 136 Impairment of Assets.
Citadel is a company of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Instrument amounts in the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated.
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation
(i) Subsidiaries
Subsidiaries are all entities (including structured entities) over which Citadel has control. Citadel controls an entity Citadel is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to Citadel. They are deconsolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by Citadel (refer to note 1(f)).
Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by Citadel.
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(ii) Associates
Associates are all entities over which Citadel has significant influence but not control or joint control. This is generally the case where Citadel holds between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting (see (iii) below), after initially being recognised at cost.
(iii) Equity method
Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise Citadel’s share of the post-acquisition profits or losses of the investee in profit or loss, and Citadel’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint ventures are recognised as a reduction in the carrying amount of the investment.
When Citadel’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, Citadel does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity.
Unrealised gains on transactions between Citadel and its associates are eliminated to the extent of Citadel’s interests in these entities. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the policies adopted by Citadel.
(b) Foreign currency translation
(iv) Functional and presentation currency
Items included in the consolidated financial statements of each of Citadel’s entities are measured using Australian dollars $A (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is CGL’s functional and presentation currency.
(v) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of profit or loss and other comprehensive income.
(c) Goods and services tax (GST)
Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.
Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet.
Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow.
(d) New, revised or amending Accounting Standards and Interpretations adopted
Citadel has applied the following standards and amendments for the first time for the reporting period commencing 1 July 2017:
AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107
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AASB 2017-2 Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016
AASB 1048 Interpretation of Standards
AASB 2016-2 amends AASB 107 Statement of Cash Flows (August 2015) to require entities preparing financial statements in accordance with Tier 1 reporting requirements to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The Group’s liabilities arising from financing activities consist of share issues (note 28), dividend payments (note 25 and note 13 (b)), borrowings (note 15 and note 16) and repayment of lease liabilities (note 17 and 18). A reconciliation between the opening and closing balances of these items is provided in note 33. Consistent with the transition provisions of the amendments, the Group has not disclosed comparative information for the prior period. Apart from the additional disclosure in note 33, the application of these amendments has had no impact on the Group’s consolidated financial statements.
AASB 2017-2 amends AASB 12 Disclosure of Interests in Other Entities, to clarify the interaction of AASB 12 with AASB 5 Non-current Assets Held for Sale and Discontinued Operations to explain that disclosures under AASB 12 are required for interests in entities classified as held for sale or discontinued operations in accordance with AASB 5. The Group’s disclosures relating to discontinued operations are detailed in note 31.
A new principal version of AASB 1048 provides an up-to-date listing of Australian Interpretations, including Interpretation 22 Foreign Currency Transactions and Advance Consideration and Interpretation 23 Uncertainty over Income Tax Treatments. This service standard ensures there is no difference between the status of Interpretations in the hierarchy between IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. The adoption of this standard did not have a material impact on Citadel’s consolidated financial statements.
(e) Standards and Interpretations in issue not yet adopted
At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective.
Standard/Interpretation Effective for annual reporting periods beginning on or after
Expected to be initially applied in the financial year ending
AASB 9 Financial Instruments, and the relevant amending standards
1 January 2018 30 June 2019
AASB 15 Revenue from Contracts with Customers, and the relevant amending standards
1 January 2018 30 June 2019
AASB 16 Leases 1 January 2019 30 June 2020
AASB 2016-5 Amendment to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions
1 January 2018 30 June 2019
AASB 9 addresses the requirements for the classification, measurement and derecognition of financial assets and financial liabilities. It also introduces new rules for hedge accounting and a new impairment model for financial assets. The new impairment model require the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under AASB 139. Citadel does not expect
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any material impact from the requirements of the amended standard as there are currently no hedges in place and the changes are not expected to materially impact other financial assets and liabilities held by Citadel.
AASB 15 is a new standard for the recognition of revenue and will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The standard permits a modified retrospective approach for the adoption.
A quantitative analysis has been performed showing that there will not be a material impact on the profit and loss of Citadel in current or future reporting periods, however there will be a material impact on the balance sheet. Applying the new standard to the FY18 results would result in an immaterial decrease to net profit after tax. On the balance sheet there would be an overall decrease in net assets of $1.0m with an increase in total assets as at 30 June 2018 of $1.8 million from the recognition of additional prepayments and work in progress offset by a reduction in accrued revenue, and an increase in total liabilities of $2.8 million from the recognition of additional deferred revenue. There will be no material change to disclosures other than the presentation of the aforementioned balance sheet items.
Accounting policies for the Group will be revised in line with the changes in the standard. Under the new standard Citadel is required to determine if control has been established which may be on completion or achievement of predetermined deliverables.
AASB 16 provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements for both lessees and lessors. The accounting model for lessees will require lessees to recognise all leases on balance sheet, except for short-term leases and leases of low value assets. Citadel has performed a quantitative assessment and does not consider the implementation of the standard to have a significant impact on net profit after tax given the small number of affected leases (note 34 provides details of current operating lease arrangements); however it will have a significant impact on the balance sheet with the recognition of operating lease commitments as part of fixed assets and the recognition of operating lease liabilities, which are amortised over the period of the lease. Additional disclosure will be required to recognise a lease asset and lease liability on the statement of financial position.
AASB 2016-5 includes amendments to AASB 2 to clarify the treatment for share based payments where there are modifications to the terms and conditions that change the classification and measurement of cash-settled payments for the effects of vesting and non-vesting conditions.
The adoption of these Standards and Interpretations in issue but not yet effective will impact Citadel’s accounting policies and will result in changes to information currently disclosed. Citadel does not intend to adopt any of these pronouncements before their effective dates. There are no other standards that are not yet effective and that would be expected to have a material impact on Citadel in the current or future reporting periods and on foreseeable future transactions.
(f) Business combinations
Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by Citadel, liabilities incurred by Citadel and the equity instruments issued by Citadel in exchange for control of the acquire. Acquisition-related costs are recognised in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, with the exception of deferred tax liabilities which are measured in line with AASB 112.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interests in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in profit or loss as a bargain purchase.
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Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s internal rate of return, being the implied discount rate which equates the present value of projected cash flows in relation to the acquisition with its purchase price, taking into account the time value of money and the relative riskiness of the investment.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such re-measurement are recognised in profit or loss.
(g) Critical accounting judgements and key sources of estimation uncertainty
(i) Significant accounting judgements
The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying Citadel’s accounting policies. The estimates, judgements and assumptions are based on historical experience, adjusted for current market conditions and other factors that are believed to be reasonable under the circumstances and are reviewed on a regular basis. Actual results may differ from these estimates.
The areas that involved a higher degree of judgement or complexity are included in the following notes:
Note 2 – Percentage of completion
Note 12 – Fair value of acquired intangibles
Note 12 – Impairment of goodwill and intangibles with indefinite useful lives
Note 28 – Share-based payment arrangements
Note 30 – Fair value of consideration on acquisition
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NOTE 2 – REVENUES
Significant accounting policies
Citadel recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of Citadel’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. Citadel bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and duties and taxes paid.
Generally, Citadel records the full gross amount of sale proceeds as revenue. However, if Citadel is acting as an agent, revenue is recorded on a net basis (being the gross amount billed less the amount paid to the supplier acting as a principal in the arrangement).
(i) Sale of technological products
In addition to the recognition criteria noted above, revenue from the sale of technological products is recognised when:
Citadel has passed the risk and rewards of ownership in the goods to the buyer;
Citadel retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; and,
The costs incurred or to be incurred in respect of the transaction can be measured reliably.
(ii) Rendering of services
Technology consulting and integration services
The revenue of time and material contracts is recognised at the contractual rates as labour hours are delivered and direct expenses are incurred.
For services contracts, revenue is recognised on a straight line basis over the contractual term of the contract.
2018 2017
$’000 $’000
(a) Sale of goods and rendering of services
Rendering of services 78,330 69,102
Sale of goods 17,827 16,143
Licence fees 11,330 11,880
107,487 97,125
(b) Other Income
Finance revenue 184 182
Net foreign exchange (24) (10)
Gain on fair value re-measurement of financial instruments 588 1,316
Other income 282 232
1,030 1,720
Total revenue 108,517 98,845
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For fixed price contracts, revenue is recognised under the percentage of completion method.
Where a loss is expected to occur, it is recognised immediately in the statement of profit or loss and other comprehensive income. If circumstances arise that may change the original estimate of the revenue, costs or extent of progress towards completion, the estimates are revised. These revisions may result in increases or decreases in revenue and costs and are reflected in the period in which the circumstances that give rise to the revision became known by management.
Software development
The revenue recognition policy for software development services is the same as noted above for fixed price contracts.
(iii) Licence fees
Revenue from licence fees for use of developed software is recognised on a straight line basis over the term of the licence. If the licence is perpetual and has no ongoing obligations, the revenue is recognised at the point of sale.
(iv) Dividends
Dividends are recognised as revenue when the right to receive payment is established.
(v) Finance revenue
Finance revenue is recognised as it accrues, taking into account the effective yield on the financial asset, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.
(vi) Gain on fair value re-measurement of financial instruments
Gain on fair value re-measurement of financial instruments reflects the gain from management’s re-estimate of contingent consideration which is based on an average EBITDA measure. If the expectation of the payable amount is lower than previously estimated, the difference is recognised directly in the statement of profit or loss and other comprehensive income as other income.
Critical accounting estimates
(i) Percentage of completion
The percentage of completion is determined by the aggregated cost of effort for the individual contract incurred at the end of the reporting period compared with the estimated budgeted effort. Management’s estimation of the cost incurred to date and the budgeted cost are primarily based on the labour effort employed in the contract. Corresponding revenue from contract work is also estimated by management based on the percentage of completion and contracted revenue. Citadel regularly reviews and revises the estimation of both contract revenue and contract cost in the budget prepared for each contract as the contract progresses.
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NOTE 3 – INDIVIDUALLY SIGNIFICANT EXPENSE ITEMS
Citadel has identified a number of items which are significant due to their nature and/or amount. These are listed separately here to provide a better understanding of the financial performance of Citadel.
NOTE 4 – EXPENSE ITEMS
2018 2017
$’000 $’000
Acquisition-related costs 426 322
426 322
2018 2017
$’000 $’000
(a) Breakdown of expenses by nature
Changes in inventory of finished goods and work in progress 14,788 13,907
Employee benefits expenses 28,594 23,413
Depreciation 1,548 982
Amortisation 5,665 4,737
(b) Finance costs
Finance charges payable under invoice financing & trade facility 30 25
Finance charges payable under finance leases 42 29
Overdraft charges & bank fees 933 665
Liabilities: unwinding of discount 433 2,347
Total finance costs expensed 1,438 3,066
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NOTE 5 – INCOME TAX EXPENSE
Refer below for details on Citadel’s tax funding arrangement as a tax consolidated group. Movements in and closing balances of deferred tax during the year are summarised below:
2018 2017
$’000 $’000
(a) Income Tax Expense relating to continuing operations
Current Tax
6,043 7,101
Current Tax – adjustment to prior year
(539) (312)
Deferred Tax
401 (883)
5,905 5,906
Deferred income tax (revenue) expense included in income tax expense comprises:
Decrease/(Increase) in deferred tax assets (not including any increase through business combinations)
(16) (415)
Increase/(Decrease) in deferred tax liabilities (not including any increase through business combinations)
417 (468)
401 (883)
(b) Numerical reconciliation of income tax expense to prima facie tax payable
Profit from continuing operations before income tax expense 25,323 21,312
At the Group’s statutory income tax rate of 30 % (2017: 30%) 7,597 6,394
Gain on fair value increases (176) (395)
Research & development credit (1,107) (486)
Unwinding of discount 130 705
Under/(over) provision of prior year income tax (539) (312)
Income tax expense recognised in profit or loss (relating to continuing operations)
5,905 5,906
(c) Current tax liabilities
Provision for income tax 19 1,052 2,030
1,052 2,030
(d) Deferred tax balances are presented in the statement of financial position as follows:
Deferred tax liabilities 6,387 5,987
Net deferred tax liability 6,387 5,987
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2018
Opening balance
Recognised in profit or loss
Recognised in other
comprehensive income
Closing balance
$,000 $,000 $,000 $,000
Provisions 513 489 - 1,002
Inventory obsolescence 34 58 - 92
Doubtful debts 71 (71) - -
Prepayments (5) (1) - (6)
IPO costs 380 (190) - 190
Capital legal fees 5 (1) - 4
Accrued expenses 543 (298) - 245
R & D (809) (539) - (1,348)
Accrued revenue (1,398) (616) - (2,014)
Share based payments 278 (84) - 194
Intangible assets (5,726) 1,085 - (4,641)
Other liabilities 101 21 - 122
Amortisation 26 8 - 34
(5,987) (139) - (6,126)
Deferred tax liability assumed on acquisition (261)
Net deferred tax liability expected to be settled after more than 12 months
(6,387)
Net deferred tax assets / (liabilities) (6,387)
2017 $,000 $,000 $,000 $,000
Provisions 468 45 - 513
Inventory obsolescence 9 25 - 34
Doubtful debts 28 43 - 71
Prepayments (8) 3 - (5)
IPO costs 570 (190) - 380
Capital legal fees 3 2 - 5
Accrued expenses 157 386 - 543
R & D (409) (400) - (809)
Accrued revenue (95) (1,303) - (1,398)
Share based payments 155 123 - 278
Intangible assets (6,436) 2,170 - (4,266)
Other liabilities 94 7 - 101
Amortisation 54 (28) - 26
(5,410) 883 - (4,527)
Deferred tax liability assumed on acquisition (1,461)
Net deferred tax assets expected to be recovered after more than 12 months
(5,987)
Net deferred tax assets / (liabilities) (5,987)
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Significant accounting policies
Income tax expense represents the sum of the tax currently payable and deferred tax.
(i) Current tax
The income tax expense or credit for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Citadel’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
(ii) Deferred tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.
However the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit & loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.
Citadel and its wholly owned Australian controlled entities implemented the tax consolidation legislation as of 1 July 2005. The head entity, Citadel and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. Citadel has applied the allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the consolidated group.
In addition to its own current and deferred tax amounts, Citadel also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from the controlled entities in the tax consolidated group.
Assets or liabilities arising under the tax funding agreements with the tax consolidated entities are recognised as amounts receivable or payable to other entities in Citadel. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly owned tax consolidation entities.
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NOTE 6 – EARNINGS PER SHARE
(a) Employee share rights
Share rights granted to employees are considered to be potential ordinary shares. They have been included in the determination of diluted earnings per share as the participants still remain employed by Citadel. They have not been included in the determination of basic earnings per share. Details relating to the rights are set out in note 28(a).
2018 2017
Cents per share Cents per share
Basic earnings per share 32.5 24.0
Diluted earnings per share 32.1 23.7
$’000 $’000
(a) Basic earnings per share
The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:
Profit from continuing operations for the year attributable to owners of Citadel 15,792 11,424
Earnings from continuing operations used in the calculation of basic earnings per share
15,792 11,424
Profit for the year from discontinued operations used in the calculation of basic earnings per share from discontinued operations
(1,492) (2,781)
Earnings used in the calculation of basic earnings per share 14,300 8,643
Weighted average number of ordinary shares for the purposes of basic earnings per share
48,655 47,549
(b) Diluted earnings per share
The earnings used in the calculation of diluted earnings per share are as follows:
Earnings used in the calculation of basic earnings per share 15,792 11,424
Earnings used in the calculation of diluted earnings per share 15,792 11,424
Profit for the year from discontinued operations used in the calculation of basic earnings per share from discontinued operations
(1,492) (2,781)
Earnings used in the calculation of diluted earnings per share 14,300 8,643
Weighted average number of ordinary shares used in the calculation of basic earnings per share
48,655 47,549
Shares deemed to be issued for no consideration in respect of:
Options - 228
Employee share rights 1,151 529
Weighted average number of ordinary shares used in the calculation of diluted earnings per share
49,086 48,306
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Significant accounting policies
(i) Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of Citadel, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year.
(ii) Diluted earnings per share
Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.
NOTE 7 – CASH AND CASH EQUIVALENTS
Significant accounting policies
Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value and bank overdrafts.
(a) Cash and cash equivalents per the statement of financial position 2018 2017
$’000 $’000
Cash at bank and in hand 17,808 6,179
Short-term deposit 7,103 23,643
24,911 29,822
(b) Cash and cash equivalents reconciliation for cash flow purposes
Cash at bank and in hand 17,808 6,179
Short-term deposit 7,103 23,643
Short-term bank facilities (992) -
23,919 29,822
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NOTE 8 – TRADE AND OTHER RECEIVABLES
Significant accounting policies
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less an impairment provision. Trade receivables are generally due for settlement between 30 and 60 days from the date of invoice.
Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. An impairment provision is established when there is objective evidence that Citadel will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the provision is recognised in the income statement.
2018 2017
$’000 $’000
Trade receivables 15,105 17,062
Provision for doubtful debts - (237)
Other receivables 45 252
15,150 17,077
The aging analysis of trade receivables is as follows:
Past due
Total Neither Past Due nor impaired
30 to 60 days 60 to 90 days >90 days
$’000 $’000 $’000 $’000 $’000
30-Jun-18 15,105 12,720 2,232 88 65
30-Jun-17 17,062 15,015 1,552 254 241
Provision for doubtful debts relates wholly to trade receivables >90 days.
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NOTE 9 – INVENTORIES
(i) Assigning costs to inventories
The costs of individual items of inventory are determined using weighted average costs.
(ii) Amounts recognised in profit and loss
There were no reversals of write-down in the current year (2017: nil).
Significant accounting policies
Work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials and direct labour. Costs are assigned to individual items of inventory on the basis of weighted average costs. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
NOTE 10 – OTHER CURRENT ASSETS AND INCOME ACCRUAL
Significant accounting policies
Income is accrued when it satisfies the revenue recognition policy (refer to note 2). Income has been accrued where Citadel has met the performance obligations of the contract and collectability is reasonably probable. It is recognised initially at fair value and subsequently measured at amortised cost, less an impairment provision.
Collectability of income accruals is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. An impairment provision is established when there is objective evidence that Citadel will not be able to collect all amounts due. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the provision is recognised in the income statement.
2018 2017
$’000 $’000
Finished goods 2,340 2,140
Provision for obsolescence (311) (191)
Work in progress - 78
2,029 2,027
2018 2017
$’000 $’000
Income accrual 19,502 6,828
Other current assets
Prepayments 1,301 414
Short-term deposits 1 1
Total current assets 1,302 415
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NOTE 11 – PLANT AND EQUIPMENT
Furniture &
office equipment
Plant & equipment
Computer equipment
Leasehold improvements
Motor vehicles
Make good assets
ICT Software
Total
$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
Cost
Balance at 1 July 2016 271 264 2,086 2,222 256 417 3,491 9,007
Additions 1 212 - 38 146 32 - 2,801 3,229
Disposals/write-offs (234) - (238) (1,689) - (258) (135) (2,554)
Balance at 1 July 2017 249 264 1,886 679 288 159 6,157 9,682
Additions 1 18 54 325 492 - 12 2,840 3,741
Disposals/write-offs (43) - (4) - - - (809) (856)
Cost at 30 June 2018 224 318 2,207 1,171 288 171 8,188 12,567
Accumulated depreciation
Balance at 1 July 2016 (129) (132) (974) (599) (41) (183) (980) (3,038)
Depreciation and impairment losses for the year (42) (28) (351) (605) (33) (66) (751) (1,876)
Disposals/write-off 48 - 200 941 - 160 94 1,443
Balance at 1 July 2017 (123) (160) (1,125) (263) (74) (89) (1,637) (3,471)
Depreciation and impairment losses for the year (37) (17) (295) (179) (36) (28) (1,379) (1,971)
Disposals/write-off 43 - 4 - - - 725 772
Accumulated depreciation at 30 June 2018 (117) (177) (1,416) (442) (110) (117) (2,291) (4,670)
Net book value at 30 June 2018 107 141 791 729 178 54 5,897 7,897
Net book value at 30 June 2017 126 104 761 416 214 70 4,520 6,211
1 Additions including transfers from assets under construction and acquired through business combinations. Additions from the capitalisation of employee time was $2.6m (2017: $2.1m).
Plant and equipment includes $0.1m in net book value of assets under finance leases.
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Significant accounting policies
All plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Citadel and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Depreciation on assets is calculated using the straight line or diminishing value method to allocate their cost, net of their residual values, over their estimated useful lives, as follows:
Furniture and office equipment 3-8 years
Plant and equipment 5-10 years
Computer equipment 3-5 years
ICT Software 2-10 years
Motor vehicles 3-5 years
Leasehold improvements Term of lease
The asset’s residual value and useful life is reviewed, and adjusted if appropriate, at each balance sheet date.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing sales proceeds with carrying amount. These are included in the statement of profit or loss and other comprehensive income.
An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset.
(i) (i) Impairment of non-financial assets other than goodwill and indefinite life intangibles
Non-financial assets other than goodwill and intangible assets that have an indefinite useful life are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
(j) (ii) Significant accounting judgements
Acquired software valuation
Citadel measures ICT Software at fair value for financial reporting purposes when non-monetary assets are given as consideration in line with the requirements of AASB 138 Intangible Assets. In estimating the fair value, Citadel adopts a discounted cash flow approach. This methodology requires significant assumptions regarding expected future revenue streams and the discount rate.
Where a signed contract is available which details the future revenue charges, these amounts are used as the basis for expected future revenue. Citadel also uses transactions of a similar nature as a guide to determining expected revenue from selling licences and/or managed services for the software. The level of risk associated with the software is considered when calculating the discount rate in addition to the average borrowing rate Citadel would be able to obtain from external funding.
Citadel amortises ICT Software acquired through non-monetary exchange in line with the useful lives detailed above, and perform impairment testing on an annual basis.
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NOTE 12 – INTANGIBLE ASSETS
Goodwill Business process,
software and product
development
Trademarks & other rights
Patents & licences
Customer contracts
Total
$’000 $’000 $’000 $’000 $’000 $’000
Cost
Balance at 1 July 2016 29,394 30,002 55 121 11,026 70,598
Additions – capitalised development costs
- 32 - - - 32
Additions – acquired through business combinations
6,162 3,664 301 5,073 15,200
Disposals and transfers - (1,792) - (121) - (1,913)
Total Cost at 30 June 2017 35,556 31,906 356 - 16,099 83,917
Additions – capitalised development costs
- 24 - - - 24
Additions – acquired through business combinations
1,206 8,167 300 - 1,197 10,870
Disposals/write-off and transfers - - - - - -
Total Cost at 30 June 2018 36,762 40,097 656 - 17,296 94,811
Accumulated amortisation and impairment
Balance at 1 July 2016 (5,995) (4,117) - - (1,195) (11,307)
Amortisation expense and/or impairment loss
- (3,174) - - (1,610) (4,784)
Disposals/write-off - 532 - - - 532
Total Accumulated Amortisation at 30 June 2017
(5,995) (6,759) - - (2,805) (15,559)
Amortisation expense and/or impairment loss
- (3,687) - - (1,698) (5,385)
Disposals/write-off - - - - - -
Total Accumulated Amortisation at 30 June 2018
(5,995) (10,446) - - (4,503) (20,944)
Net book value
30 June 2018 30,767 29,651 656 - 12,793 73,867
30 June 2017 29,561 25,147 356 - 13,294 68,358
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Goodwill and other intangible assets with indefinite useful lives have been allocated for impairment testing purposes to the cash-generating units listed below.
Goodwill Trademarks & other rights
Total
$’000 $’000 $’000
Knowledge 14,047 352 14,399
Technology 8,325 - 8,325
Health 8,395 304 8,699
30 June 2018 Total 30,767 656 31,423
Knowledge 14,047 352 14,399
Technology 8,325 - 8,325
Health 7,189 4 7,193
30 June 2017 Total 29,561 356 29,917
Citadel tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of a cash generating unit (CGU) is determined based on value-in-use calculations which require the use of assumptions, which are detailed below. The calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The growth rates used in the cash flow predications are limited by the accounting standards to growth from existing markets and existing products. Expansion into adjacent markets and products have been excluded from these growth assumptions.
Forecasted Revenue
Compound Annual Growth
Rates
Discount Rate Terminal Rate
% % %
Knowledge 3.0 12.7 1.0
Technology & Integration 4.5 12.7 1.0
Health (0.9) 13.5 1.0
These assumptions have been used for the analysis of each CGU within an operating division. Management determined budgeted gross margin based on past performance and its expectations for the future. The compound annual growth rates used are based on past performance, expected contract changes and/or continued growth planned without further strategic initiatives approved by management. The discount rates used reflect specific risks relating to Citadel and the markets in which we operate. The directors and management have considered and assessed reasonably possible changes for key assumptions and have not identified any instances that are likely to cause the carrying amount of a CGU to exceed its recoverable amount.
Significant accounting policies
Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development
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costs, are not capitalised and expenditure is recognised in profit or loss in the year which the expenditure is incurred.
The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over their useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset.
Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level consistent with the methodology outlined for goodwill below. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportive. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis.
Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised.
(i) Goodwill
Goodwill acquired in a business combination is initially measured at cost of the business combination being the excess of the consideration transferred over the fair value of Citadel’s net identifiable assets acquired and liabilities assumed. If this consideration transferred is lower than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of Citadel’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of Citadel are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.
Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. If the recoverable amount of the cash-generating unit to which goodwill has been allocated is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods.
(ii) Research and development costs
Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when Citadel can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development.
Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project.
The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use, or more frequently, when an indication of impairment arises during the reporting period.
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A summary of the policies applied to Citadel’s intangible assets is as follows:
Goodwill Business process, software and
product development
Trademarks & other rights
Customer contracts
Useful lives Indefinite 3 – 10 years Indefinite 5-10 years
Impairment testing Bi-Annually Bi-Annually Annually Bi-Annually
(iii) Trademarks and other rights
Costs capitalised include external direct costs of materials and service in acquiring the trademarks and other rights.
(iv) IT development and software
Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised. Costs capitalised include external direct costs of materials and service, direct payroll and payroll related costs of employees’ time spent on the project.
IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where Citadel has an intention and ability to use the asset.
(v) Customer contracts
Customer contracts acquired as part of a business combination are recognised at fair value at the date of acquisition and are subsequently amortised on a straight-line based on the timing of projected cash flows of the contracts over their estimated useful lives.
Significant assumptions
Fair value of acquired intangibles
The fair value of intangible assets acquired in a business combination has been determined using a discounted cash flow approach. This methodology requires significant assumptions regarding the future revenue streams, EBITDA results, the proportion of EBITDA attributable to software versus customer contracts, and the discount rate.
Future revenue streams and EBITDA results are determined using budget estimates and forecasts taking into consideration the expected revenue arising from contracts and the costs associated with delivering those contracts. The level of risk associated with the software was also considered when calculating the discount rate. Citadel amortises the acquired intangibles in line with the useful lives detailed above and will perform impairment testing on an annual basis.
Impairment of goodwill and intangibles with indefinite useful lives
Citadel tests for impairment of goodwill and intangibles with indefinite useful lives on at least an annual basis. This requires estimates of the recoverable amount of the cash generating units using a value-in-use discounted cash flow methodology, to which the goodwill and intangibles with indefinite useful lives are allocated.
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NOTE 13 – SUBSIDIARIES
(a) Material subsidiaries
Details of Citadel’s material subsidiaries at the end of the reporting period are as follows:
Name of subsidiary Principal activity Place of incorporation and operation
Proportion of ownership interest and voting power held by Citadel
2018 2017
Australian Business Academy Pty Ltd
Education provider Australia 100% 100%
Citadel Group Services Australia Pty Ltd (b)
Specialist consulting and HR solutions provider
Australia 100% 100%
Citadel Technology Solutions Pty Ltd
Technology and integration services
Australia 100% 100%
Jakeman Business Solutions Pty Ltd
Knowledge management and advisory services
Australia 100% 100%
Citadel Health Pty Ltd Technology and managed services
Australia 100% 100%
Citadel Health Management Pty Ltd
Technology and managed services
Australia 100% 100%
Kapish Pty Ltd Technology and managed services
Australia 100% 100%
Kapish Services Pty Ltd Technology and managed services
Australia 100% 100%
Charm Health International Pty Ltd (a)
Oncology patient management software
Australia 100% 0%
filosoph-e Pty Ltd
Information and Communications Technology managed services provider
Australia 50% 50%
(a) On 15 September 2017, Citadel acquired Charm Health International Pty Ltd and its subsidiaries (Charm), Australia’s leading supplier of specialist oncology e-health systems with an upfront payment of $8.2m (Note 30).
(b) On 27 June 2018, Frontier Group Australia Pty Limited changed its name to Citadel Group Services Australia Pty Ltd.
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(b) Non-controlling interests (NCI) Set out below is summarised financial information for each subsidiary that has non-controlling interests that are material to Citadel. The amounts disclosed for each subsidiary are before inter-company eliminations.
Significant accounting policies
Citadel recognises non-controlling interests in an acquired entity either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. This decision is made on an acquisition-by-acquisition basis. For the non-controlling interests in filosoph-e Pty Ltd, Citadel elected to recognise the non-controlling interests at its proportionate share of the acquired identifiable net assets. See note 1 for Citadel’s accounting policies for business combinations.
Filosoph-e Pty Ltd 2018 2017
$’000 $’000
Summarised balance sheet
Total current assets 12,476 14,213
Total current liabilities (3,077) (4,211)
Total non-current liabilities (1,858) (1,113)
Net assets 7,541 8,889
2018 2017
$’000 $’000
Accumulated NCI 3,770 4,444
Summarised statement of profit or loss and other comprehensive income
Profit for the year attributed to NCI 3,626 3,982
Total comprehensive income for the year 3,626 3,982
Dividends paid to NCI 4,300 3,150
Summarised cash flow
Cash flows from operating activities 10,824 6,987
Cash flow from financing activities (8,600) (6,300)
Net increase in cash and cash equivalents 2,224 687
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NOTE 14 – TRADE AND OTHER PAYABLES
2018 2017
$’000 $’000
Trade creditors 7,356 6,949
Other payables 1,636 1,812
GST payable 951 1,600
Accrued expenses 11,028 6,478
20,971 16,839
Significant accounting policies
These amounts represent liabilities for goods and services provided to Citadel prior to the end of financial year which are unpaid. These amounts are carried at amortised cost and due to their short term nature they are not discounted. These amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period.
NOTE 15 – INTEREST BEARING LIABILITIES: CURRENT
2018 2017
$’000 $’000
Secured bank loan 4,581 3,334
Unsecured loans 1,032 40
Finance lease Liability (note 18) 285 340
5,898 3,714
The bank facilities are issued by ANZ Bank. The debt facilities are held by the legal parent The Citadel Group Limited and are secured by a fixed and floating charge over Citadel’s assets. Each subsidiary of Citadel has agreed to a cross collateral mortgage debenture securing the parent entity’s debt facility. All covenants relating to these facilities have been complied with during the 2018 and 2017 reporting period. The current average effective interest rate on the facilities is 3.5% per annum (2017: 3.3% per annum). The carrying amount of the current and non-current borrowings approximates their fair value.
Significant accounting policies
Interest bearing liabilities are initially recognised at fair value, net of transaction costs incurred. Interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the statement of comprehensive income over the period of the liability using the effective interest method.
Interest bearing liabilities are removed from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income or other expenses.
Interest bearing liabilities are classified as current liabilities unless Citadel has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.
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NOTE 16 – INTEREST BEARING LIABILITIES: NON CURRENT
2018 2017
$’000 $’000
Secured bank loan 11,497 4,532
Finance lease liabilities (note 18) 407 616
11,904 5,148
NOTE 17 – OTHER PAYABLES: NON CURRENT
2018 2017
$’000 $’000
Lease liability 301 337
Consideration Liabilities 519 -
820 337
NOTE 18 – OBLIGATIONS UNDER FINANCE LEASES
Citadel leased certain of its equipment under finance leases. The average lease term is 3 years (2017: 4 years). Citadel has options to purchase the equipment for a nominal amount at the end of the lease terms. Citadel’s obligations under finance leases are secured by the lessor’s title to the leased assets.
Interest rates underlying all obligations under finance leases are fixed at respective contract dates ranging from 5.3% to 7.8% (2017: 5.0% to 7.8%) per annum.
Minimum lease payments Present value of
minimum lease payments
2018 $’000
2017 $’000
2018 $’000
2017 $’000
Not later than one year 313 387 285 340
Later than one year and not later than five years 423 646 407 616
736 1,033 692 956
Less future finance charges (44) (77) - -
Present value of minimum lease payments 692 956 692 956
Included in the consolidated statement of financial position
- current interest bearing liabilities 285 340
- non-current interest bearing liabilities 407 616
692 956
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Significant accounting policies
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are initially recognised as assets of Citadel at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.
Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss. Contingent rentals are recognised as expenses in the periods in which they are incurred.
Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.
In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
NOTE 19 – PROVISIONS AND CURRENT TAX LIABILITIES
2018 2017
$’000 $’000
Current provisions
Employee benefits (a) 1,748 1,432
Make good and provision for onerous lease (note 20) 736 259
Total current provisions 2,484 1,691
Current tax liabilities
Provision for income tax (note 5) 1,052 2,030
Total current tax liabilities 1,052 2,030
Non-current provisions
Employee benefits (a) 317 295
Make good and provision for onerous lease (note 20) 886 76
Total non-current provisions 1,203 371
(a) The provision for employee benefits relates to Citadel’s liability for long service leave and annual leave.
Significant accounting policies
(i) (i) Provisions
(j) Provisions for make good obligations are recognised when Citadel has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be
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small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense.
(ii) Employee benefits
A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave, and vesting personal leave when it is probable that settlement will be required and they are capable of being measured reliably.
Liabilities recognised in respect of short-term employee benefits are measured at their nominal values using the remuneration rate expected to apply at the time of settlement and are recognised in other payables where the liability is expected to be settled within 12 months. Expenses for non-vesting personal leave are recognised when the leave is taken and are measured at the rates paid or payable.
Liabilities recognised in respect of long term employee benefits, including annual leave and long service leave not expected to be settled within 12 months, are measured as the present value of the estimated future cash flows to be made by Citadel in respect of services provided by employees up to reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. Re-measurements as a result of experience adjustments and changes in assumptions are recognised in profit or loss.
NOTE 20 – MAKE GOOD PROVISION AND PROVISION FOR ONEROUS LEASE
2018 2017
$’000 $’000
Opening amount as at 1 July 335 393
Additional make good provision accrued 13 -
Make good provision paid - (58)
Provision for onerous lease 1,274 -
Closing amount as at 30 June 1,622 335
Current provision 736 259
Non-current provision 886 76
Total make good provision 1,622 335
Provisions are considered current if they are expected to crystallise in the next 12 months.
Citadel is required to restore all leased premises to their original condition with the exception of the principle place of business in Symonston ACT. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets.
Citadel has accounted for onerous contracts in relation to leased premises for Australian Business Academy Pty Ltd. Sub leases for these premises have been signed and onerous lease expenses recognised for the unavoidable costs.
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NOTE 21 – OTHER LIABILITIES: CURRENT
2018 2017
$’000 $’000
Deferred income 7,196 5,899
Consideration liabilities - 13,286
7,196 19,185
Significant accounting policies
A deferred income balance is recognised as a liability when Citadel either received payment or raised an invoice in advance of delivering contracted goods and services. The balance of the deferred income account is amortised to revenue in the period when the goods are delivered or the services rendered.
NOTE 22 – CONTRIBUTED EQUITY
2018 2017 2018 2017
Shares Shares $,000 $,000
Fully paid ordinary shares issued 49,106,001 47,894,599 58,172 53,722
Details Number of
shares $,000
Balance 30 June 2016 46,744,240 48,172
Conversion of rights and share options (i) 91,805 231
Employee share scheme 9,649 51
Exercise of options – proceeds received (i) 100,000 268
Granted as consideration 948,905 5,000
Balance 30 June 2017 47,894,599 53,722
Conversion of rights and share options (i) 336,861 1,023
Employee share scheme 13,031 77
Exercise of options – proceeds received (i) 500,000 1,350
Granted as consideration 361,510 2,000
Closing balance 30 June 2018 49,106,001 58,172
(i) During the year, share rights and share options issued to directors and executives were exercised into ordinary shares.
(a) Ordinary shares
Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of Citadel in proportion to the number of and amounts paid on the shares held.
On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote.
Ordinary shares have no par value and Citadel does not have a limited amount of authorised capital.
Managing Complexity
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Significant accounting policies
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration.
NOTE 23 – RESERVES (NET OF INCOME TAX)
2018 2017
$’000 $’000
Equity-settled employee benefits 1,135 1,413
1,135 1,413
Balance at beginning of year 1,413 1,004
Value of share options and rights to employees 822 691
Exercise of rights and options (1,100) (282)
Balance at end of year 1,135 1,413
NOTE 24 – RETAINED EARNINGS
2018 2017
$’000 $’000
Retained earnings 23,959 15,872
Balance at beginning of year 15,872 11,770
Profit attributable to owners of Citadel 14,300 8,643
Payment of dividends (note 25) (6,213) (4,541)
Balance at end of year 23,959 15,872
NOTE 25 – DIVIDENDS
2018 2017
$’000 $’000
(a) Dividends paid – to ordinary shareholders (excludes non-controlling interests)
Final dividend paid 29 September 2017: 8.0 cents per share fully franked based on tax paid at 30% (2017: 4.8 cents per share fully franked based on tax paid at 30%)
3,856 2,243
Interim dividend paid 31 March 2018: 4.8 cents per share fully franked dividend based on tax paid at 30% (2017: 4.8 cents per share fully franked based on tax paid at 30%)
2,357 2,298
Total dividend paid 6,213 4,541
(b) Dividends not recognised at the end of the reporting period
Since year end the Directors have recommended the payment of a dividend of 9.0 cents fully franked based on tax paid at 30% (2017: 8.0 cents fully franked).
4,420
3,831
Managing Complexity
74
Significant accounting policies
A provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date.
NOTE 26 – CAPITAL MANAGEMENT
Citadel’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, Citadel may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistently with others in the industry, Citadel monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘interest bearing liabilities’ as shown in the consolidated statement of financial position) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated statement of financial position plus net debt.
During 2018, Citadel’s strategy has maintained a net asset gearing ratio of (0.09) (2017: (0.10) net asset position) due to strong cash balances at 17% of total assets (2017: 23%). This is considered appropriate for the current conditions.
The gearing ratio at 30 June 2018 and 30 June 2017 was as follows:
2018 2017
$’000 $’000
Net (asset)/debt (7,622) (7,715)
Total equity 87,036 75,451
Net (asset)/debt to equity ratio (0.09) (0.10)
As at 30 June 2018 and 30 June 2017, Citadel held more cash and cash equivalents than debt.
Managing Complexity
75
NOTE 27 – FINANCIAL RISK MANAGEMENT
Citadel’s activities expose it to a variety of financial risks: market risk (including currency risk, and interest rate risk), credit risk and liquidity risk. Citadel’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of Citadel.
Financial risk management is carried out by Citadel’s corporate centre (Group Treasury) and reported to the Board. Group Treasury identifies and evaluates financial risks in close co-operation with Citadel’s operating units.
Citadel’s principal financial instruments are summarised below:
2018 2017
$’000 $’000
Financial assets
Cash and bank balances (including short term investments > 3 months) 24,911 29,822
Loans and receivables 15,150 17,077
Financial liabilities
Amortised cost (trade and other payables , finance leases, and vendor facilities) 11,627 11,318
Bank loans 16,078 7,865
Consideration liabilities 519 13,286
(a) Market risk
(i) Currency risk
Citadel sources goods and services internationally and is exposed to foreign exchange risk arising from currency exposures with respect to the NZ dollar, US dollar and Canadian dollar.
To date the foreign exchange risk exposure through international sourcing of services has been considered immaterial with no specific management strategies adopted.
Citadel’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows:
2018 2017
$’000 $’000
USD Trade receivables 30 11
CAD Trade receivables 15 15
NZD Trade receivables 15 10
Managing Complexity
76
During the year, the following foreign-exchange related amounts were recognised in the statement of profit or loss and other comprehensive income:
2018 2017
$’000 $’000
Net foreign exchange (loss)/gain included in other income/(other expenses) (24) (10)
Citadel’s exposure to foreign currency risk is considered immaterial and therefore, movements in the US, Canadian and New Zealand dollar are not considered to have a material impact on post-tax profit or other components of equity.
(ii) Cash flow and fair value interest rate risk
Citadel’s main interest rate risk arises from long-term borrowings as well as working capital facilities including overdrafts and invoice financing. Borrowings issued at variable rates expose Citadel to cash flow interest rate risk. The risk is managed by Citadel by regularly monitoring cash flow requirements.
As at the reporting date, Citadel had the following variable rate borrowings outstanding:
2018 2017
Average interest rate
%
$’000 Average interest rate
%
$’000
Short term interest bearing investments (interest revenue) 1.7 7,104 0.9 23,643
Short term bank facilities (interest expense) 3.0 992 - -
At 30 June 2018, if interest rates had changed by -/+ 100 basis points from the year-end rates with all other variables held constant, post-tax profit for the year would have been:
2018 2017
Outstanding at year end
$’000
Sensitivity (after tax)
-/+ 100 bps $
Outstanding at year end
$’000
Sensitivity (after tax)
-/+ 100 bps $
Short term interest bearing investments 7,104 (71)/71 23,643 (2,026)/2,026
Short term bank facilities 992 (9)/9 - -
(b) Credit risk
Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to government and wholesale customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. Government customers are classified as Commonwealth, State and Local. Citadel has not separately assessed the credit risk for a government customer. If there is no independent rating for wholesale customers, Citadel assesses the credit quality of the customer, taking into account its financial position, past experience and other factors.
Sales to wholesale customers are required to be settled in cash, cheque or EFT, mitigating credit risk. Credit risk for deposits (loans) outstanding with employees is assessed by taking into account the individuals’ position and time in Citadel, past experience and other factors. All employees make payments through the payroll system.
Citadel trades only with recognised, credit worthy third parties and, as such, collateral is not requested nor is it Citadel’s policy to securitise its trade and other receivables.
Managing Complexity
77
In addition, receivable balances are monitored on an ongoing basis. Citadel has not experienced significant levels of bad debt.
The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised following.
2018 2017
$’000 $’000
Financial assets
Cash at bank
Australian Banks Rating of A or Better 17,731 6,179
Short term deposits
Australian Banks Rating of A or Better 7,180 23,643
Total cash and cash equivalents 24,911 29,822
Total receivables
Commonwealth government 1,485 3,037
State government 2,117 1,369
Local government 1,930 1,262
Customers independently rated B or above 4,305 4,524
Wholesale customers 5,160 6,780
Related parties and associates 107 90
Total trade receivables 15,104 17,062
Financial assets
Associated entities 45 252
Total other receivables and employee loans 45 252
Total financial assets 40,060 47,136
Citadel has reduced the provision against trade receivables to nil in 2018 (2017: $0.2 million).
(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Citadel manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.
Managing Complexity
78
(i) Maturities of financial assets and liabilities
The amounts disclosed below in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
0 – 12 months 12 – 24 months 24 – 48 months 48 + months
$’000 $’000 $’000 $’000
Financial assets
Cash and cash equivalents 24,911 - - -
Trade and other receivables 15,150 - - -
Financial assets 40,061 - - -
Financial liabilities
Trade payables (non-interest bearing) 7,356 - - -
Other payables (non-interest bearing) 2,587 - - -
Bank Loans 4,581 4,599 6,898 -
Consideration liabilities - 600 - -
Trade and other bank facilities 993 - - -
Finance lease liability 285 283 118 6
Financial liabilities 15,802 5,482 7,016 6
Net financial assets/(liabilities) 24,259 (5,482) (7,016) (6)
The Directors consider that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values.
(d) Recognised fair value measurements
(i) Fair value hierarchy
This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, Citadel has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level follows underneath the table.
Level 1 Level 2 Level 3 Total
Notes $’000 $’000 $’000 $’000
Consideration Liabilities – Current - - - -
Consideration Liabilities – Non current - - 519 519
Total financial liabilities as at 30 June 2018 - - 519 519
Consideration Liabilities – Current - - 13,286 13,286
Consideration Liabilities – Non current - - - -
Total financial liabilities as at 30 June 2017 - - 13,286 13,286
There were no transfers between levels during the year.
Managing Complexity
79
Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by Citadel is the current bid price. These instruments are included in level 1.
Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.
Level 3: If one or more of the significant inputs is not based on observable data, the instrument is included in level 3. This is the case for consideration liabilities.
(ii) Valuation techniques used to determine fair values
Specific valuation techniques used to value financial instruments include:
Discounting of budget and forecast cash flow results, using a discount rate that is reflective of the risk associated with the instrument.
The above methodology has been used to determine the fair value of consideration liabilities.
(iii) Fair value measurements using significant unobservable inputs (level 3)
The following table presents the changes in level 3 items for the period ended 30 June 2018:
Consideration Liabilities
Total
$’000 $’000
Opening balance as at 1 July 2017 13,286 13,286
Acquisitions 989 989
Payments satisfied during the year (cash and shares) (13,598) (13,598)
Recognised in profit before income tax – unwinding of discount 430 430
Recognised in profit before income tax – gain on fair value adjustment (588) (588)
Total financial liabilities 519 519
(iv) Valuation inputs and relationships to fair value
The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements.
Fair value as at 30 June 2018
Unobservable inputs
Range of inputs
Relationship of unobservable inputs to fair value
Description $’000 2018
Consideration Liabilities
519 Risk-adjusted discount rate
14% A change in the discount rate by 100 bps would
increase/decrease the fair value by $0.01
Expected revenue
$6.5m If expected average EBITDA were 10% higher or
lower, the FV would increase/decrease by $0.2m
Managing Complexity
80
(v) Valuation processes
For the purposes of determining the fair value of consideration paid to acquire a business, Citadel uses the services of external valuation experts. The fair value is reassessed by the finance team at least once every six months, in line with Citadel’s half-yearly reporting periods. The main level 3 inputs used by Citadel are derived and evaluated as follows:
Discount rates for financial liabilities are determined using a capital asset pricing model to calculate a rate that reflects current market assessments of the time value of money and the risk specific to the liability; and,
Expected average EBITDA is estimated based on the entity’s knowledge of the business and the likely impact of the current economic environment.
NOTE 28 – SHARE-BASED PAYMENTS
(a) Employee share rights plan
Details of the share rights plan for senior management personnel are provided below. Note that the terms of the plan are consistent with those offered to KMP as disclosed in the Remuneration Report.
2018 2017
Number of rights to deferred shares granted on 1 October 2016 (i) - 159,291
Weighted average fair value of rights at grant date: 1 October 2016 - $5.29
Number of rights to deferred shares granted on 1 October 2017 (ii) 149,714 -
Weighted average fair value of rights at grant date: 1 October 2017 $5.48 -
(i) On 1 October 2016, a total of 159,291 share rights were issued at a weighted average fair value of $5.29 per share right. All share rights under this grant remain on issue as at 30 June 2017.
(ii) On 1 October 2017, a total of 149,714 share rights were issued at a weighted average fair value of $5.48 per share. All share rights under this grant remain on issue as at 30 June 2018.
(b) Expenses Share Scheme
The employee share scheme was launched in FY16 and provides permanent full-time and part-time employees who are Australian tax residents and are aged 18 years or over, with the opportunity to purchase shares from pre-tax income via salary sacrifice. Under the scheme, 13,031 share rights were issued on 31 October 2017; these rights converted on 31 December 2017 and 30 June 2018.
(c) Share Options
Share options were issued to non-executive directors on 1 November 2014, which was a one off incentive. If a non-executive director ceases to be a director, any options issued to that director which have not become exercisable automatically lapse. In the event of a takeover of Citadel or the same of its main undertaking all of the options shall be exercisable on the date the takeover, merger or sale is completed. The options do not carry any participation rights in new share issues. On 13 November 2017, the remaining five-sixths of the options issued to the non-executive directors on 1 November 2014 were exercised into ordinary shares (one-sixth during FY17). The exercise price of the options was $2.70 and the market price was $6.00 per share (FY17: $5.00 per share). Set out below is a summary of the options issued under the plan.
Managing Complexity
81
2018 2017
Exercise price per share
option
Number of options
Exercise price per share
option
Number of options
As as 1 July 2.70 500,000 2.70 600,000
Exercised during the year 2.70 (500,000) 2.70 (100,000)
As at 30 June - - 2.70 500,000
Total expenses arising from share-based payment transactions recognised during the year as part of expenses were as follows:
2018 2017
$’000 $’000
Options expensed over vesting period 25 68
Share rights granted 797 623
822 691
Significant assumptions
(i) (i) Fair value of share rights issued to employees (non-executives)
Citadel uses the Black-Scholes model for determining the fair value of share options issued. As such, this requires estimates for the inputs to the model.
(ii) Share-based payments arrangements
Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on Citadel’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, Citadel revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimate, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve.
Managing Complexity
82
NOTE 29 – RELATED PARTY TRANSACTIONS
(a) Trading transactions
During the year, the Group did not enter into any related party transactions.
(b) Subsidiaries
Interests in subsidiaries are set out in Note 13(a).
(c) Key Management Personnal Compensation
Detailed compensation arrangements relating to key management personnel are disclosed in the Remuneration Report however, a summary is set out below:
2018 2017
$,000 $,000
Short-term employee benefits 1,852 1,968
Post-employment benefits 71 60
Long-term employee benefits 10 13
Share-based payment 436 432
2,369 2,473
(d) Other related party transactions
(i) Jakeman Family Trust
Citadel has entered into a contract with the Jakeman Family Trust (JFT) for the provision of services by Dr Miles Jakeman details of which are included in the Remuneration Report.
NOTE 30 – BUSINESS COMBINATIONS
Citadel acquired 100% of Charm Health International Pty Ltd and subsidiaries, and the business assets of Anaesthetic Private Practice during the year ended 30 June 2018:
Principal activity Date of
acquisition Proportion
acquired Consideration
% $,000
Charm Health International Pty Ltd (Charm)
Oncology patient management
software
15 September 2017
100% 9,146
Anaesthetic Private Practice (APP) (business assets acquired)
Practice management and billing tool for the
Australian Anaesthetics sector
4 May 2018 - 2,082
Both businesses align with the Group’s existing offerings in electronic content management and cloud based computing, allowing the Group to expand its current operations and continue the execution of our growth strategy.
In purchasing APP, Citadel obtained the customer contracts and the intellectual property and applied operation processes.
Managing Complexity
83
(a) Fair value of consideration transferred
2018 2018 2018
APP Charm Total
$’000 $’000 $’000
Cash paid 2,082 5,000 7,082
Equity issued - 2,000 2,000
Final adjusted working capital payment - 1,158 1,158
Earn out payment year 1 (i) - 526 526
Earn out payment year 2 (i) - 462 462
Total 2,082 9,146 11,228
(i) The following contingent consideration has been included in the respective acquisitions:
Charm
Under the arrangement, there are two tranches to be paid with the amount payable for each tranche dependent on the revenue achieved during the ‘earn out’ period. The ‘earn out’ period runs from completion date to 15 September 2019. The ‘earn out’ amount for year 1 after completion and year 2 after completion is capped at $1.0m for each year. These amounts have been recognised as a financial liability under AASB 13 Fair Value Measurement which requires the payable amount to be discounted back to the present value as at 15 September 2017.
Significant Accounting Policies
In order to comply with accounting policy note 1(f), Citadel adopted a number of assumptions relating to the appropriate discount rate to apply to future tranches when determining the present and the expected future performance of the acquired entity.
Future performance was based on budget estimates and forecasts taking into consideration the expected revenue arising from contracts and the costs associated with delivering those contracts. The discount rate was determined using Citadel’s existing cost of debt and equity. Citadel obtained the assistance of valuation experts in this process.
Managing Complexity
84
(b) Fair value of assets acquired and liabilities assumed at the date of acquisition
2018 2018
APP Charm
$’000 $’000
Assets
Cash and cash equivalents - 1,624
Trade and other receivables - 486
Other - 19
Deferred tax assets - -
Property, plant and equipment - 31
Work in progress - -
Intangible assets: software and customer contracts 2,100 7,588
Liabilities
Trade and other payables - 326
Provision for employee benefits 18 156
Income in advance - 1,110
Provision for tax - -
Other - -
Deferred tax liabilities on acquired intangible assets - 216
Net assets acquired 2,082 7,940
The receivables and other debtors acquired in the Charm transaction with a fair value of $0.5 million had gross contractual amounts of $0.5 million. The best estimate at acquisition date of the contractual cash flows not expected to be collected is nil.
(c) Goodwill arising on acquisition
2018 2018
APP Charm
$’000 $’000
Consideration transferred 2,082 9,146
Less: fair value of identifiable net assets acquired (2,082) (7,940)
Goodwill arising on acquisition - 1,206
Goodwill arose in the acquisition of these entities because the consideration paid for the combination effectively included amounts in relation to the benefits of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.
None of the goodwill arising on these acquisitions is expected to be deductible for tax purposes.
Managing Complexity
85
(d) Net cash outflow on acquisition
Year ended 30 June 2018
$’000
Consideration paid in cash for acquisitions during the year 8,263
Less: Cash and cash equivalent balances acquired (1,624)
Deferred consideration settled during the period for Kapish Pty Ltd (acquired 1 July 2016) 798
Deferred consideration settled during the period for PJA Solutions Pty Ltd (acquired 1 June 2015) 12,800
Outflow of cash – investing activities 20,237
(e) Impact of acquisitions on the results of Citadel
Included in the profit after tax for the year is $0.9 million attributable to the additional business generated by Charm and $0.2 million attributable to the additional business generated by APP.
NOTE 31 – DISCONTINUED OPERATIONS
Citadel announced the exit of Australian Business Academy Pty Ltd, a subsidiary, from the vocational education and training (VET) sector on 31 October 2016 and ceased operations on 9 December 2016. Minor transactions continue to be recognised for occupancy costs.
(a) Earnings per share from discontinued operation
2018 2017
$’000 $’000
Other income - 2,018
Expenses (2,132) (5,551)
(Loss)/Profit before income tax (2,132) (3,533)
Income tax benefit/(expense) 640 752
(Loss)/Profit from discontinued operation (1,492) (2,781)
Net cash (outflow)/inflow from operating activities (1,149) (4,998)
Net cash (outflow)/inflow from financing activities (5) -
Net decrease in cash generated by the operation (1,154) (4,998)
2018 2017
Cents per share Cents per share
Basic earnings per share from discontinued operation (3.0) (5.9)
Diluted earnings per share from discontinued operation (3.0) (5.8)
Managing Complexity
86
NOTE 32 – RECONCILIATION OF THE NET PROFIT AFTER TAX TO THE NET CASH FLOW FROM CONTINUING OPERATIONS
2018 2017
$’000 $’000
Profit for the year 19,418 15,406
Depreciation and amortisation 7,454 5,817
Unwinding of discount 433 2,347
Share-based payments 745 847
Other movements 40 2
Gain on fair value re-measurement of financial instruments (588) (1,316)
(Increase)/decrease in trade and other receivables 11,977 (2,289)
(Increase)/decrease in inventories (82) (907)
(Increase)/decrease in income accruals and other assets (10,093) (3,328)
(Increase)/decrease in prepayments (862) 1,112
Increase/(decrease) in trade payables (7,802) 4,147
Increase/(decrease) in tax liabilities (2,453) (1,038)
Increase/(decrease) in provisions 184 121
Increase/(decrease) in other liabilities 1,985 4,013
Net cash inflow from operating activities 20,356 24,934
NOTE 33 – RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES
2017 Cash flows Non-cash 2018
$’000 $’000 $’000 $’000
Loans – current 3,374 1,090 1,150 5,614
Loans – non-current 4,532 7,111 (146) 11,497
Lease liabilities – current 340 (287) 232 285
Lease liabilities – non-current 616 - (209) 407
Total liabilities from financing activities 8,862 7,914 1,027 17,803
Managing Complexity
87
NOTE 34 – OPERATING LEASE ARRANGEMENTS
Operating leases relate to commercial leases for office premises with lease terms of between 3 and 5 years. Citadel does not have an option to purchase the leased land and buildings at the expiry of the lease periods.
2018 2017
Payments recognised as an expense: $’000 $’000
Minimum lease payments 1,409 1,826
Operating leases:
- Not later than one year 2,748 1,755
- Later than one but not later than five years 6,679 3,686
Aggregate lease expenditure contracted for at 30 June 9,427 5,441
Future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases
1,750 48
NOTE 35 – COMMITMENTS AND CONTINGENCIES
Finance lease liabilities and non-cancellable operating lease commitments are disclosed in notes 18 and 34 to the financial statements.
As at 30 June 2018, Citadel has a total of $2.7 million in bank guarantees outstanding (2017: $3.7 million) relating to office premises and the nRAH project. As at 30 June 2018, there were no contingent assets or liabilities (2017: nil).
NOTE 36 – REMUNERATION OF AUDITORS
During the year the following fees were paid or payable for services provided by the auditor of Citadel, and its related practices.
2018 2017
$’000 $’000
Remuneration of the external auditors PricewaterhouseCoopers
- Audit and review of financial statements 205 207
Total remuneration for audit and other assurance services 205 207
During the year the following fees were paid or payable for non-audit services by the auditor of Citadel.
2018 2017
$’000 $’000
Taxation Services 40 15
Accounting Services 3 3
It is Citadel’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with Citadel are important. These assignments are principally tax advice and due diligence works for merger and acquisition activities.
Managing Complexity
88
NOTE 37 – PARENT ENTITY FINANCIAL INFORMATION
2018 2017
$’000 $’000
Assets
Current assets 11,821 9,615
Total assets 91,062 78,979
Liabilities
Current liabilities 28,995 32,481
Total liabilities 41,400 36,179
Net assets 49,662 42,800
Shareholders’ equity Issued capital 53,984 49,533
Retained earnings (5,457) (8,147)
Reserves - share based payments 1,135 1,414
Total equity 49,662 42,800
Profit (loss) for the year of the parent entity 9,079 659
Total comprehensive income of the parent entity 9,079 659
(a) Guarantees
During the years ended 30 June 2018 and 30 June 2017, Citadel had signed a cross-collateral mortgage debenture with ANZ bank for the outstanding debt of all entities within Citadel.
In addition, Citadel has $0.5 million (2017: $0.7 million) in bank guarantees outstanding relating to office premises.
(b) Contingent Assets and Liabilities
As at 30 June 2018 there are no contingent assets or liabilities (2017: nil).
(c) Contractual Commitments for the acquisition of property plant and equipment
As at 30 June 2018 there are no contractual commitments for the acquisition of property, plant and equipment (2017: nil).
Significant Accounting Policies
The financial information for the parent entity, The Citadel Group Limited, has been prepared on the same basis as the consolidated financial statements, except as set out below.
(a) Investments in subsidiaries and associates
Investments in subsidiaries are accounted for at cost. Such investments include both investments in shares issued by the subsidiary and other parent entity interests that in substance form part of the parent entity’s investment in the subsidiary. These include investments in the form of interest-free loans which have no fixed repayment terms and which have been provided to subsidiaries as an additional source of long term capital.
Trade amounts receivable from subsidiaries in the normal course of business and other amounts advanced on commercial terms and conditions are included in receivables.
Managing Complexity
89
NOTE 38 – EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
There are no significant events that have occurred that would require a change to or disclosure in the full year report.
Managing Complexity
90
Directors’ declaration
In the Directors’ opinion:
a. the financial statements and notes set out on pages 37 to 89 are in accordance with theCorporations Act 2001, including:
i. complying with Accounting Standards, the Corporations Regulations 2001 and othermandatory professional reporting requirements;
ii. giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of its performance, for the financial year ended on that date; and,
b. there are reasonable grounds to believe that the company will be able to pay its debts as andwhen they become due and payable.
The Directors have been given the declaration by the Chief Executive Officer required by section 295A of the Corporations Act 2001.
This declaration is made in accordance with a resolution of the Directors.
Mr Kevin McCann, AM
Chairman
Canberra
20 August 2018
PricewaterhouseCoopers, ABN 52 780 433 757 28 Sydney Avenue, FORREST ACT 2603, GPO Box 447, CANBERRA CITY ACT 2601 T: + 61 2 6271 3000, F: + 61 2 6271 3999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
Independent auditor’s report To the members of The Citadel Group Limited
Report on the audit of the financial report
Our opinion
In our opinion:
The accompanying financial report of The Citadel Group Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including:
(a) giving a true and fair view of the Group's financial position as at 30 June 2018 and of its financial performance for the year then ended
(b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
What we have audited
The Group financial report comprises:
the consolidated statement of financial position as at 30 June 2018
the consolidated statement of changes in equity for the year then ended
the consolidated statement of cash flows for the year then ended
the consolidated statement of profit or loss and other comprehensive income for the year then ended
the notes to the consolidated financial statements, which include a summary of significant accounting policies
the directors’ declaration.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.
Our audit approach
An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if
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individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the management structure of the Group, its accounting processes and controls and the industry in which it operates.
Materiality
For the purpose of our audit we used overall Group materiality of $1.25 million, which represents approximately 5% of the Group’s net profit for the year from continuing operations.
We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole.
We chose Group profit before tax because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. We excluded discontinued operations as they are unusual or infrequently occurring items impacting profit and loss.
We selected 5% based on our professional judgement, noting it is within the range of commonly acceptable thresholds.
Audit Scope
Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events.
The Group includes ten subsidiaries which operate across New South Wales, Victoria, Queensland, South Australia and the Australian Capital Territory. Given that the accounting records for all entities are held and managed by a central finance function located in Canberra the majority of our audit procedures were performed at the Group’s Canberra Office.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit, Risk and Compliance Committee.
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Key audit matter How our audit addressed the key audit matter
Acquired intangible assets impairment
assessment
(Refer to note 12) [$73.2m]
At 30 June 2018 the Group recognised $73.2m
of acquired intangible assets. This includes
$30.8m of goodwill, $12.8m of customer
contracts and relationships, and $29.6m of
software.
The $30.8m of goodwill is recognised across
the three Cash Generating Units (“CGUs”):
Knowledge, Technology, and Health.
We considered the assessment of impairment
of goodwill associated with the Health CGU to
be a key audit matter given:
the carrying value of the related
goodwill is material ($8.4m)
the relatively smaller difference
between the recoverable amount and
the carrying value for the Health
CGU; and
the carrying value in the Health CGU
is dependent on a small number of
contracts and as a result cash flows
are particularly sensitive to volume
and retention assumptions.
The $15.1m of customer contracts and
relationships, and software recognised is in
relation to the acquisitions of PJA Solutions
Pty Ltd, Charm Health International Pty Ltd,
and Kapish Pty Ltd.
We considered the assessment of impairment
of customer contracts and relationships, and
software in relation to the PJA Solutions Pty
Ltd acquisition to be a key audit matter given:
the carrying value of the intangible
assets recognised is material ($7.6m
We evaluated the Group’s cash flow forecasts, which include
customer volume and retention assumptions, and the process by
which they were developed. We compared the Group’s forecasts
for the previous five financial years, including 2018, with the
actual results for those years to assess the historical accuracy of
forecasting.
We checked the forecast used in the Health valuation model was
consistent with the Board approved budget and strategic plan
and that the determination of key assumptions were subject to
oversight from the directors.
We assessed the assumptions and methodology used for the
impairment test, in particular, those assumptions relating to the
discount rate, customer volume and retention, and EBITDA
growth rates. To do this we performed a number of procedures
including the following:
assisted by our valuations experts, evaluated the
appropriateness of the discount rate adopted, including
identifying an acceptable range of discount rates based
on market data and industry research
evaluated the underlying cash flow assumptions in
relation to EBITDA with reference to historical results,
current year results, expected project pipelines,
existing contract terms, customer volume and retention
and considered external industry information, and
market data
assessed whether the included assets, liabilities and
cash flows were directly attributable to each CGU and
the allocation of corporate assets and overheads was
reasonable
assessed whether the included cash flows were directly
attributable to each asset and the allocation of
corporate assets and overheads was reasonable
checked the calculations in the valuations model for
mathematical accuracy; and
tested the sensitivity of the calculations by varying key
assumptions and applying other values within a
reasonably possible range, for example by reducing
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Key audit matter How our audit addressed the key audit matter
and $19.1m respectively); and
the carrying value of these assets is
dependent on a small number of
contracts and as a result cash flows
are particularly sensitive to volume
and retention assumptions.
Assessing the carrying value of acquired
intangible assets requires the Group to make
estimates of uncertain future cash flows in
models. Given the specific situations for the
CGUs/assets discussed above the impairment
outcome may be sensitive to reasonably
possible changes in the assumptions. The
significant assumptions include customer
volumes and retention, the earnings before
interest, tax, depreciation and amortisation
(“EBITDA”), growth, terminal growth, and
discount rates, and useful lives (customer
contracts and relationship and software only).
certain growth assumptions.
We evaluated the adequacy of the disclosures made in note 12 in
relation to the key assumptions used in the impairment
assessment in light of outcomes of the above analysis and the
requirements of Australian Accounting Standards.
Charm business combination
(Refer to note 30) [$9.1m]
On 15 September 2017 the Group acquired
100% of the shares in Charm Health
International Pty Ltd (“Charm Health”) for
$9.1m. The consideration included $5.0m in
cash, Group shares to the value of $2.0m,
completion balance payment of $1.1m, and
contingent consideration of $1.0m, which is
dependent on achieving specific revenue
targets over the earn out period to 15
September 2019.
The acquisition of a business is complex and
Australian Accounting Standards require the
Group to identify all assets and liabilities of
Charm Health and estimate the fair value of
each item. The fair value of these items may be
significantly different to the historical cost,
which had been previously recorded by the
acquired business. Also, the items may not
previously have met the recognition criteria
We read key transaction documents in relation to the acquisition
of Charm Health and assessed how the Group estimated the fair
value of the assets and liabilities identified in the acquisition,
and allocated the purchase consideration.
In relation to the fair value of the assets and liabilities identified
we focussed on significant judgements made by the Group in
assessing the fair value of software and customer relationships.
To do this we performed a number of procedures including the
following:
evaluated the methodology used by the Group’s
valuation experts in preparing the purchase price
allocation against the requirements of Australian
Accounting Standards
evaluated cash flow forecasts in the fair value models
by comparing the forecasted revenue and EBITDA to
historical Charm Health performance; and
compared the discount rate adopted in determining the
fair value of assets acquired to the Group’s historical
cost of capital, and that of other market participants.
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Key audit matter How our audit addressed the key audit matter
under Australian Accounting Standards.
The acquisition of Charm Health was a key
audit matter given:
its significance to the Group
significant judgement is involved in
assigning a fair value to the assets
and liabilities acquired; and
significant judgement is required in
estimating the purchase
consideration, particularly in respect
of contingent consideration payable
on the achievement of probable
future revenue generated by Charm
Health.
In relation to the valuation of the contingent consideration
liability we:
assessed if the calculation of the contingent
consideration liability was in accordance with the
contractual arrangements and the requirements of
Australian Accounting Standards; and
assessed the Group’s forecasting accuracy by
comparing past forecasts with actual performance.
Income accrual
(Refer to note 10) [$19.8m]
Several of the Group’s customers require
practical completion of works to be approved
by them prior to invoices being issued. This
process can extend the time that revenue is
held as accrued, and cause a significant timing
difference between revenue recognition and
cash collection.
We considered the recoverability of accrued
revenue recognised as a key audit matter
given:
it is material and there has been a
significant increase in the balance
year-on-year ($13.0m increase)
there is judgement required to
determine the timing of recognition
and whether any allowance is
required in case the full amount may
not be recovered.
We evaluated the recognition and recoverability of accrued
revenue by the Group. To do this we performed a number of
procedures including the following:
evaluated the Group’s accrued revenue accounting
policies against the requirements of Australian
Accounting Standards; and
tested individual accrued revenue items on a sample
basis to assess the timing of recognition and
recoverability based on the services delivered and
contractual requirements, and subsequent receipt.
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Other information
The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2018, including the Chairman’s Report, Operating and Financial Review, Shareholder Information and the Director's Report, but does not include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of the directors for the financial report
The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.
In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.
A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report.
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Report on the remuneration report
Our opinion on the remuneration report
We have audited the remuneration report included in pages 22 to 34 of the directors’ report for the year ended 30 June 2018.
In our opinion, the remuneration report of The Citadel Group Limited for the year ended 30 June 2018 complies with section 300A of the Corporations Act 2001.
Responsibilities
The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards.
PricewaterhouseCoopers
David Murphy Canberra Partner 20 August 2018
Managing Complexity
98
Shareholder information
Additional information required under ASX Listing Rule 4.10 and not shown elsewhere in this Annual Report is as follows. This information is current as at 1 August 2018.
In accordance with ASX Listing Rule 4.10.19, Citadel confirms that it has used the cash and assets in a form readily convertible to cash that it had at the time of admission to the ASX in a way consistent with its business objectives.
1. DISTRIBUTION OF SHAREHOLDERS
The distribution of issued capital is as follows:
Holding Total No. of Shares Held
No. of Shareholders
100,001 and over 10,001 – 100,000
5,001 – 10,000 1,001 – 5,000
1 – 1,000
40,256,375 3,362,557 1,579,920 2,700,721
808,461
27 138 209
1,087 1,704
48,708,034 3,165
2. DISTRIBUTION OF PERFORMANCERIGHTS HOLDERS
Holding Total No. of
Rights Held
No. of Shareholders
100,001 and over 10,001 – 100,000
5,001 – 10,000 1,001 – 5,000
1 – 1,000
234,984 210,951
15,233 9,210
-
2 6 2 2 -
470,378 12
3. DISTRIBUTION OF OPTIONS
The distribution of unquoted options on issue are:
Holding Total No. of
Options Held No. of
Shareholders
100,001 and over 10,001 – 100,000
5,001 – 10,000 1,001 – 5,000
1 – 1,000
- - - - -
- - - - -
4. - -
4. TWENTY LARGEST SHAREHOLDERS
The twenty largest holders of quoted equity securities are listed below:
ORDINARY SHARES
Shareholder Number Held % of Issued Shares
Jakeman Enterprises Pty Ltd
8,309,009 17.06%
Bryony McConnell 6,626,306 13.60%
HSBS Custody Nominees (Australia) Limited
4,860,284 9.92%
J P Morgan Nominees Australia Limited
4,094,297 8.41%
National Nominees Australia Limited
3,834,207 7.87%
PJA Australia Pty Ltd 3,807,382 7.82%
BNP Paribas Nominees Pty Ltd
2,170,988 4.46%
Citicorp Nominees Pty Limited
1,359,460 2.79%
BNP Paribas Noms Pty Ltd 1,225,930 2.52%
Brispot Nominees Pty Ltd 719,288 1.48%
The Plant Consulting Group Pty Ltd
352,401 0.72%
Skills4life Pty Ltd 350,000 0.72%
UBS Nominees Pty Ltd 324,475 0.67%
Neweconomy com au Nominees Pty Limited
231,503 0.48%
Ms Susan Jane Irvine 219,388 0.45%
CS Fourth Nominees Pty Limited
210,590 0.43%
Bond Street Custodians Limited
204,830 0.42%
Citicopr Nominees Pty Limited
188,719 0.39%
Jeanmar Pty Ltd 178,253 0.37%
Monjoy Pty Limited 163,000 0.33%
Managing Complexity
99
5. SUBSTANTIAL SHAREHOLDERS
The names of the Substantial Shareholders listed in the Company’s Register as at 1 August 2018:
ORDINARY SHARES
Shareholder Number Held % of Issued Shares
Jakeman Enterprises Pty Ltd
8,309,009 17.06%
Bryony McConnell 6,626,306 13.60%
PJA Australia Pty Ltd 3,807,382 7.82%
Copia Investment Partners Limited
3,417,569 7.02%
6. LESS THAN MARKETABLE PARCELS OF ORDINARY SHARES
There are 46 shareholders with unmarketable parcels totalling 347 shares.
7. UNQUOTED EQUITY SECURITIES
The company had the following unquoted securities on issue as at 1 August 2018:
Security No. of securities
Unquoted Rights Unquoted Options
470,378 -
8. RESTRICTED SECURITIES
The company had the following restricted securities on issue as at 1 August 2018:
Class No. of Shares
% of issued capital
Fully paid ordinary shares – mandatory escrow Restricted until 15 Sep 2018 Restricted until 31 Dec 2018 Restricted until 30 Jun 2019 Restricted until 15 Sep 2019 Restricted until 30 Dec 2019 Restricted until 30 Jun 2020
180,755 1,089 7,567
180,755 946
8,703
0.37% 0.00% 0.02% 0.37% 0.00% 0.02%
9. VOTING RIGHTS
In accordance with the Constitution each member present at a meeting whether in person, or by proxy, or by power of attorney, or in a duly
authorised representative in the case of a corporate member, shall have one vote on a show of hands, and one vote for each fully paid ordinary share, on a poll.
Performance rights and Options have no voting rights.
10. ON-MARKET BUY-BACKS
There is no current on-market buy-back in relation to the Company’s securities.
Managing Complexity
100
The Citadel Group Limited
ABN: 79 127 151 026
2018
