Desane Group Holdings Limited
Annual Report 2019

Plain-text annual report

2019 Annual Report CONTENTS At a Glance Chairman’s Report Chief Executive’s Report Meet the Board Directors' Report Auditor's Independence Declaration Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Directory 3 4 6 16 18 27 28 67 68 73 75 At A GLANCE 3 Investing for tomorrow, today. We are focused on creating wealth for our shareholders by specialising in property development and property investment operations. Our in-depth knowledge of these sectors, together with our intimate understanding of our clients and customers allows us to transform add value opportunities into long term earnings and growth, ensuring consistent returns for shareholders. Rewarding shareholders $16.8m Solid balance sheet Franked dividends paid over past 5 financial years Total Assets $91.9m Cash & Other Assets $46.2m 159 Allen St, Leichhardt $22.8m 7 Sirius Road, Lane Cove $7.5m 91 Thornton Drive, Penrith $7.2m 13 Sirius Road, Lane Cove $5.9m S4, 26-32 Pirrama Road, Pyrmont $2.3m EBIT NPAT NTA per share $39.2m $27.3m $1.43 Desane Group Holdings Limited – 2019 Annual ReportChairman's report 5 It gives me great pleasure to introduce the Annual Report of Desane Group Holdings Limited for 2019. I can report to shareholders that the Group’s earnings before interest and tax, for the financial year ending 30 June 2019, was $39.2m and the Group’s net assets are $91.85m. The Group’s net tangible assets (NTA) now stand at $1.43 per security accounting for the proposed dividend payment. The Board has resolved to declare an increased final dividend of 3.00 cents per security, partially franked, to be paid in October 2019. This will bring the total dividend for FY19 to 5.25 cents per security. Maintenance of the Group’s continuing strong financial results was achieved notwithstanding a year of significant uncertainty surrounding the proposed compulsory acquisition of our flagship property at 68-72 Lilyfield Road, Rozelle. The resolution of this matter resulted in the sale of the property for $78m plus GST in November 2018. During the course of the financial year, management has been active in progressing the Company’s property projects, which include 91 Thornton Drive, Penrith and 159 Allen Street, Leichhardt. I believe that the undersupply of new housing, as well as building approvals for development in locations close to public transport, as well as city centres, will strengthen the underlying values of these properties over the medium term. In addition, the Group’s management continues to be active in canvassing the acquisition of properties for investment and or redevelopment in a number of strategic locations in the Sydney metropolitan area. As mentioned in my report last year, increasingly fragile international relations, notably between the USA and China, coupled with the prospect of Brexit with the United Kingdom leaving the European Community (EU), has continued to reinforce perceptions of the robustness of the Australian property market. Indeed, overseas investors in both domestic equities and local property continue to regard Australia as a safe haven for their funds. The recent reduction in official interest rates by the Reserve Bank of Australia has highlighted for many commentators, the concomitant inversion of benchmark bond yields, in both Australia and overseas. Paradoxically, the reduction in official interest rates and the yield curve inversion has resulted in a focus on direct investment in primary Australian property markets, with their significantly higher returns and arguably less risk. Finally, I can report to shareholders that this annual report is the 32nd such report of Desane Group Holdings Limited. Your Company has continued to prosper due to the superb quality of its senior management and the invaluable contribution of its past and present Board. Importantly, I need to record my appreciation, on behalf of both the Board and Desane staff, of the long service by Mr John Bartholomew to the Group, firstly as Company Secretary (1989-2016) and subsequently as a Director (2010-2019) of Desane Group Holdings Limited. John’s careful assessment of financial matters over a long period of time was a crucial underpinning of the Group’s success, and I wish him well in his well-deserved retirement. The search to replace John Bartholomew and his special skills has resulted in the appointment of Mr Peter Krejci, who joined the Board on 8 July 2019. Peter has a range of financial and corporate expertise which will add to the already significant experience of current Directors, sharing strong and aligned values. I welcome Peter as he joins the Board in the new financial year. Your Board remains confident the current strategies will continue to result in asset growth and consistent earnings in future years for shareholders. I congratulate both the Group Executives and the employees of Desane Group Holdings Limited for the solid and as always, prudent management of the Group. Finally, I would like to welcome those shareholders who have recently joined the Company. The Board looks forward to a rewarding and fruitful association with those new shareholders during the coming years. Professor John Sheehan AM Chairman, Desane Group Holdings Professor John Sheehan AM Chairman, Desane Group Holdings Desane Group Holdings Limited – 2019 Annual Report Chief executive's report 6 This year has been an eventful and financially rewarding year for Desane and its shareholders. The sale and settlement of our Company’s Rozelle flagship property to the NSW Roads and Maritime Services (RMS) in November 2018 for $78m, under the compulsory acquisition process has enabled our Company’s management to focus its attention on identifying property investment assets with strong underlying covenants in close proximity to major infrastructure over the short to medium term. The sale of the Rozelle property has also enabled Desane to enter FY20 with a historically low gearing and well capitalised balance sheet, including just over $46m in cash reserves. Together with the low cost of debt and a disciplined investment strategy, this should deliver predictable earnings and build long term value for our shareholders. The opportunity to unlock future value-add strategies coupled with the Group's development pipeline should also provide significant shareholder value over the longer term. Desane’s existing property investment assets are continuing to perform well. These properties are highly sought after as investor demand remains robust. Desane will continue to review its portfolio and look to recycle capital from assets where it has already added significant value. Desane’s management believes that the underlying value of these properties should increase over the medium term, given their close proximity to public infrastructure, as well as established city centres. PHIL MONTRONE OAM Managing Director & CEO Desane Group Holdings PROPERTY REVIEW Chief executive's report Continued 8 159 Allen Street, Leichhardt The 2,792m2 property is located 5 kilometres from Sydney’s CBD and is zoned R1 General Residential. The property is located less than 200 metres from Hawthorne Station on the Sydney Light Rail Network and is a rare development opportunity in Sydney’s city fringe. Artist's impression Desane lodged a Development Application with the Inner West Council for a part 3-4 storey and part 4-5 storey residential apartment complex consisting of 46 residential apartments. Desane purchased this property off-market for $21.0m in April 2018. Settlement is due to occur in FY20. Artist's impression PROPERTY REVIEW Chief executive's report Continued 10 11 91 Thornton Drive, Penrith Desane purchased this property from the NSW Government agency UrbanGrowth NSW for $3.9m in 2017. A planning proposal was lodged with Penrith Council in June 2019. The property sits in the urban transformation area of Thornton and will be transformed as part of the NSW Government’s announcement of the $8.0 billion investment in the new Western Sydney Airport at Badgerys Creek, the $1.0 billion upgrade to the Nepean Hospital and the anticipated 40,000 new jobs that will be created in the Penrith area by 2031. PROPERTY REVIEW Chief executive's report Continued 12 7 & 13 Sirius Road, Lane Cove These two commercial buildings comprise approximately 5,000m2 of net lettable floor area and are located within the Land Cove West high tech industrial precinct, approximately 12 kilometres north of the Sydney CBD. The limited availability of highly sought after acquisition options will continue to drive investor demand in the area. 7 Sirius Road, Lane Cove 7 Sirius Road, Lane Cove 13 Sirius Road, Lane Cove PROPERTY REVIEW Chief executive's report Continued 14 Chief executive's report Continued 15 68-72 Lilyfield Road, Rozelle In November 2018, Desane completed the sale of sale of this property to RMS for $78.0m plus GST. Desane had a 70% interest in this property. The sale of this property included a $38.9m net gain before tax. The sale has positioned the Group with cash of $45.6m. During the course of the 2019 financial year, Desane lodged a development application in relation to its Leichhardt property as well as lodging a planning proposal for its property at Thornton Penrith. Group assets Uplift of 98% to $91.9m NTA per share Uplift of 81% to $1.43 Over the past five (5) years, Desane has continued to reward shareholders with just under $17m in franked dividends. Management’s focused approach to creating value for shareholders has also seen a 93% increase in net tangible assets (NTA) per share and a near doubling in Desane’s share price since the last full year reporting date. On behalf of Desane I wish to thank the executive team and all our dedicated staff for their hard work in producing an outstanding 2019 financial year. I would also like to acknowledge the support management has received from our Company’s Board particularly retiring Director John Bartholomew. John’s extensive professional experience for over thirty years has been invaluable and has ensured that decisions made by management were consistent with our Company’s long term strategies. Finally, I would like to acknowledge the strong support of our Company’s shareholders, in particular for the confidence they have placed in the Company’s management over the past twelve months. Phil Montrone OAM Managing Director & CEO Desane Group Holdings Desane Group Holdings Limited – 2019 Annual ReportMEET the board DIRECTORS' REPORT 18 19 These consolidated financial statements are the financial statements of the consolidated entity consisting of Desane Group Holdings Limited and its controlled entities. The consolidated financial statements were authorised for issue by the Directors on 20 August 2019. The Directors have the power to amend and reissue the consolidated financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All press releases, financial reports and other information are available on our website: desane.com.au The Directors of Desane Group Holdings Limited (“Desane” and “the Company”) present their report, together with the financial report of the Company and its controlled entities for the financial year ended 30 June 2019. Directors and Directors’ Interests Mr John W Bartholomew Independent Non-Executive Director Expertise and experience Prof. Sheehan, a Life Fellow member of the Australian Property Institute (NSW division), has over 30 years experience and expertise in property compensation law, town and country planning and environmental law. He has been a board member since the Company’s incorporation in 1987 and was appointed as Chairman in 1992, which he currently serves. Special responsibilities: • Chairman of the Remuneration & Nomination Committee • Chairman of the Environmental, Occupational Health and Safety Committee • Member of the Risk Management & Audit Committee • Member of the Finance & Operations Committee Interests in Desane: Ordinary shares: 148,735 Expertise and experience Mr P Montrone has over 30 years experience and expertise in property investment, acquisitions, development and project management. He has been a significant board member since the Company’s incorporation in 1987 and was appointed as Managing Director in 1987, which he currently serves. Special responsibilities: • Member of the Risk Management & Audit Committee • Member of the Finance & Operations Committee • Member of the Environmental, Occupational Health & Safety Committee Interests in Desane: Ordinary shares: 14,201,683 Prof. John B Sheehan AM Independent Non-Executive Director and Chairman MR Phil Montrone OAM Managing Director Expertise and experience Mr Bartholomew has over 30 years experience and expertise in accounting, taxation, property investment and property management. He has been a board member since his appointment in 2010. Mr Bartholomew retired as a non-executive director on 8 July 2019. Special responsibilities: • Chairman of the Risk Management & Audit Committee • Member of the Remuneration & Nomination Committee • Member of the Finance & Operations Committee • Member of the Environmental, Occupational Health & Safety Committee Interests in Desane: Ordinary shares: 672,635 Expertise and experience Mr R Montrone, who was appointed as Director in 2015, has 15 years experience in property investment, acquisitions, developments, management, leasing, sales and project management. Mr Montrone is a licensed real estate agent and an associate member of the Australian Property Institute. Special responsibilities: • Member of the Risk Management & Audit Committee • Member of the Finance & Operations Committee • Member of the Environmental, Occupational Health & Safety Committee Interests in Desane: Ordinary shares: 166,821 Mr Rick Montrone Director Company Secretary The following person held the position of company secretary at the end of the financial year: Expertise and experience Mr J Sciara joined Desane in 2001, and has over 20 years experience and expertise in corporate accounting and taxation. Jack was appointed as Company Secretary in 2016. His role in the Company includes developing financial and tax strategies for the Group, investor relations, ASX compliance and corporate governance and overseeing the financial operations and financial reporting of all controlled entities. Jack is a member of the Institute of Public Accountants and a registered Tax Agent.. Mr Jack Sciara Company Secretary Special responsibilities: • Chief Financial Officer and Company Secretary Interests in Desane: Ordinary shares: 258,030 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report DIRECTORS' REPORT Continued 20 21 Meetings of Directors Principal Activities The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the company during the financial year are: There were no significant changes in the principal activities of the Company during the financial year, which were: Directors’ Meetings and Finance & Operations Committee Meetings Risk Management and Audit Committee Meetings No. of Meetings Attended No. of Meetings Held No. of Meetings Attended No. of Meetings Held 13 13 13 12 13 13 13 13 13 13 1 2 2 2 2 2 2 2 2 2 Remuneration & Nomination Committee Meetings Environmental & Occupational Health & Safety Committee Meetings No. of Meetings Attended No. of Meetings Held No. of Meetings Attended No. of Meetings Held 1 1* 1 1* 1* 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Director J B Sheehan P Montrone J Bartholomew R Montrone J Sciara Director J B Sheehan P Montrone J Bartholomew R Montrone J Sciara * By invitation • Property investment; and • Property development (residential and mixed use). Operating and Financial Review The Group recorded a consolidated statutory net profit after tax for the year of $27.3m (2018: $0.7m). Statutory net profit after tax has been prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards, which comply with International Financial Reporting Standards. The profit of the consolidated group, after providing for income tax amounted to 27,297 2019 $’000 2018 $’000 664 A summary of consolidated financial results by operational segments is set out below: Total Revenue Segment Result Gain on sale of investment property – net Property development expenses Property investment – rental Property services Property management Property investment – net revaluations Interest income Less: Unallocated expenses Operating profit Income tax (expense)/benefit attributable to operating profit Deferred tax attributable to operating profit Operating profit after income tax attributable to members of Desane Group Holdings Limited 2019 $’000 38,947 - 2,163 1,054 75 - 860 2018 $’000 - - 1,216 192 62 3,393 525 43,099 5,388 40,529 2019 $’000 38,947 2018 $’000 - (783) (1,062) 376 1,054 75 - 860 (968) 192 62 3,393 525 2,142 (1,663) (1,192) 38,866 950 - - (11,569) (286) 27,297 664 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportDIRECTORS' REPORT Continued 22 Financial Review In November 2018, Desane Properties Pty Ltd, a controlled entity of Desane Group Holdings Limited, completed the sale of its Rozelle flagship property to the Roads and Maritime Services for $78.0m plus GST under the compulsory acquisition process. Desane Properties Pty Ltd has a 70% interest in the assets and income of the property. The Group’s consolidated statutory net profit after tax included a net gain of $38.9m from the sale of the Rozelle property. The sale has positioned the Group with cash of $45.6m, which will provide flexibility to pursue potential acquisition opportunities in the Sydney metropolitan area and generate continued shareholder returns. Capital Gains Tax Deferral Included in the deferred tax liability of $15.4m is approximately $13.9m of capital gains tax (CGT) deferral pertaining to the sale of the Rozelle property. The Rozelle property was sold to the Roads and Maritime Services involuntarily as part of the compulsory acquisition process and triggered a CGT event. Dividends Paid or Recognised Dividends paid or declared for payment are as follows: Final dividend of $0.0225 franked, per share, paid on 6 October 2017 Special dividend of $0.10 franked, per share, paid on 6 October 2017 Interim dividend of $0.0225 franked, per share, paid on 31 March 2018 Final dividend of $0.0225 franked, per share, paid on 26 October 2018 Interim dividend of $0.0225 franked, per share, paid on 29 March 2019 Ordinary dividend of $0.03 partially franked, per share, declared by the directors from retained earnings payable on 25 October 2019 2019 $’000 2018 $’000 837 3,719 837 920 920 1,227 Dividend Reinvestment Plan (DRP) Likely developments The DRP has been suspended until further notice. Significant Changes in State of Affairs There was no significant change in the state of affairs of the Group. Events Subsequent to Balance Date Subsequent to balance date, Non-Executive Director, Mr John Bartholomew, retired on 8 July 2019. Mr Peter Krejci was appointed as Non-Executive Director on the same date. The Group continues to pursue its strategy of focusing on its core operations, utilising a strengthened balance sheet to provide support to grow and develop these operations. Environmental Regulation The consolidated group complies with all relevant legislation and regulations in respect to environmental matters. No matters have arisen during the year in connection with Desane’s obligations pursuant to Commonwealth and State environmental regulations. 23 Incentive Schemes (Discretionary Remuneration) Short Term Incentives A discretionary Short Term Incentive (“STI”) cash bonus may be offered to executives and key management personnel (“KMP”) at the discretion of the Remuneration Committee. STIs align the achievement of strategic short term objectives for the long term benefit of the Company and its shareholders. The total potential STI available is set at a level that provides sufficient incentive to the executive to achieve the operational targets at a cost to the Group that is reasonable. Approved STIs depend on the extent to which specific targets set by the Board at the beginning of the financial year (or shortly thereafter) are achieved. The targets consist of a number of Key Performance Indicators (“KPI”) which are linked to the Company’s strategic business objectives such as (but not limited to): • Dividends paid; • Earnings before interest and tax (“EBIT”); • Net profit after tax (“NPAT”); • Share price performance; and • Net tangible asset (“NTA”) per share. On an annual basis, after consideration of the Group’s performance against KPIs, the remuneration committee determines the amount, if any, of the STI to be paid to KMP. Based on the achievement of the operational targets in the financial year, the Remuneration Committee approved the payment of a $175,000 STI bonus to KMP for the 2019 financial year (2018: $150,000). Occupational Health and Safety Regulations The consolidated group complies with all relevant legislation and regulations in respect to occupational health and safety matters. No matters have arisen during the year in connection with Desane’s obligations pursuant to Commonwealth and State occupational health and safety regulations. Audited Remuneration Report This report details the nature and amount of remuneration for each director of Desane Group Holdings Limited, and for the executives receiving the highest remuneration. Remuneration Policy The remuneration policy of Desane Group Holdings Limited has been designed to align director and executive objectives with shareholder and business objectives. The board of Desane Group Holdings Limited believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best executives and directors to run and manage the consolidated group, as well as create goal congruence between directors, executives and shareholders. Approach to Remuneration The Group is committed to applying fair and equitable remuneration practices, taking into account the Company’s corporate strategy, objectives and shareholder returns. The Group’s current remuneration framework includes: 1. Fixed remuneration 2. Incentive schemes 3. Executive agreements Fixed Remuneration Fixed remuneration includes a base salary, statutory superannuation and all other statutory entitlements. Fixed remunerations are reviewed annually by the Remuneration Committee and are based upon performance, qualification, experience and current market practices. The Remuneration Committee accesses external independent advice if required. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report DIRECTORS' REPORT Continued 24 25 Consequences of Performance on Shareholder Wealth Details of Remuneration for year ended 30 June 2019 In considering the Group’s performance and benefits for shareholder wealth, the remuneration committee have regard to the following indices in respect of the current and previous financial years. The remuneration for each director and the executive officer of the consolidated entity receiving the highest remuneration during the year was as follows: NPAT for the year at 30 June Dividends paid per share (cents) 2019 $27.3m 5.25 2018 $0.7m 4.5 Closing share price at 30 June $1.405 $1.125 Earnings/(loss) per share (cents) at 30 June 66.73 1.78 2017 $5.1m 14.5 $1.08 13.57 Ordinary shares on issue at 30 June 40,909,990 37,190,900 37,190,900 NTA per share at 30 June $1.43 $0.79 $0.82 Executive Agreements Executive agreements are formal legal agreements between the Company and all executives and KMP. The agreements are executed in line with the Corporations Act and will define terms of employment, role and responsibilities, performance expectations, specify termination payment arrangements, provide provisions for performance related bonuses and ensure transparency for the Company and its shareholders. Executive agreements are generally reviewed every three years (unless required earlier) by the executive, KMP and the Remuneration Committee to ensure that they are adequate and updated if required. Termination benefits are within the limits set by the Corporations Act 2001 such that they do not require shareholder approval. Name Commencement Date Term of Agreement & Notice Period Base Salary Including Superannuation $’000 Termination Payments / Benefits $’000 P Montrone 1 September 1987 No fixed term & 12 months R Montrone 2 November 2003 No fixed term & 12 months J Sciara 3 September 2001 No fixed term & 12 months 400 367 252 - - - Non Executive Directors Total compensation for all non executive directors, last voted on at the 2015 Annual General Meeting, is not to exceed $300,000 per annum. Currently, non executive directors are compensated to a total of $108,000 per annum (2018: $84,000), inclusive of superannuation. The 2019 non executive director fees are 36% (2018: 28%) of the aggregate maximum sum approved by shareholders. The base fee for the Chairman is $84,000 per annum and $24,000 per annum for other non executive directors. Base fees cover all main board activities and membership of all board committees. Non executive directors are not provided with retirement benefits apart from statutory superannuation if applicable. Short Term Benefits Salary & Fees $’000 STI Cash Bonus $’000 Superannuation $’000 Total $’000 Directors John B. Sheehan (non-executive) John Bartholomew (non-executive) Phil Montrone Rick Montrone Chief Financial Officer/Company Secretary Jack Sciara 84 24 365 335 230 1,038 - - - 150 25 175 - - 35 32 22 89 84 24 400 517 277 1,302 Indemnifying Officers or Auditor Options No options have been granted over unissued shares during the financial year and there are no outstanding options at 30 June 2019. Proceedings on Behalf of the Company No person has applied for leave of Court to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings. The company was not a party to any such proceedings during the 2019 financial year. The company or consolidated group has not, during or since the financial year, in respect of any person who is or has been an officer or auditor of the company or a related body corporate, indemnified or made any relevant agreement for indemnifying against a liability incurred as an officer, including costs and expenses in successfully defending legal proceedings. The company paid a premium of $14,899 to insure the directors of the company and controlled entities. The policy provides cover for individual directors and officers of the company, in respect of claims made and notified to the insurer during the policy period for losses and expenses incurred in defence of claims for any alleged wrongful acts arising out of their official capacities. It will also reimburse the company for any liability it has to indemnify the directors or officers for such losses. It is noted that the company’s Constitution allows an officer or auditor of the company to be indemnified by the company against any liability incurred by him in his capacity of officer or auditor in defending any proceedings in which judgement is given in his favour. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report AUDITOR'S INDEPENDENCE DECLARATION 27 DIRECTORS' REPORT Continued 26 Non-audit Services The board of directors, in accordance with the advice from the Audit Committee, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed below did not compromise the external auditor’s independence for the following reasons: • All non-audit services are reviewed and approved by the Audit Committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and • The nature of the services provided does not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. The following fees for non-audit services were paid/payable to the external auditors during the year ended 30 June 2019. Taxation services Auditor’s Independence Declaration $’000 3 The lead auditor’s Independence Declaration for the year ended 30 June 2019, has been received and can be found on page 27 of the Financial Report. ASIC Class Order 98/100 Rounding of Amounts The company is an entity to which ASIC Class Order 98/100 applies and accordingly, amounts in the financial statements and directors’ report have been rounded to the nearest thousand dollars. Corporate Governance Statement Desane is committed to implementing sound standards of corporate governance. The Group has taken into consideration the ASX Corporate Governance Council’s Corporate Governance principles and Recommendations (3rd Edition) (“ASX Recommendations”). The Group’s corporate governance statement outlines the key principles and practices of the Company. A copy of the Group’s Corporate Governance Statement has been placed on the Group’s website under the About Us tab in the Corporate Governance Section - desane.com.au/about-us/corporate-governance/ This Report of the Directors, incorporating the Remuneration Report, is signed in accordance with a resolution of the Board of Directors, at Sydney, this 20th day of August, 2019. J B Sheehan Director Sydney P Montrone Director Sydney Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position 28 For the year ended 30 June 2019 As at 30 June 2019 29 Continuing Operations Revenue Other income Gain/(loss) on revaluation of investment properties Gain on sale of investment property – net Property development expenses Employee benefits expense Depreciation and amortisation expense Finance costs Doubtful debt Consolidated Group Note 2019 $’000 2018 $’000 2 3,292 2a, 2b 2 2 860 - 38,947 (783) (1,344) (35) (377) (32) 1,470 525 3,393 - (1,062) (1,241) (11) (577) - Other expenses from ordinary activities (1,662) (1,547) Profit before income tax Income tax (expense)/benefit Profit from continuing operations Other comprehensive income Net Profit (after income tax) Profit attributable to minority equity interest Profit attributable to members of the parent entity Earnings per Share: Overall Operations Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Continuing Operations Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The accompanying notes form part of these financial statements. 38,866 4 (11,569) 27,297 - 27,297 - 27,297 66.73 66.73 66.73 66.73 8 8 950 (286) 664 - 664 - 664 1.78 1.62 1.78 1.62 Current Assets Cash and cash equivalents Trade and other receivables Other current assets Other financial assets Development property reclassified as current Total Current Assets Non-current Assets Trade and other receivables Investment properties Property, plant and equipment Other assets Total Non-current Assets Total Assets Current Liabilities Trade and other payables Borrowings Provisions Total Current Liabilities Non-current Liabilities Trade and other payables Borrowings Provisions Deferred tax liability Total Non-current Liabilities Total Liabilities Net Assets Equity Issued capital Retained earnings Total Equity The accompanying notes form part of these financial statements. Consolidated Group Note 2019 $’000 2018 $’000 9 10 11 12 13 11 13 14 11 15 16 17 18 16 19 23 20 21 45,576 79 261 101 - 46,017 - 43,398 2,432 2 45,832 91,849 10,718 - 1,369 12,087 - 5,900 86 15,381 21,367 33,454 58,395 21,213 37,182 58,395 4,500 209 1,851 1,246 12,893 20,699 - 25,667 25 - 25,692 46,391 981 5,250 1,044 7,275 2 5,900 62 3,812 9,776 17,051 29,340 17,308 12,032 29,340 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Consolidated Statement of Changes in Equity 30 For the year ended 30 June 2019 Consolidated Statement of Cash Flows For the year ended 30 June 2019 31 Consolidated Group Balance as at 1 July 2018 Shares issued during the year Profit attributable to members of the parent entity Issued Capital $’000 Retained Earnings $’000 Total $’000 17,308 12,032 29,340 3,905 - 21,213 - 27,297 39,329 3,905 27,297 60,542 Dividends paid or recognised for the year - (2,147) (2,147) Balance at 30 June 2019 21,213 37,182 58,395 Consolidated Group Balance as at 1 July 2017 Shares issued during the year Profit attributable to members of the parent entity Issued Capital $’000 Retained Earnings $’000 Total $’000 17,308 13,126 30,434 - - - 664 - 664 17,308 13,790 31,098 Dividends paid or recognised for the year - (1,758) (1,758) Balance at 30 June 2018 17,308 12,032 29,340 The accompanying notes form part of these financial statements. Consolidated Group 2019 Inflows (Outflows) $’000 2018 Inflows (Outflows) $’000 Note Cash flows from operating activities Receipts from customers Payments to suppliers and employees Refund of company income tax Payment of company income tax Property development expenditure Interest received Finance costs Net cash provided by (used in) operating activities 30 Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of plant and equipment Proceeds from sale of properties Purchase of investment properties Purchase of financial assets Proceeds from matured financial assets Capital costs of investment properties Net cash provided by (used in) investing activities Cash flows from financing activities Proceeds from issue of shares Dividends paid by parent entity Proceeds from borrowings Repayments of borrowings Retention repaid Rental bonds repaid Rental bonds received Net cash provided by (used in) financing activities Net increase/(decrease) in cash held Cash at beginning of financial year Cash at end of financial year 9 The accompanying notes form part of these financial statements. 5,484 (4,226) 24 - (783) 860 (377) 982 (2,443) 4 51,839 (6,464) (100) 1,213 (767) 43,282 3,905 (1,841) - (5,250) - (2) - (3,188) 41,076 4,500 45,576 1,447 (3,723) - (2,790) (1,062) 525 (577) (6,180) (3) - 17,825 (5,346) - 1,324 (1,086) 12,714 - (5,393) 45 (5,485) (213) (40) - (11,086) (4,552) 9,052 4,500 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements 32 For the year ended 30 June 2019 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Preparation The financial report covers the economic entity of Desane Group Holdings Limited and its controlled entities. The separate financial statements of the parent entity, Desane Group Holdings Limited, have not been presented within this financial report, as permitted by the Corporations Act, 2001. Desane Group Holdings Limited is a listed public company, incorporated and domiciled in Australia. The consolidated financial statements are presented in Australian dollars, which is the functional currency for the parent company and its controlled entities. The financial statements were authorised for issue on 20 August 2019 by the directors of the Company. The financial statements are a general purpose financial report, that have been prepared in accordance with the Corporations Act, 2001, Australian Accounting Standards and Interpretations of the Australian Accounting Standards Board (“AASB”) and the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”). The Group is a for-profit entity for financial reporting purposes under Australian Accounting Standards. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards, as issued by IASB. Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. The following is a summary of the material accounting policies adopted by the consolidated group in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. The accounting policies set out below have been consistently applied to all years presented. Accounting Policies a. Principles of Consolidation The consolidated financial statements incorporate all of the assets, liabilities and results of the parent entity controlled by Desane Group Holdings Limited and all of its controlled entities. Desane Group Holdings Limited controls an entity when it 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 over the entity. A list of controlled entities is contained in note 31 to the financial statements. All controlled entities have a 30 June financial year end. All inter-company balances and transactions between entities in the economic entity, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of controlled entities have been changed where necessary to ensure consistencies with those policies applied by the parent entity. Where controlled entities have entered or left the economic entity during the year, their operating results have been included/excluded from the date control was obtained or until the date control ceased. Non-controlling interests, being the equity in a controlled entity not attributable, directly or indirectly, to a parent, are reported separately within the equity section of the consolidated statement of financial position and statement of other comprehensive income. The non-controlling interests in the net assets comprise their interests at the date of the original business combination and their share of changes in equity since that date. b. Income Tax The income tax expense (benefit) for the year comprises current income tax expense and deferred tax expense (benefit). Current income tax expense charged to the profit or loss is the tax payable on taxable income calculated using the applicable income tax rates enacted, or substantially enacted, as at reporting date. Current tax liabilities (assets) are therefore measured at the amount expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses. Deferred tax assets and liabilities are ascertained based on the temporary differences arising between the tax base of the assets and liabilities and their carrying amounts in the financial statements. Deferred 33 contributes to the income tax payable by the Group in proportion to their contribution to the Group’s taxable income. c. Development Property Held for Sale Land held for development and sale is measured at the lower of their carrying amount and net realisable value less costs to sell. Cost includes the cost of acquisition, development, borrowing costs and holding costs until the completion of development. Gains and losses are recognised in the statement of comprehensive income on the settlement of a contract of sale when the significant risks and rewards and effective control over the property is passed to the purchaser. The carrying value includes revaluations applied to the asset during the period the property was classified as an investment property. d. Property, Plant and Equipment Property Freehold land and buildings are carried at their fair value (being the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction), based on periodic, but at least triennial, valuations by external independent valuers, less accumulated impairment losses and accumulated depreciation for buildings. Increases in the carrying amount arising on revaluation of land and buildings are credited to a revaluation surplus in equity. Decreases that offset previous increases of the same asset are recognised against revaluation surplus directly in equity; all other decreases are recognised in profit or loss. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or a liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax assets or liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the tax rates enacted or substantively enacted at reporting date. Their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Where temporary differences exist in relation to investments in subsidiaries, branches, associates and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that the net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where a legally enforceable right of set-off exists, the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Tax Consolidation Desane Group Holdings Limited and its wholly owned Australian controlled entities have formed an income tax consolidated group under tax consolidation legislation. Each entity in the Group recognises its own current and deferred tax assets and liabilities. Such taxes are measured using the ‘stand-alone taxpayer’ approach to allocation. Current tax liabilities (assets) and deferred tax assets arising from unused tax losses and tax credits in the controlled entities are immediately transferred to the head entity. The Group notified the Australian Taxation Office that it had formed an income tax consolidated group to apply from 1 July 2003. The tax consolidated group has entered a tax funding arrangement whereby each company in the Group Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 34 For the year ended 30 June 2019 35 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Plant and Equipment Each class of plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation and impairment losses. Plant and equipment are measured on a cost basis. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the assets employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Depreciation The depreciable amount of plant and equipment is depreciated on a straight line basis over their useful lives to the economic entity commencing from the time the asset is held ready for use. The depreciation rates used for each class of depreciable assets are: Class of Fixed Asset Depreciation Rate Motor vehicles 15% Plant and equipment 2.5%-33% Office and computer equipment 10%-33% The assets’ residual values and useful lives are reviewed and adjusted if appropriate, at each reporting date. An asset’s carrying value 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 proceeds with the carrying amount. These gains and losses are included in the consolidated statement of profit and loss and other comprehensive income. property could be exchanged between knowledgeable, willing parties in an arm's length transaction. Each property is independently valued every three years by registered valuers who have recognised and appropriate professional qualifications, and recent experience in the location and category of investment property being valued. Changes to fair value are recorded in the statement of profit and loss as revenue from non operating activities. Investment properties under construction are measured at the lower of fair value and net realisable value. Cost includes the cost of acquisition, development and interest on financing during development. Interest and other holding charges after practical completion are expensed as incurred. Investment properties are maintained at a high standard and, as permitted by accounting standards, the properties are not depreciated. Rental revenue from the leasing of investment properties is recognised in the statement of profit and loss and other comprehensive income in the periods in which it is receivable, as this represents the pattern of service rendered through the provision of the properties. All tenant leases are on an arm’s length basis. f. Leases Finance leases are capitalised by recognising an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term. Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, as recognised as expenses in the periods in which they are incurred. Lease incentives under operating leases are recognised as a liability and amortised on a straight line basis over the lease term. e. Investment Properties g. Financial Instruments Investment properties, comprising freehold office and industrial complexes, are held to generate long-term rental yields. All tenant leases are on an arm’s length basis. The fair value model is applied to all investment property and each property is reviewed at each reporting date. The fair value is defined as the price at which the The Group has adopted AASB 9: Financial Instruments. Initial recognition and measurement Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the entity commits itself to either the purchase or sale of the asset (ie. trade date accounting is adopted). Financial instruments are initially measured at fair value plus transaction costs, except where the instrument is classified “at fair value through profit or loss”, in which case transaction costs are expensed to profit or loss immediately. Classification and subsequent measurement Financial instruments are subsequently measured at fair value, amortised cost using the effective interest method, or cost. The Group has interests in the following financial assets: (i) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets that have fixed maturities and fixed or determinable payments, and it is the Group’s intention to hold these investments to maturity. Interest income is recognised in profit or loss when received. On maturity, the financial asset is derecognised and re-classified as cash at bank. h. Impairment of Assets At each reporting date, the group reviews the carrying values of its tangible assets to determine whether there is any indication that those assets have been impaired. The assessment will include the consideration of external and internal sources of information. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less cost to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of profit and loss and other comprehensive income. i. Investments in Associates Associates are companies in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the entity but is not control or joint control of those policies. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the Group’s interest in the associate. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group discontinues recognising its share of further losses unless it has incurred legal or constructive obligations or made payments on behalf of the associate. When the associate subsequently makes profits, the Group will resume recognising its share of those profits once its share of the profits equals the share of the losses not recognised. Investments in associate companies are recognised in the financial statements by applying the equity method of accounting, whereby the investment is initially recognised at cost and adjusted thereafter for the post acquisition change in the Group’s share of net assets of the associate company. In addition, the Group’s share of the profit or loss of the associate is included in the Group’s profit or loss. j. Interests in Joint Arrangements Joint arrangements represent the contractual sharing of control between parties in a business venture where unanimous decisions about relevant activities are required. Joint venture operations represent arrangements whereby joint operators maintain direct interests in each asset and exposure to each liability of the arrangement. The Group’s interests in the assets, liabilities, revenue and expenses of joint operations are included in the respective line items of the consolidated financial statements. Gains and losses resulting from sales to a joint operation are recognised to the extent of the other party’s interest. When the Group makes a purchase from a joint operation, it does not recognise its share of the gains and losses from the joint arrangement until it resells the goods and services to a third party. k. Employee Benefits Short-term Employee Benefits Provision is made for the Group’s obligation for short- term employee benefits. Short-term employee benefits (other than termination benefits) that are expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service, including wages, salaries and sick leave. Short-term employee benefits are measured at the (undiscounted) amounts expected to be paid when the obligation is settled. The Group’s obligations for short-term employee benefits such as wages, salaries and sick leave are recognised as part of current trade and other payables in the statement of financial position. The Group’s obligations for employees’ annual leave and long service leave entitlements are recognised as provisions in the statement of financial position. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportNotes to the Financial Statements Continued 36 For the year ended 30 June 2019 37 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Other Long-term Employee Benefits Provision is made for employees’ long service leave and annual leave entitlements not expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service. Other long-term employee benefits are measured at the present value of the expected future payments to be made to employees. Expected future payments incorporate anticipated future wage and salary levels, durations of service and employee departures and are discounted at rates determined by reference to market yields at the end of the reporting period on government bonds that have maturity dates that approximate the terms of the obligations. Any remeasurements for changes in assumptions of obligations for other long-term employee benefits are recognised in profit or loss in the periods in which the changes occur. The Group’s obligations for long-term employee benefits are presented as non-current provisions in its statement of financial position, except where the Group does not have an unconditional right to defer settlement for at least 12 months after the end of the reporting period, in which case the obligations are presented as current provisions. l. Provisions Provisions are recognised when the group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. m. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities on the statement of financial position. n. Revenue and Other Income The Group has applied AASB 15: Revenue from Contracts with Customers. Revenue from the rendering of property services is recognised upon delivery of the service to customers. Investment property revenue is recognised on a straight- line basis over the period of the lease term so as to reflect a constant periodic rate of return on the net investment. The Group derives revenue from investing in properties for rental and capital appreciation over time. There are no changes to the measurement or timing of investment property rental revenue that have arisen from adoption of AASB 15. Revenue from sale of properties held for resale and non- current property or other assets is brought to account on the settlement of a contract of sale. Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. Dividend revenue is recognised when the right to receive a dividend has been established. Dividends received from associates and joint venture entities are accounted for in accordance with the equity method of accounting. All revenue is stated net of the amount of goods and services tax (GST). o. Trade and Other Receivables Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinary course of business. Receivables expected to be collected within 12 months of the end of the reporting period are classified as current assets. All other receivables are classified as non-current assets. p. Trade and Other Payables Trade and other payables represent the liabilities for goods and services received by the entity that remain unpaid at the end of the reporting period. The balance is recognised as a current liability with the amounts normally paid within 30 days of recognition of the liability. q. Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are expensed in the period in which they are incurred. r. Goods and Services Tax (GST) (i) Impairment – property valuations Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financial activities, which are disclosed as operating cash flows. s. Comparative Figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in the presentation in the financial year. When the Group retrospectively applies an accounting policy and makes a retrospective restatement or reclassifies items in its financial statement, an additional (third) statement of financial position as at the beginning of the preceding period in addition to the minimum comparative financial statement is presented. t. Rounding of Amounts The parent entity has applied the relief available to it under ASIC Class Order 98/100. Accordingly, amounts in the financial statements and directors’ report have been rounded off to the nearest $1,000. u. Critical Accounting Estimates and Judgements The preparation of the financial reports requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial reports. Management bases its judgements and estimates on historical experience and other various factors it believes to be reasonable under the circumstances, but which are inherently uncertain and unpredictable, the results of which form the basis of the carrying value of assets and liabilities. The resulting accounting estimates may differ from actual results under different assumptions and conditions. Key estimates and assumptions that have a risk of causing adjustment with the next financial year to the carrying amounts of assets and liabilities recognised in these financial reports are: Critical judgements are made by the Group in respect of the fair values of investment properties. The fair value of these investments are reviewed regularly by management with reference to external independent property valuations and market conditions existing at reporting date, using generally accepted market practices. Then critical assumptions underlying management’s estimates of fair values are those relating to the passing rent, market rent, occupancy, capitalisation rate, terminal yield and discount rate. If there is any change in these assumptions or economic conditions, the fair value of the property investments may differ. Assumptions used in valuation of property investments are disclosed in note 13. (ii) Impairment – general The Group assesses impairment at the end of each reporting period by evaluating conditions and events specific to the Group that may be indicative of impairment triggers. Recoverable amounts of relevant assets are reassessed using value-in- use calculations which incorporate various key assumptions. v. New Accounting Standards for Application in Future Periods Accounting Standards issued by the AASB that are mandatorily applicable to the Group, together with an assessment of the potential impact of such pronouncements on the Group when adopted in future periods, are discussed below: • AASB 16: Leases (applicable to annual reporting periods beginning on or after 1 January 2019). This standard will result in almost all leases being recognised on the consolidated statement of financial position of lessees, as the distinction between operating and financial leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The Group has not entered into a lease agreement as lessee. The Group is the lessor in a lease agreement, adjustments may be required to align accounting for these leases with the new definition of the lease term, variable lease payments and extension/termination options. However, there are no significant impacts expected. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 38 For the year ended 30 June 2019 NOTE 2: REVENUE AND OTHER INCOME NOTE 4: INCOME TAX EXPENSE Consolidated Group a. The components of tax expense comprise: Revenue from Continuing Operations Property rental income Property management fees Property services Total Revenue from Continuing Operations Other Revenue a. Dividend revenue from: - other corporations b. Interest revenue from: - associated entities - other related parties - other persons Total Other Revenue Total Revenue Other Income Gain on sale of investment property – net Property investment – net revaluations Total Other Income Note 2019 $’000 2,163 75 1,054 3,292 - - - 860 860 4,152 38,947 - 38,947 2018 $’000 1,216 62 192 1,470 - - - 525 525 1,995 - 3,393 3,393 NOTE 3: PROFIT FOR THE YEAR Profit before income tax from continuing operations includes the following specific expenses: Expenses Auditors’ remuneration Depreciation of plant and equipment Finance costs: - External - Related entities Transfer to/(from) provisions for: - Employee entitlements Rental expenses relating to operating leases Direct property expenditure from investment property generating rental income Note 6 Consolidated Group 2019 $’000 2018 $’000 81 35 377 - 42 15 410 78 11 577 - 107 64 402 39 Note 23 Consolidated Group 2019 $’000 - 11,569 - 11,569 2018 $’000 - 285 1 286 Current tax Deferred tax Under provision prior year b. The prima facie tax on profit from ordinary activities before income tax is reconciled to income tax as follows: Prima facie tax payable on profit from ordinary activities before income tax at 30% (2018: 30%) - consolidated group Add: Tax effect of: - recoupment of prior year losses - under provision for prior year tax - other accruals/provisions - other non-allowable items - other items not included in taxable income Income tax attributable to entity The applicable weighted average effective tax rates Consolidated Group Note 2019 $’000 2018 $’000 11,659 285 - - 23 2 (115) 11,569 29.8% - 1 (75) 1 74 286 30.1% The amount of benefits brought to account or which may be realised in the future, is based on the assumption that no adverse change will occur in the income tax legislation, the anticipation that the Group will derive sufficient future assessable income to enable the benefit to be realised and continue to comply with the conditions of deductibility imposed by the law. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportNotes to the Financial Statements Continued 40 For the year ended 30 June 2019 41 NOTE 5: KEY PERSONNEL COMPENSATION a. Names and position held of economic and parent entity key personnel in office at any time during the financial year are: Key Personnel Position Prof. John B. Sheehan AM Chairman (non-executive director) Mr Phil Montrone OAM Managing Director Mr John W. Bartholomew Director (non-executive) Mr Rick Montrone Mr Jack Sciara Director – Head of Property Company Secretary and Chief Financial Officer b. Compensation Practices The board’s policy for determining the nature and amount of compensation of key personnel for the group is as follows: The compensation structure for key personnel is based on a number of factors, including length of service, particular experience of the individual concerned, and the overall performance of the company. Employment is on a continuing basis the terms of which are not expected to change in the immediate future. Upon retirement key personnel are paid employee benefit entitlements accrued to the date of retirement. The company may terminate any employee without cause by providing adequate written notice or making payment in lieu of notice based on the individual’s annual salary component. Termination payments are generally not payable on resignation or dismissal for serious misconduct. In the instance of serious misconduct the company can terminate employment at any time. All remuneration packages are set at levels that are intended to attract and retain executives capable of managing the economic entity’s operations. Refer note 5c. c. Key Personnel Compensation 2019 Key Personnel John B. Sheehan John W. Bartholomew Phil Montrone Rick Montrone Jack Sciara Salary & Fees $’000 Superannuation $’000 Short Term Incentives $’000 84 24 365 335 230 1,038 - - 35 32 22 89 - - - 150 25 175 Total $’000 84 24 400 517 277 1,302 2018 Key Personnel John B. Sheehan John W. Bartholomew Phil Montrone Rick Montrone Jack Sciara Salary & Fees $’000 Superannuation $’000 Short Term Incentives $’000 72 12 317 293 200 894 - - 25 25 19 69 - - - 150 - 150 Total $’000 72 12 342 468 219 1,113 d. Shareholdings Number of shares held by parent entity directors and specified executives. Key Personnel John B. Sheehan Phil Montrone Balance 30.06.18 Net Change Other* Balance 30.06.19 135,213 13,522 148,735 12,910,618 1,291,065 14,201,683 John W. Bartholomew 630,856 41,779 672,635 Rick Montrone Jack Sciara 124,131 42,690 166,821 222,900 35,130 258,030 14,023,718 1,424,186 15,447,904 * “Net Change Other” refers to shares purchased or sold during the financial year. NOTE 6: AUDITORS’ REMUNERATION Remuneration of the auditor for the parent entity: Michael Chau & Associates - auditing or reviewing the financial report - taxation services GCC Business Assurance Pty Ltd - auditing or reviewing the financial report - taxation services Consolidated Group 2019 $’000 2018 $’000 6 - 72 3 81 6 - 69 3 78 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 42 For the year ended 30 June 2019 43 NOTE 7: DIVIDENDS NOTE 9: CURRENT ASSETS – Cash and Cash Equivalents Dividends paid a. Final dividend of $0.0225 franked, per share, paid on 6 October 2017 Special dividend of $0.10 franked, per share, paid on 6 October 2017 Interim dividend of $0.0225 franked, per share, paid on 27 March 2018 Final dividend of $0.0225 franked, per share, paid on 26 October 2018 Consolidated Group 2019 $’000 2018 $’000 837 3,719 837 920 Interim dividend of $0.0225 franked, per share, paid on 31 March 2019 920 Ordinary dividend of $0.03 partially franked, per share, declared by directors from retained earnings payable on 25 October 2019 1,227 b. The Group has a total $0.3m (2018 - $1.1m) franking credits available before the final dividend for 2019 is provided. NOTE 8: EARNINGS PER SHARE Reconciliation of earnings used in the calculation of earnings per share Operating profit after income tax Reconciliation of weighted average numbers of ordinary shares used in the calculation of earnings per share Weighted average number of ordinary shares used in the calculation of basic earnings per share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Conversion, call, subscription or issue after 30 June 2019 Consolidated Group 2019 $’000 2018 $’000 27,297 664 Consolidated Group 2019 2018 40,909,990 37,190,900 66.73 66.73 1.78 1.62 Cash at bank and in hand Interest bearing short term deposits The effective interest rate on cash at bank was nil (2018 – nil). The effective interest rate on short term bank deposits was an average of 2.36% (2018 – 2.0%). These deposits have a weighted average maturity of 90 days. Reconciliation of cash Cash at the end of the financial year as shown in the cash flow statement is reconciled to items in the balance sheet as follows: Cash as above Less: Bank overdraft (refer to note 16) NOTE 10: CURRENT ASSETS – Trade and Other Receivables Trade receivables NOTE 11: OTHER ASSETS (a) Current Assets There has been no conversion to, calls of, or subscription for ordinary shares since the reporting date and before the completion of these accounts. Court Order cost recovery Prepayments and GST receivables Consolidated Group 2019 $’000 76 45,500 45,576 2018 $’000 1,500 3,000 4,500 45,576 4,500 - - 45,576 4,500 Consolidated Group 2019 $’000 79 2018 $’000 209 Consolidated Group 2019 $’000 - 261 261 2018 $’000 1,524 327 1,851 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportNotes to the Financial Statements Continued 44 For the year ended 30 June 2019 NOTE 11: OTHER ASSETS (Continued) (b) Non Current Assets Security deposit Formation costs Consolidated Group 2019 $’000 2018 $’000 - 2 2 - - - NOTE 13: NON-CURRENT ASSETS – Properties Investment properties: 13 Sirius Road, Lane Cove 7 Sirius Road, Lane Cove 91 Thornton Drive, Penrith 159 Allen Street, Leichhardt Valuation overview 45 Note 13a 13b 13c 13d Consolidated Group 2019 $’000 5,911 7,504 7,219 22,764 43,398 2018 $’000 5,900 7,500 6,921 5,346 25,667 NOTE 12: CURRENT ASSETS – Other Financial Assets Interest bearing deposit Held-to-maturity investments Fixed interest securities Provision for doubtful debt The effective interest rate on fixed interest securities is an average of 7.5% pa. These securities have a weighted average maturity of 280 days. NOTE 13: CURRENT ASSETS – Property Reclassified as Current 68-72 Lilyfield Road, Rozelle Consolidated Group The basis of the directors’ valuation of the investment properties (non-current) is a fair market value as defined in note 1e. 2019 $’000 - 133 (32) 101 2018 $’000 370 876 - 1,246 Consolidated Group 2019 $’000 - - 2018 $’000 12,893 12,893 In arriving at their opinion, the directors have reviewed and adopted the following three approaches and methodologies: 1. Capitalisation of current net rental income; 2. Discounted cash flow (“DCF”); and 3. Direct comparison to market sales evidence. The properties are being valued independently at least every three years. The Group has no restrictions on the realisability of an investment property nor any contractual obligations to construct, develop, perform, repair or enhance an investment property. a. The directors’ valuation, as at 30 June 2019. An independent valuation was undertaken in June 2018 by a certified practicing valuation company. The directors have based the value as per the valuation report. b. The directors’ valuation as at 30 June 2019. An independent valuation was undertaken in June 2018 by a certified practicing valuation company. The directors have adopted the value as per the valuation report. c. The directors’ valuation, as at 30 June 2019. An independent valuation was undertaken in December 2017 by a certified practicing valuation company. The directors have based the above as per the valuation report. d. Valued at cost expended as at 30 June 2019, including deposit on exchange and balance of settlement scheduled to occur on or before October 2019. Desane has entered into an unconditional contract for the purchase of 159 Allen Street, Leichhardt for $21.0m. The property is located 5km from Sydney’s CBD and is zoned R1 General Residential under the Allen Street Leichhardt Masterplan for approximately 46 residential apartments. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportNotes to the Financial Statements Continued 46 For the year ended 30 June 2019 NOTE 13: NON-CURRENT ASSETS – Properties (Continued) NOTE 14: NON-CURRENT ASSETS – Property, Plant and Equipment 47 Consolidated Group Investment Properties 2019 Acquisition Cost $’000 Construction Cost $’000 Interest Capitalised $’000 13 Sirius Rd, Lane Cove 7 Sirius Rd, Lane Cove 91 Thornton Dr, Penrith 2,900 2,950 4,154 159 Allen St, Leichhardt 22,260 672 1,137 - - 32,264 1,809 - - - - - 2018 13 Sirius Rd, Lane Cove 7 Sirius Rd, Lane Cove 91 Thornton Dr, Penrith 159 Allen St, Leichhardt Acquisition Cost $’000 Construction Cost $’000 Interest Capitalised $’000 2,900 2,950 4,154 5,296 672 1,137 - - 15,300 1,809 - - - - - Other Capital Costs $’000 1,183 295 864 504 2,846 Other Capital Costs $’000 1,172 291 565 51 2,079 Units Sold/to be Sold $’000 Carrying Value 30.6.2019 $’000 Revaluation $’000 - - - - - 1,156 5,911 3,122 7,504 2,201 7,219 - 22,764 6,479 43,398 Units Sold/to be Sold $’000 Revaluation $’000 Carrying Value 30.6.2018 $’000 - - - - - 1,156 5,900 3,122 7,500 2,201 6,921 - 5,346 6,479 25,667 Suite 4, 26-32 Pirrama Road, Pyrmont – land and buildings Less: Accumulated depreciation Capital works Less: Accumulated depreciation Leasehold improvements Less: Accumulated depreciation Depreciable plant and equipment Less: Accumulated depreciation Office furniture and equipment – at cost Less: Accumulated depreciation Motor vehicle – at cost Less: Accumulated depreciation 2019 $’000 1,834 - 1,834 351 (8) 343 104 (2) 102 21 (2) 19 106 (36) 70 69 (5) 64 Total non-current assets 2,432 2018 $’000 - - - - - - - - - - - - 43 (21) 22 29 (26) 3 25 Movements in Carrying Amounts Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year: Consolidated Group Balance at the beginning of year Additions Disposals/write offs Depreciation expense Land and Buildings $’000 Capital Works $’000 Leasehold Improvements $’000 Plant & Equipment $’000 - 1,834 - - - 351 - (8) - 104 - (2) 25 154 (1) (25) Total $’000 25 2,443 (1) (35) Carrying amount at the end of the year 1,834 343 102 153 2,432 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 48 For the year ended 30 June 2019 NOTE 15: CURRENT LIABILITIES – Trade and Other Payables Unsecured liabilities Trade payables Sundry payables and accrued expenses 159 Allen Street, Leichhardt – settlement commitment NOTE 16: BORROWINGS (a) Current Secured: Bank overdraft Secured Liabilities – Bank Loans Finance for property – Lilyfield Road Joint Venture Consolidated Group 2019 $’000 134 84 10,500 10,718 Consolidated Group Note a b 2019 $’000 - - - 2018 $’000 468 513 - 981 2018 $’000 - 5,250 5,250 a. Bank overdraft secured over Lane Cove properties (refer to note 30). b. First mortgage finance secured over respective joint venture asset. c. All covenants imposed on secured loan agreements have been adhered to, at all times within the financial year. (b) Non Current Secured Liabilities – Bank Loans Finance for property 13 Sirius Road, Lane Cove Finance for property 7 Sirius Road, Lane Cove Note 16i 16ii Consolidated Group 2019 $’000 2,950 2,950 5,900 2018 $’000 2,950 2,950 5,900 i. First mortgage finance secured over 13 Sirius Road, Lane Cove property (note 13c). Covenants imposed by mortgagor require total debt not to exceed 60% of the property value and the EBITDA is required to exceed interest expense by at least 1.9 times. ii. First mortgage finance secured over 7 Sirius Road, Lane Cove property (note 13d). Covenants imposed by mortgagor require total debt not to exceed 60% of the property value and the EBITDA is required to exceed interest expense by at least 1.9 times. iii. All covenants imposed on secured loan agreements have been met. 49 Interest Rates (average) 3.8% pa Consolidated Group 2019 $’000 5,900 5,900 2018 $’000 11,150 11,150 Maturity Schedule 26 July 2021 NOTE 17: CURRENT LIABILITIES – Provisions Current company tax Dividends Employee entitlements* * Movement represents net increase in provision set aside. Consolidated Group 2019 $’000 - 1,227 142 1,369 Consolidated Group 2019 No 6 Consolidated Group 2019 $’000 - Consolidated Group 2019 $’000 86 2018 $’000 - 920 124 1,044 2018 No 4 2018 $’000 2 2018 $’000 62 Number of employees at year end NOTE 18: NON CURRENT LIABILITIES – Trade and Other Payables Security deposits NOTE 19: NON CURRENT LIABILITIES – Provisions Employee long service leave entitlement* * Movement represents provision set aside. The provision for employee entitlements represent amounts accrued for annual leave and long service leave. The current position for the employee entitlement includes the total amount accrued for annual leave entitlement and long service leave that have been vested due to employees having completed the required period of service. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 50 For the year ended 30 June 2019 51 NOTE 20: ISSUED CAPITAL NOTE 22: INTEREST IN JOINT ARRANGEMENTS Consolidated Group 2019 $’000 2018 $’000 In September 1996, a controlled entity entered into a co-ownership agreement referred to as the Lilyfield Road Joint Venture to purchase a property asset. The controlled entity has a 70% interest in the assets and income of this joint venture. The co-ownership agreement is in place. Voting is by unanimous resolution by all joint venture members. The share of net assets employed in the joint venture is included in the controlled entity’s statement of financial position under the following classifications: 40,909,990 (2018: 37,190,900) Ordinary Shares fully paid 21,213 17,308 Ordinary Shares Fully Paid At beginning of the year Shares Issued During the Year Dividend reinvestment plan Share purchase plan Rights issue Consolidated Group Consolidated Group 2019 Shares 2018 Shares 2019 $’000 2018 $’000 37,190,900 37,190,900 17,308 17,308 - - 3,719,090 - - - - - 3,905 21,213 - - - 17,308 Ordinary Shares fully paid at reporting period 40,909,990 37,190,900 a. Movements in Ordinary Share Capital of the Company 3,719,090 were issued during 2019 (2018: Nil). b. Authorised Capital 500,000,000 Ordinary Shares of no par value. c. Capital Management Management controls the capital of the Group in order to maintain a good debt to equity ratio, provide the shareholders with adequate returns and ensure that the Group can fund its operations and continue as a going concern. The Group’s debt and capital include ordinary share capital and financial liabilities, supported by financial assets. There are no externally imposed capital requirements. Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues. There have been no significant changes in the strategy adopted by management to control and manage the capital of the Group since the prior year. NOTE 21: RETAINED EARNINGS Retained earnings at beginning of financial year Net profit attributable to members of parent entity Dividends provided for or paid Retained earnings at end of financial year Consolidated Group 2019 $’000 12,032 27,297 (2,147) 37,182 2018 $’000 13,126 664 (1,758) 12,032 Current Assets Cash Trade and other receivables Investment property reclassified as current Non-current Assets Investment property Total Assets Current Liabilities Trade and other payables Short term borrowings Non-current Liabilities Deferred tax liability Long-term borrowings Total Liabilities Equity Output Net operating profit/(loss) before income tax Gain/(loss) from the revaluation of development property Income tax credit applicable to operating profit Net profit/(loss) after income tax of joint venture The joint venture has no contingent liabilities. Consolidated Group 2019 $’000 2018 $’000 3 - - - 3 - - - - - 3 1,389 40,000 - (12,000) 28,000 63 1,661 12,893 - 14,617 596 5,250 2,350 - 8,196 6,421 371 (731) - 219 (512) The joint venture property asset, 68-72 Lilyfield Road, Rozelle, was sold to the NSW Roads and Maritime Services involuntarily as part of the compulsory acquisition process. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportNotes to the Financial Statements Continued 52 For the year ended 30 June 2019 NOTE 23: DEFERRED TAXES Consolidated Group Note 2019 $’000 2018 $’000 Non-current Deferred tax liability comprises: Tax allowances relating to property and equipment Revaluation of investment properties Deferred tax asset attributable to tax and capital losses Provisions Other Reconciliation Gross Movement The overall movement in the deferred tax account is as follows: Opening balance Charge to statement of profit and loss 4 Closing balance Deferred Tax Liability Tax allowance relating to property and equipment Opening balance Adjustment to previous year’s provision Charged to the statement of profit and loss Closing balance Revaluation of investment properties Opening balance Net revaluation during the current period Transfers on property sale Closing balance Deferred Tax Assets Tax and capital losses Opening balance Tax and capital losses utilised Closing balance Provisions Opening balance Credited to statement of profit and loss Closing balance Other Opening balance Charged to statement of profit and loss Closing balance 14,232 1,944 (707) (88) - 15,381 3,812 11,569 15,381 1,123 - 13,109 14,232 3,314 (1,370) - 1,944 (685) (22) (707) (75) (13) (88) 135 (135) - 1,123 3,314 (685) (75) 135 3,812 3,527 285 3,812 1,065 - 58 1,123 2,371 943 - 3,314 - (685) (685) (44) (31) (75) 135 - 135 53 NOTE 24: FINANCIAL INSTRUMENTS a. Financial Risk Management The group’s financial instruments consist mainly of deposits with banks, mortgage loans with banking institutions, accounts receivable and payable, and loans to and from controlled entities. Desane’s Board of Directors and management are responsible for the monitoring and managing of financial risk exposures on a monthly basis. The main risks the group is exposed to through its financial instruments are liquidity risk and interest rate risk. The contractual maturities of the financial liabilities are set out below. The amounts represent the future undiscounted principal and interest cash flows relating to the amounts drawn at reporting date. b. Credit Risk Exposure The credit risk on financial assets of the consolidated entity which has been recognised in the statement of financial position is generally the carrying amount, net of any provisions for doubtful debts. The consolidated group does not have any material credit risk exposure to any single receivable or group of receivables under financial instruments entered into by the economic entity. Liquidity Risk Liquidity risk arises from the possibility that the group might encounter difficulty in settling its debts or otherwise meeting its obligations related to financial liabilities. Desane manages this risk through the following mechanisms: c. Net Fair Values On Balance Sheet: The net fair value of cash and cash equivalents and non- interest bearing monetary financial assets and financial liabilities approximates their carrying value. • Preparing forward looking cash flow analysis in relation to its operational, investing and financing activities; Off Balance Sheet: The parent entity and certain controlled entities have potential financial liabilities which may arise from certain contingencies disclosed in note 31. No material losses are anticipated in respect of any of these contingencies. d. Carrying Amount and Net Fair Values There is no material difference between the carrying amounts and the net fair values of financial assets and liabilities. • Monitoring undrawn credit facilities; • Obtaining funding from a variety of sources; and • Investing surplus cash with major financial institutions. Interest Rate Risk Exposure to interest rate risks arises on financial assets and financial liabilities recognised at the end of the reporting period whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instruments. Interest rate risk is managed using a mix of fixed and floating rate debt. At 30 June 2019, approximately 100% of the Group’s debt is with a floating interest rate and any balance is fixed interest rate debt. The group entity’s exposure to interest rate risk and the effective weighted average interest rate by maturity periods are set out in the following table (note 24d). For interest rates applicable to each class of asset or liability, refer to individual notes to the financial statements. Exposures arise predominantly from assets and liabilities bearing variable interest rates as the consolidated entity intends to hold fixed rate assets and liabilities to maturity. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportNotes to the Financial Statements Continued 54 For the year ended 30 June 2019 55 NOTE 24: FINANCIAL INSTRUMENTS (Continued) Sensitivity Analysis 2019 Financial Assets Cash and deposits Receivables Other financial assets Note 9 10, 11 12 Floating Interest Maturing within 1-5 years $’000 Fixed Interest Maturing within 1 year $’000 Fixed Interest Maturing within 15 years $’000 Floating Interest Rate $’000 Non Interest Bearing $’000 Total $’000 - - - - - - - - 45,576 - 101 45,677 - - - - - 45,576 340 - 340 101 340 46,017 Weighted average interest rates -% -% 2.36% -% -% 2.36% Financial Liabilities Trade and other creditors Interest bearing liabilities 15, 18 16 Weighted average interest rate Net financial assets (liabilities) - - - -% - - 5,900 5,900 - - - - - - 10,718 10,718 - 5,900 10,718 16,618 3.8% -% -% -% 3.8% (5,900) 45,677 - (10,378) 29,399 2018 Financial Assets Cash and deposits Receivables Other financial assets Note 9 10, 11 12 Floating Interest Maturing within 1-5 year $’000 Fixed Interest Maturing within 1 year $’000 Fixed Interest Maturing within 15 years $’000 Floating Interest Rate $’000 Non Interest Bearing $’000 Total $’000 - - - - - - - - 4,500 - 1,246 5,746 - - - - - 4,500 2,060 2,060 - 1,246 2,060 7,806 Weighted average interest rates -% -% 2.8% -% -% 2.8% Financial Liabilities Trade and other creditors Interest bearing liabilities 15, 18 16 - - - - 11,150 11,150 - - - Weighted average interest rate -% 3.8% -% Net financial assets (liabilities) - (11,150) 5,746 - - - -% - 983 983 - 11,150 983 12,133 -% 3.8% 1,077 (4,327) The following table illustrates sensitivities to the Group’s exposure to changes in interest rates. The table indicates the impact on how profit and equity values reported at balance date would have been affected by change in the relevant risk variable that management considers to be reasonably possible. These sensitivities assume that the movement in a particular variable is independent of other variables. The net effective variable interest rate borrowings (floating interest rate) expose the Group to interest rate risk which will impact future cash flows and interest charges, are indicated in the above figures. All interest bearing liabilities and their weighted interest rate is shown in note 24(d). There are no financial liabilities maturing over 5 years. Consolidated Group Profit $’000 Equity $’000 +/- 118 +/- 118 Consolidated Group Profit $’000 Equity $’000 +/- 222 +/- 222 Year ended 30 June 2019 - interest rate sensitivity calculated at an average of +/- 2%pa. Year ended 30 June 2018 - interest rate sensitivity calculated at an average of +/- 2%pa. NOTE 25: RELATED PARTY TRANSACTIONS All transactions are under normal commercial terms and conditions. The Group’s main related parties are as follows: i. Key management personnel: Any person(s) having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity, are considered key management personnel. ii. Joint venture entities accounted for under the proportion method: The Group has an interest in one venture. The interest in this joint venture is accounted for in the consolidated financial statements of the Group using the proportion method of accounting. For details of the interest held in joint venture entities, refer to note 22. iii. Other related parties Other related parties include entities controlled by the parent entity and entities over which key management personnel have control. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportNotes to the Financial Statements Continued 56 For the year ended 30 June 2019 NOTE 25: RELATED PARTY TRANSACTIONS (Continued) Related parties of Desane Group Holdings Limited (parent entity) fall into the following categories: a. Controlled Entities Information relating to controlled entities is set out in note 31. Other transactions between related parties consist of: Desane Properties Pty Ltd: Dividend paid Desane Contracting Pty Ltd: Dividend paid b. Joint Ventures Administration fee received from Lilyfield Road Joint Venture Interest received from Lilyfield Road Joint Venture Consulting fee received from Lilyfield Road Joint Venture Property management fee received from Lilyfield Road Joint Venture Consolidated Group 2019 $’000 1,300 - 12 56 540 29 2018 $’000 1,200 - 12 146 180 11 c. Directors The names of the persons who were directors of the parent entity during the financial year are as follows: • Phil Montrone • John Blair Sheehan • John William Bartholomew • Rick Montrone Information on the remuneration of directors and executives is set out in note 5. Trafalgar Contracting Pty Ltd, which is a company owned by Mr Phil Montrone’s brother, has provided maintenance services totalling $7,310 at an investment property owned by the Group on an arm’s length basis. Mr Jack Sciara provided professional tax services to the Group for the amount of $8,160, on an arm’s length basis. The Managing Director and all executives are permanent employees of Desane Group Holdings Limited. Other than the above transactions, no director has entered into a material contract since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end. The directors participate in bonus and other share issues under the same terms and conditions as other shareholders. Particulars of directors’ interests in ordinary shares and options are disclosed in the Directors’ Report. NOTE 26: COMMITMENTS FOR EXPENDITURE As at 30 June 2019, the Group has the following contractual commitment: Not later than one year Later than one year but not more than two years 57 Consolidated Group 2019 $’000 23 - 23 2018 $’000 6,391 10,500 16,891 NOTE 27: SUPERANNUATION COMMITMENTS In the case of employees of the holding company, the company contributed 9.50% of each member’s salary into the fund nominated by each member. Group companies contribute a minimum amount equal to 9.50% of each member’s salary, plus the cost of the insurance coverage, if required, to insure the provision of all benefits to the Fund. The benefits provided by the accumulation fund are based on the contributions and income thereon held by the Fund on behalf of the member. The 9.50% contribution made by group companies is legally enforceable. The company and its controlled entities have a legally enforceable obligation to contribute to the funds. The directors are not aware of any other changes in circumstances which would have a material impact on the overall financial position of the funds. Employer contributions to the plans; consolidated $98,350 (2018 - $75,976), parent entity $65,993 (2018 - $51,073). NOTE 28: CONTINGENT LIABILITIES a. The parent entity has given a letter of support to each of its two controlled entities, to the effect that it will not require repayment of the loan funds advanced in the coming year (refer note 31(ii)). The shareholders’ funds as at 30 June 2019, in the controlled entities concerned were: 159 Allen Street Leichhardt Pty Ltd Desane Contracting Pty Limited – net assets 2019 $’000 (86) (1,777) 2018 $’000 - (976) Desane Properties Pty Limited – net assets 45,309 17,264 b. 7 Sirius Road Property The parent entity has guaranteed the repayment of the first mortgage finance secured over the 7 Sirius Road property (note 16). c. 13 Sirius Road Property The parent entity has guaranteed the repayment of the first mortgage finance secured over the 13 Sirius Road property (note 16). Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 58 For the year ended 30 June 2019 NOTE 29: OPERATING SEGMENTS – Consolidated Group Segment Information Identification of Reportable Segments The Group has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors in assessing performance and determining the allocation of resources. Reportable segments disclosed are based on aggregating operating systems where the segments are considered to have similar economic characteristics and are also similar to the operations and or services provided by the segment. Types of Operations and Services by Segment Revenue is derived by the industry segments from the following activities: i. Property Development Development projects (residential, commercial or industrial). ii. Property Investment Rental income from prime real estate investments. iii. Property Project Management and Resale Property project management and resale of commercial, industrial and residential properties, principally in Sydney metropolitan areas. iv. Property Services Property and related services. Accounting Policies Adopted Segment Liabilities Liabilities are allocated to segments where there is a direct nexus between the incurrence of the liability and the operations of the segment. Borrowings and tax liabilities are generally considered to relate to the Group as a whole and are not allocated. Segment liabilities include trade and other payables and certain direct borrowings. Unallocated Items The following items of revenue, expenses, assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment: • Net gains on disposal of available for sale investments; • Impairment of assets and other non recurring items of revenue or expenses; • Income tax expense; • Deferred tax assets and liabilities; • Current tax liabilities; • Other financial liabilities; • Retirement benefit obligations; and • Administration expenses. Geographical Segments The consolidated group operates in one geographical segment being New South Wales, Australia. Unless stated otherwise, all amounts reported to the Board of Directors, with respect to operating segments, are determined in accordance with accounting policies that are consistent to those adopted in the annual financial statements of the Group. Inter-segment Transactions Inter-segment pricing is based on what would be realised in the event the sale was made to an external party at arm's-length basis. Segment Assets Where an asset is used across multiple segments, the asset is allocated to that segment that receives majority economic value from that asset. In the majority of instances, segment assets are clearly identifiable on the basis of their nature and physical location. 59 Property Project Management and Resale $’000 Property Services $’000 Property, Plant and Equipment $’000 Consolidated Group $’000 Other $’000 - - - - 1,129 - 1,129 1,129 - - - - 860 - 860 860 43,099 - 43,099 40,906 (1,663) (377) 38,866 (11,569) 27,297 Property Investment $’000 Property Development $’000 41,110 - 41,110 39,700 - - - (783) 2019 External sales Other segments Total revenue Segment result Unallocated expenses Finance costs Profit(loss) before income tax Income tax expense Profit/(loss) after income tax 2019 Segment Assets Property Investment $’000 Property Development $’000 Property Project Management and Resale $’000 Property Services $’000 Property, Plant and Equipment $’000 Consolidated Group $’000 Other $’000 2018 opening balance 38,560 - - - 25 7,806 46,391 - 2,443 19,407 (1) (12,894) Unallocated Assets Deferred tax assets Segment Asset Increases/(Decreases) for the Period Acquisitions 16,964 Proceeds from sale of properties (12,893) Revaluations/ (devaluations) Capital expenditures 767 Development expenditures Asset held for sale Depreciation and capital allowance Asset Reclassification Net movement in other segments Unallocated Assets Deferred Tax Assets Total Group Assets (35) 38,213 43,398 - - - 2,432 46,019 - 767 - - (35) - 38,213 91,849 - 91,849 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 60 For the year ended 30 June 2019 NOTE 29: OPERATING SEGMENTS – Consolidated Group (Continued) 2019 Segment Liabilities Property Investment $’000 Property Development $’000 Property Project Management and Resale $’000 Property Services $’000 Property, Plant and Equipment $’000 Consolidated Group $’000 Other $’000 2018 opening balance 11,150 - - - - 2,089 13,239 Unallocated Liabilities Deferred tax liabilities Segment Liabilities Increases/ (Decreases) for the Period Repayments (5,250) - 3,812 (5,250) - 61 Property Investment $’000 Property Development $’000 Property Project Management and Resale $’000 Property Services $’000 Property, Plant and Equipment $’000 Consolidated Group $’000 Other $’000 42,406 4,154 - - - 11,848 58,408 2018 Segment Assets 2017 opening balance Unallocated Assets Deferred tax assets Segment Asset Increases/ (Decreases) for the Period Acquisitions 5,346 Proceeds from sale of properties (17,825) New borrowings Net movement in other segments Unallocated Liabilities Deferred Tax Liabilities Total Group Liabilities 2018 External sales Other segments Total revenue Segment result Unallocated expenses Finance costs Profit/(loss) before income tax Income tax expense Profit/(loss) after income tax 10,500 16,400 - - - - 1,673 21,885 (416) 10,084 Property Investment $’000 Property Development $’000 1,216 - 1,216 3,001 - - - (1,062) - 11,569 33,454 Property Project Management and Resale $’000 Property Services $’000 Property, Plant and Equipment $’000 Consolidated Group $’000 Other $’000 - - - - 254 - 254 254 - - - - 525 - 525 525 1,995 - 1,995 2,718 (1,191) (577) 950 (286) 664 Revaluations/ (devaluations) Capital expenditures Development expenditures Asset held for sale Revaluation increment - investment property held for resale Asset Reclassification Net movement in other segments Unallocated Assets Deferred Tax Assets Total Group Assets 3,393 1,086 4,154 (4,154) 38,560 - - - - 7,831 46,391 (4,017) (4,017) - 46,391 - 5,346 (17,825) 3,393 1,086 - - - - Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 62 For the year ended 30 June 2019 63 NOTE 29: OPERATING SEGMENTS – Consolidated Group (Continued) NOTE 30: CASH FLOW INFORMATION 2018 Segment Liabilities Property Investment $’000 Property Development $’000 2017 opening balance 16,590 Unallocated Liabilities Deferred tax liabilities Segment Liabilities Increases/(Decreases) for the Period Repayments New borrowings Net movement in other segments Unallocated Liabilities Deferred Tax Liabilities Total Group Liabilities (5,485) 45 11,150 - - Property Project Management and Resale $’000 Property Services $’000 Property, Plant and Equipment $’000 Consolidated Group $’000 Other $’000 - - - 7,857 24,447 3,527 (5,485) 45 (5,768) (5,768) - - - 2,089 16,766 285 17,051 a. Reconciliation of Cash Flow from Operations with Profit After Income Tax Consolidated Group Profit/(loss) after income tax Non-cash flows in profit/(loss) Doubtful debt Depreciation and amortisation (Gain)/loss on asset revaluation (Profit)/loss on sale of investment property Gain on disposal of fixed asset Changes in assets and liabilities (Increase)/decrease in trade receivables (Increase)/decrease in other receivables and other assets (Increase)/decrease in prepayments (Decrease)/increase in trade payments and accruals (Decrease)/increase in other payables (Decrease)/increase in provisions Increase/(decrease) in deferred taxes payable Transfer to financing activities Cash flow from operations Credit Standby Arrangements with Banks Credit facility Amount utilised 2019 $’000 27,297 33 35 - (38,947) (2) 130 1,522 66 (334) 10,071 2018 $’000 664 - 11 (3,393) - - (154) (1,521) (193) 375 193 42 (2,659) 11,569 (10,500) 285 212 982 (6,180) Consolidated Group 2019 $’000 100 - 2018 $’000 100 - Bank overdraft facility is arranged with one bank and the general terms and conditions are set and agreed annually. Interest rates are variable and subject to adjustment. Please refer to note 16. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportNotes to the Financial Statements Continued 64 For the year ended 30 June 2019 NOTE 30: CASH FLOW INFORMATION (Continued) Loan Facilities with Financial Institutions Loan facilities Amount utilised For more details on the loan facilities, please refer to note 16. Consolidated Group 2019 $’000 5,900 2018 $’000 11,150 (5,900) (11,150) NOTE 31: PARENT ENTITY DISCLOSURES The following information has been extracted from the books and records of the parent entity and has been prepared in accordance with Accounting Standards. 65 i. Controlled Entities Investments in controlled entities are unquoted and comprise: Controlled Entities Desane Properties Pty Ltd Desane Contracting Pty Ltd 159 Allen Street Leichhardt Pty Ltd Parent Entity 2019 2018 Class of Shares Ordinary Ordinary Ordinary Holding % Investment $’000 Holding % Investment $’000 100 100 100 490 - - 490 100 100 100 490 - - 490 Parent Entity 2019 $’000 2018 $’000 Note All controlled entities are incorporated in Australia. Desane Properties Pty Ltd declared a dividend of $1,300,000 out of retained profits (2018: $1,200,000). Desane Contracting Pty Ltd declared a dividend of $nil (2018: $nil). 159 Allen Street Leichhardt Pty Ltd declared a dividend of $nil (2018: $nil). STATEMENT OF COMPREHENSIVE INCOME Result of Parent Entity Profit for the period Other comprehensive income Total comprehensive income for the period STATEMENT OF FINANCIAL POSITION Current Assets Cash Trade and other receivables Other assets Non-current Assets Trade and other receivables – loans to controlled entities Investment – controlled entities Property, plant and equipment Total Assets Current Liabilities Trade and other payables Short term provisions Non-Current Liabilities Trade and other payables Provisions Total Liabilities Net Assets Total Equity Issued capital Retained earnings/(accumulated losses) Total Equity 140 - 140 5 - 49 32 - 32 4 - 8 ii i 16,211 14,190 490 134 490 25 16,889 14,717 37 1,413 - - 1,450 15,439 21,213 (5,774) 15,439 70 1,089 - 17 1,176 13,541 17,308 (3,767) 13,541 Contribution to profit/(loss) after tax: Desane Group Holdings Limited Desane Properties Pty Limited Desane Contracting Pty Limited 159 Allen Street Leichhardt Pty Ltd ii. Loans to Controlled Entities Desane Properties Pty Limited Desane Contracting Pty Limited 159 Allen Street Leichhardt Pty Ltd 2019 $’000 (1,160) 29,345 (802) (86) 27,297 2019 $’000 2,091 1,770 12,349 16,210 2018 $’000 (1,168) 2,906 (1,074) - 664 2018 $’000 7,981 901 5,308 14,190 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report Notes to the Financial Statements Continued 66 For the year ended 30 June 2019 DIRECTORS' DECLARATION 67 NOTE 31: PARENT ENTITY DISCLOSURES (Continued) Guarantees Desane Group Holdings Limited has not entered into any guarantees, in the current or previous financial year, in relation to the above debts of its controlled entities. Capital Commitments Desane Group Holdings has no capital commitments to note. Contractual Commitments At 30 June 2019, Desane Group Holdings Limited had not entered into any contractual commitments for the acquisition of property, plant and equipment or any other affairs (2018: Nil). NOTE 32: EVENTS AFTER THE REPORTING DATE Subsequent to balance date, Non-Executive Director, Mr John Bartholomew, retired on 8 July 2019. Mr Peter Krejci was appointed as Non-Executive Director on the same date. NOTE 33: ECONOMIC DEPENDENCY A significant portion of all the Group’s investment properties are under financial loans. In accordance with a resolution of the directors of Desane Group Holdings Limited, the directors of the company declare that: 1. The financial statements and notes, as set out on pages 28 to 66 are in accordance with the Corporations Act 2001 and; a. Comply with Australian Accounting Standards, which, as stated in accounting policy note 1 to the financial statements, constitutes compliance with International Financial Reporting Standards (IFRS); and b. Give a true and fair view of the financial position as at 30 June 2019 and of the performance for the year ended on that date of the consolidated group; 2. In the directors’ opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and 3. The directors have been given the declarations required by a 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer. This declaration is made in accordance with a resolution of the Board of Directors. J B Sheehan Director Sydney 20 August 2019 P Montrone Director Sydney Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DESANE GROUP HOLDINGS LIMITED 68 69 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportINDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DESANE GROUP HOLDINGS LIMITED Continued 70 71 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual ReportINDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF DESANE GROUP HOLDINGS LIMITED Continued SHAREHOLDER INFORMATION 72 The shareholder information set out below was applicable as at 6 August 2019. 73 1. Shareholding Distribution of equitable securities: Category (size of holding) Number of Ordinary Shares* Number of Holders of Ordinary Shares % of Issued Capital 1 - 1,001 - 5,001 - 10,001 - 100,001 - 1,000 5,000 10,000 100,000 and over 25,646 360,768 339,744 5,019,753 35,164,079 40,909,990 109 136 46 140 59 490 0.06 0.88 0.84 12.27 85.95 100.00 There were 75 holders of less than a marketable parcel of ordinary shares. * The number of Ordinary Shares on issue as at 30 June 2019 was 40,909,990. 2. Twenty Largest Quoted Equity Security Holders The names of the 20 largest security holders are listed below: Name 1. 2. Cupara Pty Ltd JP Morgan Nominees Australia Limited 3. Montevans Pty Ltd 4. 5. 6. 7. 8. 9. Horrie Pty Ltd Glencairn Pty Limited PFPT Management Pty Ltd Horrie Pty Ltd Cordato Partners (Superannuation) Pty Ltd Hillmorton Custodians Pty Ltd 10. John & Judith Pty Ltd 11. Keiser Investments Pty Ltd 12. National Nominees Limited 13. Dotnric Pty Ltd 14. Oakmount Nominees Pty Ltd 15. Mocorb Pty Ltd 16. Mr Peter Howells 17. Kelpador Pty Ltd 18. Whimplecreek Pty Ltd 19. Joe Scardino & Felicia Scardino 20. Mr David Cooper & Ms Adrienne Witteman Ordinary Shares % Held to Issued Capital 11,270,878 4,735,692 2,616,639 1,816,571 1,161,593 938,831 815,578 790,409 689,285 582,677 556,158 521,564 342,874 330,000 291,631 284,195 283,770 275,000 273,555 255,315 27.55 11.58 6.40 4.44 2.84 2.29 1.99 1.93 1.68 1.42 1.36 1.27 0.84 0.81 0.71 0.69 0.69 0.67 0.67 0.62 28,832,215 70.45 Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report SHAREHOLDER INFORMATION Continued 74 3. Substantial shareholders Substantial holders in the Company are set out below: Cupara Pty Ltd Greig & Harrison Pty Ltd Phoenix Portfolios Pty Ltd Montevans Pty Ltd Ordinary Number 10,246,252 5,480,418 4,560,206 2,048,762 % 28.27 14.74 12.36 5.60 4. Voting Rights The voting rights attaching to each class of shares are set out below: Ordinary Shares No restrictions. On a show of hands, every member present or by proxy shall have one vote and upon a poll, each share shall have one vote. There are no other classes of equity securities. Company Particulars 75 Directors & Key Personnel Principal Registered Office in Australia Prof. John Blair Sheehan AM Chairman (Non-executive director) Phil Montrone OAM Managing Director Rick Montrone Director Peter Krejci Director (non-executive) (appointed 8 July 2019) Jack Sciara Company Secretary and Chief Financial Officer John William Bartholomew Director (non-executive) (resigned 8 July 2019) Suite 4, 26-32 Pirrama Road, Pyrmont NSW 2009 Other Company Details Postal address: Phone: Facsimile: E-mail: Website: Share Register PO Box 331, Leichhardt NSW 2040 (02) 9555-9922 (02) 9555-9944 info@desane.com.au desane.com.au Shareholders with questions about their shareholdings should contact Desane’s external share registrar: Computershare Investor Services Pty Limited Address: Level 5, 115 Grenfell Street, Adelaide SA 5000 Postal Address: GPO Box 2975, Melbourne VIC 3001 Telephone enquiries within Australia: Telephone enquiries outside Australia: 1300-556-161 61-3-9415-4000 Website: computershare.com Please advise the share registrar if you have a new postal address. Auditor GCC Business & Assurance Pty Ltd Suite 807, 109 Pitt Street, Sydney NSW 2000 Bankers Commonwealth Bank of Australia Securities Exchange Listing Desane Group Holdings Limited shares are listed on the Australian Securities Exchange. The ASX code is DGH. Notice of Annual General Meeting The Annual General Meeting of Desane Group Holdings Limited will be held at Doltone House – The Loft, Level 3, 26-32 Pirrama Road, Pyrmont NSW on Friday, 1 November 2019 commencing at 10.00 am. Desane Group Holdings Limited – 2019 Annual ReportDesane Group Holdings Limited – 2019 Annual Report desane.com.au 

Continue reading text version or see original annual report in PDF format above