Evolution
Annual Report 2018

Plain-text annual report

Annual Report 2018 Contents Evolve’s Story Vision & Values Our Culture Statement Chair’s Report Operational Review CEO’s Letter Operational Highlights Board Profile Investing in Our People Centre Business Update Education Quality in Our Centres Childcare Options Provided by Evolve Financial Statements Independent Auditor’s Report 2 4 5 6 8 10 13 14 16 18 20 22 25 67 Corporate Governance & Statutory Information 72 Shareholder Information Subsidiary Company Directors Corporate Directory 89 91 93 Evolve Education Group Annual Report 2018 | 1 Evolve’s Story Remember as a child the excitement of a new discovery? The irrepressible sense of hope and possibility, that the world was a mystery and an adventure to explore? Remember that freedom? We do. That thrill of discovery, recalling the magic of the world through a child’s point of view, is the ethos that runs through every touchpoint in the Evolve Education Group. Whether we’re nurturing young minds in one of our centres, or educating in-home, we share a common objective - capturing that sense of unbridled possibility. Shaping this possibility for our children by helping nurture happy, caring, independent-thinking, purposeful souls to be their best is our ultimate goal. We pride ourselves on being welcoming and respecting the rich diversity of culture, tradition, people and circumstance that Evolve children represent. These influences are vital to us, part of our lifeblood, just as their whanau are part of our wider family. Respect is at the heart of our interaction with our children. Every child is an individual with a voice, every child will respond to some learning styles better than others. We understand that, and offer a variety of teaching methods and philosophies to help any child flourish. We are proud to count some of New Zealand’s most trusted early childhood professionals among our numbers. These educators have a deep and genuine passion for helping children realise their potential. Through ongoing vocational guidance, we invest in their futures too, to help them to continue to deliver industry-leading teaching and care. Every parent who entrusts their child to our care can be sure that their child’s safety, happiness and personal development is going to be at the forefront of everything we do. But more than that, as a leader in early childhood education (ECE) in New Zealand, it’s vital that our parents and children feel our passion to support and celebrate their children’s learning, and that we share their thrill at those moments of understanding and inspiration. Our delight is the ability to equip our children with the knowledge and skills to face their next challenges with confidence, and embrace a life-long learning journey. Evolve. The joy of learning lives here. 2 | Evolve Education Group Annual Report 2018 Evolve Education Group Annual Report 2018 | 3 Evolve Education Group Annual Report 2016 | 1Vision and Values Evolve Education Group is comprised of 129 ECE centres across New Zealand, as well as the PORSE and Au Pair Link networks. Our Vision: Evolve will be acclaimed and respected as an authority within ECE. Proud owners of superior, well-resourced learning centres and high quality ‘in home’ education services. Evolve children are identifi able for their love of learning, and age appropriate life skills. Evolve will be admired as the undisputed leaders in ECE, recognised practitioners and advocates for best practice within the ECE industry, and as a result, staff will view Evolve as the premier ECE employer of choice. Our Evolve brand: bright, uplifting and irrepressible We wanted our logo to embody the irrepressible sense of hope and thrill of discovery of the world through the eyes of a child. Capturing the beginning of change; the evolving young mind is entranced by a world fi lled with light and movement. A logo that carries a sense of wonder, and is broad enough to speak to the diverse ECE communities across New Zealand that the Evolve Education Group serves. Our logo represents our passion for learning, for illumination, our quest for those bright points of inspiration, whether they’re new ideas or the passionate individuals delivering fresh insight and innovation. Our Evolve bubbles give it an eff ervescent and optimistic feel. Bright, uplifting and irrepressible, it’s a logo that delivers on the personifi cation of our promise: ‘The joy of learning lives here’. Our Values: Family values are our high ground Ethics and Integrity Trust is everything Parents are trusting us with the most precious thing in their lives - their children. It’s a privilege that we honour with the highest standards of ethical behaviour, and honesty and transparency in our interactions. If we don’t have this, we have nothing. Nurture The right learning environment Evolve is a nurturing environment. For our children: we teach, observe and monitor, ensuring they are happy, stimulated and engaged. With their well-being nurtured, they are free to expand their minds and express themselves. For our staff : it’s about providing the opportunity to fulfi l their potential. Respect Every child, each other, and our planet We respect our childrens’ culture, ethnicity, personality and individuality. We teach and show respect, and our children respect one another. We extend this respect to our planet by connecting with the natural world and fostering love and stewardship to the environment we live in. Sustainability Our critical pillars Economic and social development, as well as environmental protection are inextricably linked to our alignment with our ‘New Zealandness’ and the promotion of clean, green and healthy values. Community Stronger together us: is Our wider stakeholders, supporters, partners. staff , We welcome them into our family and their support makes us stronger. We’re all on the same team. community family, important to Passion We have a mission We are passionate about quality ECE. We’re fully engaged. We stand by our principles and our sights are fi rmly fi xed on great outcomes for our children. It’s why we exist, and nothing less will do. 4 | Evolve Education Group Annual Report 2018 Our Culture Statement Within our walls, we live the values Evolve stands for, and we champion those across the ECE industry. For our children and each other, that’s about respecting individuality, recognising our children as people, hearing their voice, allowing them to feel valued and understood. That goes for our day-to-day interactions with each other too. Genuine respect is at the heart of our organisation. So we celebrate individual achievements, remember birthdays, laud the effort that goes above and beyond; we care about each other. We encourage our young enquiring minds, we share their joy of discovery, and bolster their confidence to explore and learn more. We are a collaborative team, wherever possible sharing our knowledge across the Evolve Group, leveraging our diverse skills, supporting our pioneering spirit in the pursuit of improvement. Evolve Education Group Annual Report 2018 | 5 Evolve Education Group Annual Report 2016 | 1Alistair Ryan Chair’s Report Dear Shareholders, Over the past year, Evolve Education has continued to pursue its vision of being a highly regarded and respected authority within New Zealand’s early childhood education (ECE) sector, through the operation of superior, well-resourced learning centres and high quality ‘in-home’ education services. While we have made good progress in a number of areas towards this vision, the past The board has a clear understanding of what needs to be done to achieve success; the appointment of Rosanne as our CEO is the fi rst step in strengthening the enterprise and making it more robust in what will continue to be a challenging environment. All of this will take some time to turnaround and rebuild and we respectfully ask for some patience from shareholders as the board and management take on the tasks ahead of us. year has proved diffi cult for the company, with a change of Evolve remains a strong long-term investment proposition. CEO mid-year and an environment that has provided signifi cant We are New Zealand’s second largest ECE operator with 129 challenge and headwind. Ministry of Education funding was frozen at the same levels as applied three years ago in an environment where our cost base (rents, salaries and wages) came under infl ationary pressure, coupled with an increasing challenge in terms of centres, most of which are performing well. Our centres are well-located, well-built and we have some excellent managers and teachers working for us throughout the country. We put our families and children fi rst and we know that this is the driving force behind quality services and a successful business over teacher availability, particularly in Auckland. Small movements time. in revenues (through lower occupancy rates, for instance) The board wishes to thank the staff of Evolve for their have magnifi ed impacts on earnings as it takes time to adjust commitment and professionalism over the past year. We the cost base to refl ect these movements. Rents continue to particularly recognise the eff orts of our 2,290 employees apply unchanged and staffi ng ratios cannot adjust easily to who help us to deliver the highest quality education for our small changes in attendance levels. At the same time, Evolve, children, and positive outcomes for our families and broader as a relatively new organisation, has needed to invest in communities. It is through their dedication that we are able to infrastructure to relieve the burden on centre management strive towards our vision of being New Zealand’s leading early in respect of recruitment, property management and other childhood educator. overhead type tasks unrelated to the direct provision of Financial Result learning services to children, while also ensuring that Ministry of Education requirements are met and exceeded. The past fi nancial year has seen marginal reductions in occupancies across a signifi cant number of centres in our network, while at the same time, other centres have been able to increase occupancies. We are encouraged that assistance to those centres which are having diffi culty maintaining occupancies should be able to improve their fi nancial performance but this is proving to be a task that requires consistent focus and is not achieved overnight. We are very pleased to be welcoming Rosanne Graham as Chief Executive Offi cer from 2 July. Rosanne has an excellent skill set and a high level of energy and enthusiasm for tackling our revenue and operational challenges and for improving our corporate infrastructure to allow staff to focus on their core roles and to make Evolve a highly regarded place to work. The enthusiasm of satisfi ed and motivated teachers then rubs off on parents and children who will prefer our centres over the alternatives. The board wishes to acknowledge and thank Mark Finlay for his sterling eff orts as CEO between September last year and now. Mark fi lled in at short notice following the resignation of Alan Wham and has got to grips well with the key issues and challenges facing the company. We are fortunate that we will be able to continue to tap into Mark’s considerable experience in ECE as Mark will continue to work with Evolve on an advisory basis. 6 | Evolve Education Group Annual Report 2018 Net profi t after tax and before non-recurring items for the fi nancial year ended 31 March 2018 was $12.0 million. This was in-line with guidance provided in February, but lower than our forecast at the annual shareholders’ meeting (August 2017) of $14 million to $15 million. This compares with $15.9 million recorded in the prior year. In addition, we recorded non- recurring expense items of $16.2 million after tax in the year, and this resulted in a net loss after tax of $4.2 million. Non-recurring items were the cost of the settlement reached with the Inland Revenue Department on the historical PORSE GST issue ($3.0 million), and the after-tax impairment expense of $13.2 million relating to the home-based division and the closure of one ECE centre. Earnings included $0.5 million of start-up losses on three new development centres, two of which commenced operations during the year. Total revenue of $159 million increased by $7.3 million or 4.8% on the prior year. This was driven by new centre acquisitions and the development of new centres, partly off set by a decline in enrolments in both Centres and Home-Based divisions. Occupancy in the Centres division was 2% lower, on average, on a comparable basis, and enrolments in the Home-Based division were also lower than the prior year. Government Funding In the May 2018 Budget, the Government announced a 1.6% increase for ECE centre universal funding, beginning in January 2019. This was a welcome increase, given that funding has been fixed for the past four years, although we were disappointed that there was no recovery of the four years of backlog. Government The results for 2018 included an impairment charge of $12.9 million reflecting the write off of the non-current assets (primarily intangible assets) of the Home-Based division. This was due principally to the decline in enrolments since PORSE was acquired which have reduced the revenue and profitability of that division. funding is an important revenue stream for our industry and our A further $1.0 million of goodwill associated with the Centres parents and teaching staff. We are encouraged that the new division was written off following the merger of two centres. Government has recognised that the early childhood sector has Strategy & Outlook been underfunded for some time and is signalling an intention to provide better support in the future. It is clearly in New Zealand’s best interests to have an early childcare education system that is appropriately funded and is able to attract and retain qualified and talented teachers. Dividend The final dividend for the year was 2.0 cents per share, compared with 2.5 cents per share paid as a final dividend in the 2017 financial year. This brings the total dividend for the 2018 financial year to 4.5 cents per share compared with 5.0 cents per share for the prior year. The dividend will be fully imputed for New Zealand taxation purposes and will be paid on 28 June 2018. We have been able to pay a dividend, despite recording a net loss for the year, due to the non-cash nature of the impairment expense. The total dividend represents a payout ratio of 67% of net profit after tax before non-recurring items. Balance Sheet We have continued to maintain a conservative balance sheet with the underlying gearing ratio, expressed as Net Debt to EBITDA, of 1.24 times as at 31 March 2018. Following the year- end our core debt facility was renewed to provide a $70 million acquisition facility and $25 million working capital facility through to April 2022, representing an overall increase of $5 While the 2018 financial year has proved to be a challenging one for Evolve, our goals remain largely unchanged from those that were established at the time of the company’s formation: • • • • To be leader in the strong demand ECE sector in New Zealand, To achieve the competitive benefits of a large-scale operator in a fragmented industry, To continue to expand through the measured acquisition of centres, and To undertake new purpose-built, purpose-located centre developments. In undertaking these activities, our aim is to maintain a level of profitability that provides a strong flow of funds for reinvestment in the business, whilst maintaining a 40%-60% dividend return to shareholders. We remain confident that the Evolve management team can improve the performance of the business in the medium term but full maturity of our service offering will take several years to be fully achieved. Driving enrolments and lifting overall centre occupancy remain the key drivers for the business. We will continue our focus on attracting and retaining qualified teachers, as this is a critical element in maintaining high quality ECE services, enrolments and occupancy levels. million in funding lines. $60 million of the acquisition facility For the 2019 financial year, we have identified a number of key has been utilised to date, leaving $10 million available for milestones which we will be looking to achieve as we build a acquisitions over and above retained cash. stronger business for the future: Settlement of PORSE GST Issue During the year we finalised agreement with the Inland Revenue Department (IRD) in respect of various historical taxation matters relating to the PORSE in-home childcare business. The settlement agreement required Evolve to pay $3.0 million to IRD and has ensured that all current areas of discussion are • • • • • Lifting overall occupancy from 78% to 79%, Opening four new development centres, Reversing the recent trend of rises in the ratio of staff costs to revenue, Improving employee engagement and retention, and Turning around (or divesting) the centres that are currently closed off. Payment of the settlement amount was funded by trading unprofitably. Evolve’s existing cash reserves. Review of Asset Carrying Values Evolve currently has $207 million of intangible assets on its balance sheet, mainly comprising goodwill arising from ECE centre acquisitions. These assets are tested for impairment twice a year. Alistair Ryan Board Chair Evolve Education Group Annual Report 2018 | 7 Evolve Education Group Annual Report 2016 | 1Operational Review Centres Evolve had a total of 129 centres in operation as at 31 March 2018, up from 121 at the end of the prior year. In the first half of the year seven centres were acquired and, in addition, two new centres were developed and opened with occupancy rates lifting in line with the business plan. We have seen growth in the number of competing new centres being brought into the market by property developers and this has impacted occupancy in some areas. Scaling back our centre acquisition programme has enabled us to focus on endeavouring to lift the performance of our existing portfolio. One centre was merged with another subsequent to balance date, to address persistent low occupancy challenges of both sites. The others We have adopted a cautious approach to centre acquisitions and have been reviewed, the causes of low occupancy pin-pointed, no new centres were acquired in the second half of the year. and remediation plans have been initiated. After several years of significant growth through the acquisition of ECE centres, we have been consolidating our operations. Acquiring existing ECE centres requires management attention following each transaction and the growth through acquisition of existing centres has stretched management resources at times. While we remain open to further acquisitions, vendor pricing expectations remain inflated, although have shown some signs of reducing. We expect that the acquisition market will re-set and this should allow further opportunities for expansion in the medium term. In the meantime, we have continued to see good opportunities to invest in the development of new centres in selected geographies where the demand profile is strong. In the past eighteen months we have developed and opened 3 new centres. With these new developments, we are able to ensure that they are well-located, purpose-built facilities that are attractive to parents and teachers alike. While newly developed centres take longer to come on stream than they generate positive returns We have a number of initiatives in train which we are confident will lift performance in the medium to long term. We have established a central enrolments team to co-ordinate the enrolment process and ensure that all leads are followed up. This team handles all in-bound enquiries for our ECE centres, and offers a seamless, consistent level of service for enrolment enquiries. We are ensuring that we price competitive in areas of high competition. Coupled with this we have increased investment in a coordinated digital marketing strategy. Home-based The market for home-based ECE services continued to attract new participants. Consequently, while both PORSE and Au Pair Link hold segment-leading positions, enrolment levels declined 15% in 2018 over the year. It was not possible to maintain EBITDA through cost savings in the face of the 15% reduction in revenues and EBITDA declined to $0.9 million in 2018 versus $2.6 million in 2017. more quickly as there is no goodwill payment. The early results We have commenced a sale process for the PORSE in-home from our own centre developments have been encouraging. childcare business. This decision follows a strategic review of Two of the three centres have exceeded 50% occupancy and are PORSE and its fit with Evolve’s core activity of centre-based anticipated to generate a monthly profit imminently. ECE. The review has shown that the two businesses are serving In the 2019 financial year we will be developing and opening a further four centres in Papakura, Mt Wellington, Helensville and Napier. Key to the development of new centres is a strong brand strategy. We have rationalised the many brands we had quite different and distinct markets, with limited overlap between the two activities. Consequently, potential synergies between centre-based and home-based ECE have been limited. PORSE accounts for less than 5% of Evolve earnings. We will retain ownership of our other home-based business, Au Pair Link, which serves a different market and is trading well. down to seven, and new brand signage has now been rolled out across most centres. Each of our seven brands has clear Costs points of differentiation and a distinctive learning philosophy. In the 2018 financial year, wages as a percentage of revenue, Underpinning each is a commitment to delivering what families on a like for like basis, increased from 51.4% to 53.8% as we want: quality ECE through caring and nurturing staff and a good held required staffing levels despite the reduction in occupancy learning environment that lifts child enjoyment every day. in anticipation of higher enrolments. Cost margins have been Occupancy Overall, occupancy was 2% lower compared with a year ago, and this had a negative impact on our earnings performance. There was a wide disparity in the performance of the company’s centres around the country. More than half of our ECE centres continued to have occupancy levels in excess of 80%, but 14 centres had occupancy rates below 60%, and 11 centres generated an operating loss totaling $0.5 million in the 2018 financial year. 8 | Evolve Education Group Annual Report 2018 impacted by the lack of any increase in Government per child funding for ECE and rising employee and facility costs, which have in turn been further compounded by a shortage of qualified early childhood educators in some regions. In the year ahead, we will be working to re-balance costs back to our historical levels. We will also be evaluating and implementing a teacher rostering system that is easy to use and configured to the requirements of a multi-centre New Zealand ECE group. In addition, we are seeking to improve management of our existing internal pool of relieving staff and will use Staff Sync software to provide improved reliever options to centre managers, thereby reducing the need to use expensive agency- provided staff. People and Culture Our success depends fundamentally on the engagement and retention of our teaching staff and centre management teams. As a scale operator, Evolve has a unique opportunity to differentiate itself as an employer in the ECE sector and thus improve retention and build engagement. Over the coming year we will be targeting specific actions to lift employee engagement, including: • Further developing a targeted professional and career development programme for centre managers and teachers, • Using our scale to improve the working experience of our teachers and centre managers. We will establish a property maintenance management function to assume this responsibility on behalf of our centre staff, • Providing greater support from the corporate office around functions such as recruitment and staff deployment, and building capex, repairs and maintenance, and • Improving the quality and focus of internal communications. Mark Finlay CEO (until 2 July 2018) Evolve Education Group Annual Report 2018 | 9 Evolve Education Group Annual Report 2016 | 1Rosanne Graham CEO’s Letter I am delighted to have been appointed CEO of Evolve Education Group and am greatly looking forward to taking up the role in July. Evolve takes the responsibility of educating our young children very seriously. ECE nurtures children’s growth and development and sets them up for future success in the schooling system. It also enables parents to entrust their children to us, safe in the knowledge that they are being cared for by highly trained, caring, professional educators in well-resourced facilities. As one of the largest operators in ECE in New Zealand, Evolve is able to provide a consistent, high-quality learning experience for all young children. In addition, I believe that the company has a real point of diff erence to off er its staff , through providing them with the best opportunities in the industry for personal development and career advancement. In joining Evolve, I can see a clear opportunity to build on the foundation that exists today and to grow a strong, resilient, future-focused organisation. My success will be measured by the satisfaction of all of our stakeholders, but it all starts with the children and families that we serve and the positive engagement of our staff . Rosanne Graham CEO (eff ective 2 July 2018) 10 | Evolve Education Group Annual Report 2018 Evolve Education Group Annual Report 2018 | 11 Evolve Education Group Annual Report 2016 | 112 | Evolve Education Group Annual Report 2018 Operational Highlights Revenue 4.8% Centre License Places 9,178 March 2018 8,274 March 2017 Number of Centres 129 March 2018 121 March 2017 Group Revenue FY18 $159.0m 0.3% 12.9% Group Revenue FY17 $151.4m 0.6% 15.9% 86.8% 83.5% ECE Centres Home-based ECE Other ECE Centres Home-based ECE Other Evolve Education Group Annual Report 2018 | 13 Evolve Education Group Annual Report 2016 | 1Board Profi le Evolve Education has an experienced and balanced Board with a diverse range of skills, including industry and business knowledge, and corporate governance experience. The Board currently comprises an independent Chair and four independent non-executive Directors. Alistair Ryan Chair (Independent) MCom, FCA. Appointed as Director 13 November 2014 Norah Barlow Non-Executive Director (Independent) BCA, CA. Appointed as Director 13 November 2014 Anthony Quirk Non-Executive Director (Independent) BCA (Hons), INFINZ (Fellow), AFA. Appointed as Director 2 August 2017 14 | Evolve Education Group Annual Report 2018 Alistair is an experienced company Director and corporate executive. In addition to Evolve, he is currently Chair of Kingfi sh Limited, Barramundi Limited and Marlin Global Limited. Other current board positions include Kiwibank Limited, Metlifecare Limited, and Christchurch Casinos Limited. Alistair is also a member of FMA’s Audit Oversight Committee. Alistair was a senior executive of SKYCITY Limited from pre-opening (1995) until he retired as CFO in June 2011. Prior to SKYCITY, Alistair was a Corporate Services Partner with international accounting fi rm EY, in Auckland. Alistair is a member of Evolve’s Audit and Risk Committee. Norah is the Managing Director and CEO of Estia Health Limited, an ASX listed company providing aged care in Australia. Norah is an accountant by profession, having operated her own partnership for a number of years, prior to becoming the Group Accountant, and then CEO of NZX and ASX listed Summerset Group. Norah retired from that role in April 2014 remaining on the Board as a non-executive Director until 2016, when she was appointed to Estia. Norah is also a Ministerial appointee to the National Advisory Council for the Employment of Women. In 2014 she was awarded an ONZM for services to business. Norah is a member of both Evolve Education’s Remuneration and People Committee and the Audit and Risk Committee. Anthony is an experienced fi nancial services sector professional with over 30 years executive experience in the sector. He now has a varied portfolio of governance interests with an emphasis on areas that improve communities. In addition to Evolve Education Group Anthony is currently a Director of the NZ Local Government Funding Agency and Milford Asset Management. He is also Chair of New Zealand Water Polo, Deputy Chair of Compass Housing NZ (a social housing organisation) and a Trustee on the Graeme Dingle Foundation Board in Wellington. Anthony was previously a Director and Chair of the Institute of Finance Professionals and is a Fellow of that organisation. Anthony is Chair of Evolve Education’s Audit and Risk Committee. Lynda Reid Non-Executive Director (Independent) ONZM, BA, TTC. Appointed as Director 2 August 2017 Gráinne Troute Non-Executive Director (Independent) GradDipBusStuds (HRM) CMInstD. Appointed as Director 1 May 2017 As former CEO of St Cuthbert’s College in Auckland, Lynda adds strong technical, social and business diversity to the Evolve board. In addition to excellent sector expertise coupled with robust executive leadership and governance experience. As St Cuthbert’s CEO, Lynda was involved with a wide range of stakeholder groups, people and organisations including the school board, parents, teachers, students, Ministry of Education and the education community generally, and commercial organisations. Lynda is an Offi cer of the New Zealand Order of Merit (2017) and a recipient of the Independent Schools of New Zealand Distinguished Service Award (2016), along with many other distinguished service awards and recognitions, and regular membership of important sector forums. Lynda is a member of the Remuneration and People Committee. Gráinne has extensive experience as a corporate executive and in board and charitable trust governance roles. She is currently a Director of Investore Property Limited, NZX-listed companies Tourism Holdings Limited and Summerset Group Holdings Limited. She was General Manager, Corporate Services at SKYCITY Entertainment Group for 8 years and earlier held senior executive roles at McDonald’s Restaurants for 14 years, for the last three of which she was Managing Director, New Zealand. Gráinne also served for many years as a trustee and chair in the not-for-profi t sector, including having been Chair of Ronald McDonald House Charities NZ for fi ve years. Gráinne is Chair of Evolve Education’s Remuneration and People Committee. Evolve Education Group Annual Report 2018 | 15 Evolve Education Group Annual Report 2016 | 1 Investing in Our People Our staff are passionate about their work with children and they love what they do. Critical to success is having an engaged workforce that can make a difference to the development of the children in our care. To ensure that we attract and retain the best people in our industry, we will continue to proactively invest in our people. It is our goal to support our team values and culture at centre level, continuing to develop a high degree of encouragement and camaraderie. Each of our ECE centres extends the brand and Evolve’s approach to teaching and learning. Our approach encourages relevance, innovation, and development for our staff and the children within the professional framework established groupwide. Retention and valuing our staff are key drivers for Evolve even amidst the scarcity of ECE trained educators and professionals. Evolve continues to invest in additional support and extended training, such as safeguarding children training, professional development to support strategic goals, first aid, supporting teacher registration costs, leveraging our scale advantages to provide discount arrangements for our staff in banking, health care and other areas of benefit for staff. All staff are involved in professional appraisal and performance development. This supports our approach to continuous improvement, as well as raising the quality of learning for children. Our approach to professional development is designed to move the whole team forward as well as strengthening and leveraging the attributes of individuals. This approach allows both team-based and individual development so that personal and business outcomes can complement each other. We actively invest in team leadership and development days at all levels of the business. This involves reaching our staff at all ends of the country. This work includes providing mentorships, head teacher training days, coaching support days for home-based staff, leadership development for centre management staff, and skills development in critical areas such as social competency and people management. Career paths have been developed and are being refined for both qualified and non-qualified staff. Our approach values on-the-job learning, as well as formal education development, together with effective mentoring and coaching of our staff as they develop. Health and Safety Evolve places paramount importance on health, safety, and wellness. The Company has established a group wide Health and Safety Steering Group that provides input for policy assessment and formulation, ongoing process improvements and incident tracking. The Steering Group has established an infrastructure and technology platform for better reporting, and root cause analysis that enables the business to better understand, prevent and manage key organisational, and business-specific risks. We also provide staff access to Employee Assistance Programme (EAP) services to provide them with support and counsel as required. Policy reviews are continuous, ensuring we are up to date with the latest requirements and best practice, as well as staff input to ensure ongoing improvement. 16 | Evolve Education Group Annual Report 2018 Evolve Education Group Annual Report 2018 | 17 Evolve Education Group Annual Report 2016 | 1Centre Business Update Three and a half years on, the focus remains to embed high quality teaching practice, strong policies and processes to support staff and to entrench a positive staff culture in all the centres. The core driver in the centres has been to lift the focus on quality learning environments and practice, operational processes and quality engagement. In FY19, we are shifting to further lift our professional support to teacher learning and career growth, as well as leadership. Within the last year, the centre support structure continued to be improved and extended, to ensure alignment with the values, vision and goals for the company. Our centres are supported with operational leadership and guidance, as well as our professional teaching and learning development management team. This team ensures the centres continue to strive to be sustainable across all areas, through continuous focus on the core purpose, and positive quality outcomes for children. This is achieved through the provision of high quality care and learning for each child at every developmental stage and to each child’s potential. The past year has seen an evolution of the brand strategy into a more deeply embedded cultural positioning around brands, or kaupapas. Our kaupapas are the essence and life force of what we do in each centre, with distinct philosophies and cultures, embraced and supported in each individual service, alongside a core value system and curriculum designed for each kaupapa. Evolve has recently introduced a family enrolment team to further assist centres with enrolments from web and phone enquiries. This is the next key step post-establishing the digital presence and establishing measurable engagement online. Childcare CRM continues to be used across the centres to ensure a more efficient process for families to enquire, book centre visits and enrol with Evolve. The system also enhances workflows and is fully integrated with the support systems in the centres. We continue to seek ways to improve the benefits that come with scale and reach. The scale that Evolve offers now has improved supplier arrangements, procurement efficiencies and ultimately increased professional support to the centres across New Zealand. Evolve has implemented a fully customised HR support system, MyPeople, which ensures that processes, policies and procedures in engaging staff, managing staff and support are consistently applied. The centre business has grown further with the acquisition of six Little Wonders centres in the South Island. There was also the acquisition of Lollipops Paraparaumu, a well-performing purpose-built centre with strong community support in Kapiti. Three new development centres have opened in the past 12 months. Active Explorers Kaiapoi opened in June 2017 in the Canterbury region. Lollipops Lynfield opened in January 2018, and Active Explorers Papakura opened in May 2018. Both new Auckland centres opened to strong interest and enrolments. Developments continue to expand, with four new centres, including Active Explorers Papakura, planned to open over the course of FY19. Looking ahead, it is anticipated that the business objectives and management strategies around operational excellence, service, learning and care will continue to lift Evolve’s performance and positioning in New Zealand. Evolve is entrenching its centres as highly functioning places of learning where the “joy of learning” can be tangibly felt and experienced by all our children, their families and the wider community. 18 | Evolve Education Group Annual Report 2018 Evolve Education Group Annual Report 2018 | 19 Evolve Education Group Annual Report 2016 | 1Education Quality in Our Centres Evolve centres employ well over a thousand qualified teachers, who are deeply engaged with the purpose of providing positive learning environments and outcomes for all the children in our care. The teaching and curriculum management structure is embedded with clear processes in place, ensuring focus on core developmental learning strategies, teacher practice, and leading curricula by extending Te Whāriki for all our centres. Te Whāriki is a curriculum guideline first published in 1996, revised in 2017 by the New Zealand Ministry of Education. It outlines the curriculum that the Ministry requires every early childhood service in NZ to follow if it is to retain its license to operate, care for and educate children. The focus on each developmental stage ensures the curriculum offered is developmentally appropriate and is critical to lifting the quality of learning and care in each of our centres, as well as aligning ourselves with best practice and the latest research in ECE. This is achieved through a focused strategic plan for the next three years to develop distinct frameworks for learning outcomes across all age groups, stages of development and key areas such as literacy and numeracy. FY19 goals include a focus on infancy and the early years and school readiness. In addition, we will be developing and rolling out a programme to enhance children’s social competence and resilience, which is proven to be a vital requirement for improving long term outcomes for children well into adulthood. The teaching and learning team has redesigned the policy and systems for monitoring and improving quality at centre level. This ensures that we are doing what we say we do and makes it evident to families attending our centres. This will focus on aspects such as effective educational mentoring to improve teacher practice and high quality internal evaluation which focuses on documenting the continual improvement of outcomes for children at each centre. Our centres focus on each child’s developmental and learning stage and aim to communicate with whanau and parents as to their progress and enjoyment through Storypark and in one to one engagements. All Evolve centres use Storypark which is a safe and easy- to-use platform that helps teachers and families record and share children’s learning and development. It is a key goal for Evolve to ensure that all our families have the comfort of knowing that each child has a positive and enhancing learning experience aligned with their individual potential. There is increased engagement with whanau, with a clear focus on provision of superior quality learning, care and differentiated experiences through the newly positioned centre kaupapas (brands). Our Learning Pillars Each of our brands has a distinct learning philosophy that is based on Te Whāriki and extended with specific frameworks per brand along with global best practice for early childhood development. These will set expectations for the learning programme provided in each centre, and are deliberately different for each kaupapa, allowing parents to choose a philosophy of learning which is best- suited to their own. Along with the overall focus, we are developing a specific curriculum for school readiness, run across all our centres to ensure that every child will be prepared, confident and ready to face the challenges and new chapter on their learning journey. Each Kaupapa’s Teaching Philosophy Active Explorers has been developed on an enquiry- based learning philosophy to increase problem-solving and creative thinking. The practice encourages seeking out solutions, curiosity, experimentation and active learning. Lollipops has a philosophy centred on the principles of Ako (reciprocal learning between teacher and child) and experiential-based learning philosophy, inspired by Reggio Emilia. Learning is child-led with inspirational and varied provocation stations that lead to creative exploration by every child. Pascals focuses on learning extension, experiential and enquiry-based learning philosophy in centres of excellence further inspired by leading research in ECE. Little Earth Montessori is grounded in the widely practiced Montessori philosophy, with extensive engagement with each learner structured across accepted milestones but anchored on the foundation of Te Whāriki. Learning Adventures is a community kaupapa, inspiring curiosity through inspiration and guidance, blended learning philosophy anchored in the community with a focus on participation, health and social development and parenting support. Little Wonders is a family-centric kaupapa, with the focus on learning through play. By offering a wide range of open-ended resources which value children’s independent choices and provide provocations to entice creative play, children are encouraged to express and 20 | Evolve Education Group Annual Report 2018 explore their working theories. Little Lights has Christian values and beliefs woven into all aspects of daily interactions and learning. Our Teaching Team We have structured the team to include four teaching and learning development managers across New Zealand to lift the practice and learning outcomes for all our children. The focus for this team is to further develop a team of fully certificated, skilled practitioners, with experience in facilitation and communication to extend the curriculum goals and guidelines for Evolve. They will be active researchers in particular areas to enable them to remain current and up-to-date with legislation and to feed this to the broader team. Our teaching and learning development team will ensure that this is structured and that clear frameworks are developed. We aim to support all our teaching staff on planning, assessment and evaluation, model best practice and complete observations to support teacher appraisal processes. We actively monitor and facilitate professional development on all aspects of teaching and learning to ensure that there is consistency in delivery across all our services. Evolve seeks to continuously improve and deliver high quality learning and care to all children throughout the centres. In support of this objective we will work to further extend the teaching and learning team with curriculum champions. Evolve Education Group Annual Report 2018 | 21 Evolve Education Group Annual Report 2016 | 1Childcare Options Provided by Evolve Enquiry-based learning Our Active Explorers centres are a group of family-orientated, high quality vibrant and stimulating ECE centres where creative thinking is celebrated through enquiry-based learning. Here the love of learning is genuinely lived out. The busy, vibrant hum that greets you when you enter an Active Explorers learning centre tells you you’re in a place where children are engaged and absorbed and loving it. Find us online: www.activeexplorers.co.nz or on Facebook: @ActiveExplorers Community-based learning Learning Adventures are community-based, value-orientated ECE centres. These centres off er a warm, caring environment where children’s well-being comes fi rst. Here the children are loved and nurtured, and learning is adventurous and experiential. These centres are a vital link in the communities they serve, places where we respect the diversity of children, backgrounds and ethnicity, and where whanau are very welcome. Learning Adventures is where we come together, and the children learn to be confi dent adventurers, with a strong connection to Aotearoa. Find us online: www.learningadventures.co.nz or on Facebook: @learningadventuresnz Montessori-based learning Our warm and welcoming Little Earth Montessori centres follow the teaching principles of Maria Montessori, helping nurture learners who are socially, academically and emotionally well-developed and ready for life’s challenges. Each of our centres is an appealing, purpose-built environment. We support our highly qualifi ed teachers by resourcing each centre with high quality, carefully selected Montessori materials that support our children’s holistic learning experience. Find us online: www.littleearth.co.nz or on Facebook: @LittleEarthMontessoriNZ Christian philosophy At Little Lights our Christian philosophy forms the foundation of who we are and what we do. Christian values and beliefs are woven into all aspects of our daily interactions and learning. We aim to create a caring and fun environment where each child feels secure, loved and respected. Find us online: www.littlelights.co.nz 22 | Evolve Education Group Annual Report 2018 Partnership-based learning Little Wonders welcomes you and your child to what we trust will be an extension of your home. By working together we provide an environment that promotes quality childcare and education. We take great pride in our high quality care, facilities and the positive outcomes we generate for children. Our childcare centres provide excellent facilities, quality educational equipment and programmes and well-qualifi ed and caring teaching staff . Find us online: www.littlewonders.nz or on Facebook: @Littlewondersnz Child-led learning Lollipops is a family-centred brand. These are high quality centres, with a natural theme. This is a uniquely New Zealand experience where your children blossom in partnership with our dedicated teachers, learning through Ako principles. Ako is inspired by the ‘Reggio’ teaching philosophy, which has the natural development of a child as its key pillar. With Reggio, children must have some control over the direction of their learning in partnership with their teacher and be able to learn through experiences observation and exploration, rather than simply receive instruction. It’s a relationship of mutual respect. Find us online: www.lollipopseducare.co.nz or on Facebook: @LollipopsEducare Research-led learning Pascals are inspirational places of learning for your child. These are Evolve’s centres of excellence, where we implement and lead research into best practice ECE. Pascals pioneers the very best enquiry-based learning; here we nurture our innovators and thinkers of tomorrow! Pascals uses the internationally acclaimed and forward thinking New Zealand early education curriculum Te Whariki as the basis for our interaction and teaching. Find us online: www.pascalselc.co.nz or on Facebook: @Pascalselc The joy of learning lives here. Evolve Education Group Annual Report 2018 | 23 Evolve Education Group Annual Report 2016 | 1 24 | Evolve Education Group Annual Report 2018 Evolve Education Group Limited Consolidated Financial Statements For the Year Ended 31 March 2018 The Directors present the Consolidated Financial Statements of Evolve Education Group Limited, for the year ended 31 March 2018 The Consolidated Financial Statements presented are signed for and on behalf of the Board and were authorised for issue on 28 May 2018 ________________________ Alistair Ryan Chair 28 May 2018 ________________________ Anthony Quirk Chair of Audit and Risk Committee 28 May 2018 Evolve Education Group Annual Report 2018 | 25 Evolve Education Group Annual Report 2016 | 1Consolidated Statement of Comprehensive Income $'000 Revenue Other income Total income Expenses Employee benefits expense Building occupancy expenses Direct expenses of providing services Acquisition expenses Integration expenses Depreciation Amortisation Impairment expense PORSE GST settlement Other expenses Total expenses Profit before net finance expense and income tax Finance income Finance costs Net finance expense (Loss)/ Profit before income tax Income tax expense YEAR YEAR 31 MARCH 2018 31 MARCH 2017 158,953 151,439 - 184 158,953 151,623 (92,173) (22,961) (18,070) (102) (39) (2,622) (619) (13,890) (3,000) (4,118) (82,675) (20,332) (16,467) (714) (624) (2,027) (602) - - (4,558) (157,594) (127,999) 1,359 23,624 47 (1,641) (1,594) 104 (1,366) (1,262) (235) 22,362 (3,978) (6,489) Note 5 5 11 11 9 12 9, 12,13 6 5 5 5 5 7 (Loss)/ Profit for the year (4,213) 15,873 Other comprehensive income - - Total comprehensive (loss)/income attributed to the owners of the Company Earnings per share (4,213) 15,873 Basic (and diluted) earnings per share (cents) 20 (2.4) 8.9 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 26 | Evolve Education Group Annual Report 2018 FOR THE YEAR ENDED 31 MARCH 2018 Consolidated Statement of Movements in Equity $'000 As at 31 March 2016 ISSUED SHARE CAPITAL RETAINED (DEFICIT)/ EARNINGS TOTAL Note 157,364 3,369 160,733 Total comprehensive income - 15,873 15,873 Shares issued under Dividend Re-investment Plan Share issue costs relating to shares issued Executive share based payment Dividends paid As at 31 March 2017 Total comprehensive loss Shares issued under Dividend Re-investment Plan Share issue costs relating to shares issued Dividends paid As at 31 March 2018 17 17 17 19 17 17 19 655 (12) 99 - - - - 655 (12) 99 (8,677) (8,677) 158,106 10,565 168,671 - (4,213) (4,213) 1,058 (15) - - - 1,058 (15) (8,926) (8,926) 159,149 (2,574) 156,575 The above Consolidated Statement of Movements in Equity should be read in conjunction with the accompanying notes. Evolve Education Group Annual Report 2018 | 27 Evolve Education Group Annual Report 2016 | 1FOR THE YEAR ENDED 31 MARCH 2018 $'000 Current assets Cash and cash equivalents Current income tax receivable Other current assets Total current assets Non-current assets Property, plant and equipment Deferred tax asset Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Current income tax liabilities Funding received in advance PORSE GST settlement payable Employee entitlements Total current liabilities Non-current liabilities Borrowings Total non-current liabilities Total liabilities Net assets Equity Issued share capital Retained (deficit)/earnings Total equity Note 8, 22 9 7 12 14 15 6 16 AS AT AS AT 31 MARCH 2018 31 MARCH 2017 5,362 552 1,788 7,702 4,095 - 1,924 6,019 8,586 1,636 207,170 217,392 5,742 840 212,121 218,703 225,094 224,722 10,019 - 17,864 1,500 6,836 36,219 10,376 841 18,052 - 6,582 35,851 21, 22 32,300 32,300 20,200 20,200 68,519 56,051 156,575 168,671 17 159,149 (2,574) 158,106 10,565 156,575 168,671 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 28 | Evolve Education Group Annual Report 2018 Consolidated Statement of Financial PositionAS AT 31 MARCH 2018 Consolidated Statement of Cash Flows $'000 Cash flows from operating activities Receipts from customers (including Ministry of Education funding) Payments to suppliers and employees PORSE GST settlement Taxes paid Interest received Net cash flows from operating activities Cash flows from investing activities Payments for purchase of businesses Payments for release of retentions Receipts from sale of joint venture Receipts from sale of business Payments for software, property, plant and equipment Net cash flows from investing activities Cash flows from financing activities Share issue costs Interest paid on borrowings Bank borrowings drawn Bank borrowings repaid Dividends paid Net cash flows from financing activities Net cash flows Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period YEAR YEAR 31 MARCH 2018 31 MARCH 2017 Note 159,186 (137,219) (1,500) (6,198) 47 14,316 151,889 (123,114) - (6,329) 104 22,550 (9,892) (21,678) (203) - 100 (5,630) (15,625) (115) 1,628 - (1,872) (22,037) (15) (1,641) 117,500 (12) (1,343) 198,340 (105,400) (224,005) (7,868) 2,576 (8,022) (35,042) 1,267 (34,529) 4,095 38,624 5,362 4,095 6 23 11 17 22 22 19 22 8 8 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. Evolve Education Group Annual Report 2018 | 29 Evolve Education Group Annual Report 2016 | 1FOR THE YEAR ENDED 31 MARCH 2018 Index to Notes to the Consolidated Financial Statements Note Title Page 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Reporting Entity Basis of Preparation Significant Accounting Policies Segment Information Disclosure of Items in the Consolidated Statement of Comprehensive Income PORSE GST Settlement Taxation Cash and Cash Equivalents Property, Plant and Equipment Group Information Business Combinations Intangible Assets Impairment Testing of Goodwill and Intangible Assets With Indefinite Lives Trade and Other Payables Funding Received in Advance Employee Entitlements Issued Capital Capital Management Dividends Earnings Per Share (EPS) Financial Assets and Liabilities Net Debt Reconciliation Reconciliation of (Loss)/Profit After Tax to Net Operating Cash Flows Commitments and Contingencies Related Party Transactions Auditor's Remuneration Events After the Reporting Period 31 31 35 44 46 47 48 49 50 51 51 53 54 57 57 57 58 58 58 59 59 61 62 62 63 65 66 30 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 20181. Reporting Entity Evolve Education Group Limited (the “Company”) is a company incorporated in New Zealand, registered under the Companies Act 1993 and listed on the NZX Main Board (“NZX”) and the Australian Stock Exchange (“ASX”). The Company is a FMC Reporting Entity in terms of Part 7 of the Financial Markets Conduct Act 2013 (“the Act”). The registered office is located at Level 2, 54 Fort Street, Auckland, New Zealand. The Group’s principal activities are to invest in the provision and management of a high quality ECE service which currently gives parents and caregivers the option of which service best suits their child’s learning and care needs (see Note 4, Segment Information). Information on the Group’s structure is provided in Note 10. 2. Basis of Preparation Statement of Compliance The consolidated financial statements (the “Group financial statements”) have been prepared in accordance with the requirements of the NZX and ASX listing rules. The Group financial statements are for the Evolve Education Group Limited Group (the “Group”). The Group financial statements comprise the Company and its subsidiaries. In accordance with the Act, separate financial statements for the Company are not required to be prepared. These Group financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (“NZ GAAP”). The Group is a Tier 1 reporting entity. The Group financial statements comply with New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”) and other applicable Financial Reporting Standards, as appropriate for profit-oriented entities. These financial statements also comply with International Financial Reporting Standards (“IFRS”) and IFRS Interpretations Committee interpretations. The financial statements for the year ended 31 March 2018 were approved and authorised for issue by the Board of Directors on 28 May 2018. Going Concern The financial statements have been prepared on a going concern basis. From time to time and mainly due to funding received in advance from the Ministry of Education and employee entitlements the current liabilities may exceed current assets. The Group has funding arrangements in place (as per Note 21) with its bank to meet all its current obligations. Accordingly, the preparation of the financial statements on a going concern basis is appropriate. Basis of Measurement The financial statements are prepared on the basis of historical cost with the exception of certain items for which specific accounting policies are identified, as noted below. Functional and Presentation Currency These financial statements are presented in New Zealand Dollars ($) which is the Group’s functional and presentation currency. Unless otherwise stated, financial information has been rounded to the nearest thousand dollars ($’000). Evolve Education Group Annual Report 2018 | 31 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 2. Basis of Preparation (continued) Estimates and Judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements required in the application of accounting policies are described below. Business combinations As discussed in note 3(a), business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the Group taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. Identification and valuation of intangible assets acquired As part of the accounting for business combinations, the Group reviews each acquisition on a case by case basis to determine the nature and value of any intangible assets acquired. Different factors are considered including market presence of the acquired entity, the existence of any specialised or developed assets (for example, software and training materials), and the nature and longevity of the acquired entity’s customer-base. Following this assessment the Group determines if the value of the intangible assets acquired can or should be allocated between fixed life or indefinite life intangible assets and goodwill. Once identified the Group assesses how the intangible assets are to be valued and this requires the use of judgement as follows: • • Brand valuations require an assessment of the appropriate valuation methodology and in the case of the Group the expected life of the brand names, the forecast sales for comparable branded services if available or, if not, branded sales for “proxy” industries, an appropriate royalty rate and discount factors to be applied to the forecast royalty stream. Fixed life intangible assets (for example, software, customer lists) require an assessment of the appropriate valuation methodology and depending on the methodology adopted the Group must make assessments including likely replacement costs, estimated useful lives of the assets, relevance of customer databases to the Group and the price the Group is willing to pay per customer/contract. Goodwill and other indefinite life intangible assets The Group tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in notes 3(h) and 3(l) below. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Further detail on the assumptions applied are included in Note 13. 32 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 2. Basis of Preparation (continued) Identification of Cash Generating Units In order to complete the impairment review referred to above, the Group must identify the individual cash generating units (“CGUs”) that best represent the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill in particular does not generate cash flows in its own right and therefore it must be allocated to a CGU for goodwill impairment testing purposes. Identifying CGUs requires judgement and must be at the lowest level to minimise the possibility that impairments of one asset or group will be masked by a high-performing asset. The Group has considered all factors and assessed that the operating segments identified at Note 4 best represent the CGU’s for impairment testing purposes. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses (refer Note 7). New Standards and Interpretations Not Yet Adopted The Group has adopted all applicable Accounting Standards and Interpretations issued by the External Reporting Board (‘XRB’) that are mandatory for the current reporting period. A number of new standards, amendments to standards and interpretations have been approved but are not yet effective and have not been adopted by the Group for the period ended 31 March 2018. The Group’s assessment and expected impact of these Standards is set out below: NZ IFRS 9: Financial Instruments Nature of change NZ IFRS 9 addresses the classification, measurement and recognition of financial assets and liabilities. The standard introduces new rules for hedge accounting and a new impairment model for financial assets. The NZ IFRS 9 impairment requirements are based on an expected credit loss model, replacing the incurred loss methodology under the current standard (NZ IAS 39). Potential impact • • • There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The new hedge accounting rules are not applicable given the Group does not have any hedging relationships. The Group intends to apply the simplified approach to recognise lifetime expected credit losses for its trade receivables. Based on the assessment undertaken to date, the Group anticipates that only parental debtors (held at amortised cost) will be impacted. It is anticipated that the application of the expected credit loss model will result in an immaterial transition adjustment that will be recognised in opening retained earnings as permitted by the standard. It is not expected that there will be an impact to future earnings as a result of implementation of IFRS 9. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. Date of adoption NZ IFRS 9 is effective for reporting periods beginning on or after 1 January 2018. The Group will apply the new rules from 1 April 2018 (i.e. effective for the financial year ending 31 March 2019), with the practical expedients permitted under the standard. Evolve Education Group Annual Report 2018 | 33 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 2. Basis of Preparation (continued) New Standards and Interpretations Not Yet Adopted (continued) NZ IFRS 15: Revenue from Contracts with Customers Nature of change NZ IFRS 15 replaces the current revenue recognition guidance in NZ IAS 18 Revenue which covers contracts for the sale of goods and services and NZ IAS 11 Construction Contracts. The new standard is based on the principle that revenue is recognised to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services . The standard permits either a full retrospective or a modified retrospective approach for the adoption. Potential impact Management are currently completing their assessment of the impact of this standard. The assessment to date has focused on segregating the different revenue streams that exist within the Group. Based on the assessment performed to date, the Group expects adoption of the new standard to have the following impact: • • No impact on ECE Centre Ministry of Education funding or Childcare fees (refer note 3(c) for description of the current accounting for revenue streams). Management are assessing the full impact of the new standard on its Home-Based ECE revenue streams, specifically education income. However, given the nature of these revenue streams, it is expected that there will be no significant impact on the consolidated financial statements from the adoption of NZ IFRS 15. Management are still reviewing the appropriate classification within the Consolidated Statement of Comprehensive Income of certain Home-Based revenue streams. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures. Date of adoption NZ IFRS 15 is effective for reporting periods beginning on or after 1 January 2018. The Group intends to adopt the standard for the year ended 31 March 2019 using the modified retrospective approach. This means that the cumulative impact of the adoption (if any) will be recognised in retained earnings as of 1 April 2018 and that comparatives will not be restated. NZ IFRS 16: Leases Nature of change NZ IFRS 16 replaces all existing lease requirements in NZ IAS 17 Leases. It will result in almost all leases, where the Group is a lessee, being recognised in the Consolidated Statement of Financial Position, as the distinction between operating and finance leases is removed. Under the new standard, a lessee is required to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The income statement will also be impacted by the recognition of an interest expense and a depreciation expense and the removal of the current rental expense currently recognised within ‘building occupancy expenses’. The standard includes two recognition exemptions for lessees, short-term (those with a term of 12 months or less) and low-value leases (such as leases of laptops). Potential impact The standard will affect the accounting for the Group’s operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments of $139m, see note 24. The Group is in the process of identifying the current operating lease contracts that will be in the scope of NZ IFRS 16 at transition by reviewing and analysing the terms of these contracts. The Group has not quantified the effect of the new standard, however the following impacts are expected: • the total assets and liabilities on the Consolidated Statement of Financial Position will increase with a decrease in total net assets, due to the reduction of capitalised asset being on a straight-line basis whilst the liability is reduced by the principal amount of repayments. Net current assets will show a decrease due to an element of the liability being disclosed as current liability; 34 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 2. Basis of Preparation (continued) New Standards and Interpretations Not Yet Adopted (continued) NZ IFRS 16: Leases (continued) Potential impact (continued) • interest expense will increase due to the unwinding of the effective interest rate implicit in the lease. Interest expense will be greater earlier in a lease life due to the higher principal value causing profit variability over the course of a lease’s life. This effect may be partially mitigated due to number of leases held in the Group at different stages of the lease’s term; and • operating cash flows will be higher as repayment of the principal portion of all lease liabilities will be classified as financing activities. There will be no cash effect on the Group and the change is for financial reporting purposes only. Date of adoption NZ IFRS 16 is effective for reporting periods beginning on or after 1 January 2019. At this stage, the Group intends to adopt the simplified transition approach in the year ending 31 March 2020. 3. Significant Accounting Policies The accounting policies set out below have been applied consistently in these consolidated financial statements, and have been applied consistently by Group entities. (a) Basis of Consolidation Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group controls an entity when the Group 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. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The Group measures goodwill at the acquisition date as: • • the fair value of the consideration transferred; less the net recognised amount of the identifiable assets acquired, the liabilities assumed, measured at fair value and any non-controlling interest in the acquiree. When the excess is negative, a bargain purchase gain is recognised immediately in the Consolidated Statement of Comprehensive Income. Consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts generally are recognised in Consolidated Statement of Comprehensive Income. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Evolve Education Group Annual Report 2018 | 35 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 3. Significant Accounting Policies (continued) (a) Basis of Consolidation (continued) Business combinations (continued) Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Business combinations are initially accounted for on a provisional basis. The Group retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Subsidiaries Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Assets held for sale Non-current assets, or disposal Groups comprising assets and liabilities, that are expected to be recovered primarily through sale or distribution rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal Group, are re-measured in accordance with the Group’s accounting policies. Thereafter generally the assets, or disposal Group, are measured at the lower of their carrying amount and fair value less cost to sell. Impairment losses on initial classification as held for sale and subsequent gains or losses on re-measurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated. Transactions eliminated on consolidation Intra-Group balances and transactions, and any unrealised income and expenses arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements. 36 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 3. Significant Accounting Policies (continued) (b) Determination of Fair Values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following method. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Intangible assets The fair value of brands acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the brand being owned (“relief from royalty method”). The fair value of customer relationships acquired in a business combination is determined using the notional price per customer methodology. Software acquired in a business combination is determined using an estimate of replacement cost. Syllabus material acquired in a business combination is determined using the market elimination method. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. (c) Revenue Revenues are recognised when the amount of revenue can be reliably measured, it is probable that the future economic benefits will flow to the Group, and specific criteria have been met for each of the Group’s activities as described below. In all cases, the Group assesses revenue arrangements against specific criteria to determine if it is acting as the principal or agent in a revenue transaction. In an agency relationship only a portion of the revenue received on the Group’s own account is recognised as revenue. Ministry of Education funding Ministry of Education funding is recognised initially as funding received in advance and is then recognised in the Statement of Comprehensive Income over the period childcare services are provided. Income receivable from the Ministry of Education by way of a wash-up payment is recognised as an asset, and is netted off against the income received in advance. Childcare fees Fees paid by government (childcare benefit) or parents are recognised as and when a child attends, or was scheduled to attend, a childcare facility or receives home-based care. Education income Revenue from the provision of tertiary education is recognised as the service is rendered. Interest income Interest income is recognised in the Consolidated Statement of Comprehensive Income using the effective interest method. Evolve Education Group Annual Report 2018 | 37 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 3. Significant Accounting Policies (continued) (d) Taxation Tax expense Tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in the Consolidated Statement of Comprehensive Income except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: • • • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, temporary differences arising on the initial recognition of goodwill; and temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. In determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax positions, if any, and whether additional taxes and interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (e) Foreign Currency Transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Foreign exchange gains and losses resulting from the settlement of the above are recognised in the Consolidated Statement of Comprehensive Income. 38 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 20183. Significant Accounting Policies (continued) (f) Dividends The Group recognises a liability to make cash distributions to equity holders of the parent when the distribution is authorised and the distribution is no longer at the discretion of the Company. As per company law in New Zealand, a distribution is authorised when it is approved by the directors. A corresponding amount is recognised directly in equity. (g) Property, Plant and Equipment Recognition and measurement Items of property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses. Any gain or loss on disposal of an item of property, plant and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in the Consolidated Statement of Comprehensive Income. Depreciation Depreciation is charged based on the cost of an asset less its residual value. Depreciation is charged to the Consolidated Statement of Comprehensive Income on a straight line basis over the estimated useful lives of each item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Useful lives as at balance date were: Buildings Plant and equipment Office furniture & fittings Leasehold improvements Motor vehicles 50 years 4 years 4 years 4 years 5 years The depreciation methods, useful lives and residual values are reviewed at the reporting date and adjusted if appropriate. Work in progress is not depreciated until the asset is available for use. (h) Intangible Assets Goodwill Goodwill initially represents amounts arising on acquisition of a business and is the difference between the cost of acquisition and the fair value of the net identifiable assets acquired. Goodwill is subsequently measured at cost less accumulated impairment losses. Goodwill is allocated to cash- generating units and is not amortised but is reviewed at each balance date to determine whether there is any objective evidence of impairment (refer to (l) Impairment). Other intangible assets Other intangible assets that are acquired by the Group and have finite and indefinite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses, as appropriate. Other intangible assets have been amortised on a straight-line basis over their estimated useful lives: Customer lists Syllabus material Management contracts Software Brands 4 years 4 years 4 years 4 years Indefinite life Evolve Education Group Annual Report 2018 | 39 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 3. Significant Accounting Policies (continued) (h) Intangible Assets (continued) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in the Consolidated Statement of Comprehensive Income as incurred. (i) Leased Assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and are not recognised in the Consolidated Statement of Financial Position. (j) Financial Instruments Non-derivative financial assets The Group initially recognises loans and receivables on the date that they are originated. Financial assets and liabilities are offset and the net amount presented in the Consolidated Statement of Financial Position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period; these are classified as non-current assets. Loans and receivables comprise cash and cash equivalents and trade and other receivables, included in other current assets. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with banks and bank overdrafts. In the Consolidated Statement of Financial Position bank overdrafts are shown within borrowings in current liabilities. Non-derivative financial liabilities The Group initially recognises financial liabilities on the date that they are originated. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. The Group classifies non-derivative financial liabilities into the other financial liabilities category. Financial liabilities comprise borrowings, bank overdrafts, trade and other payables and PORSE GST settlement payable. 40 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 3. Significant Accounting Policies (continued) (j) Financial Instruments (continued) Non-derivative financial liabilities (continued) Trade and other payables Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. They are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. (k) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. (l) Impairment Non-derivative financial assets A financial asset not carried at fair value through profit and loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that the loss event(s) had an impact on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired includes default or delinquency by a debtor and adverse changes in the payment status of debtors. Non-financial assets The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and indefinite-life intangible assets are tested annually for impairment. An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds its estimated recoverable amount, refer to note 13. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to an operating segment ceiling test, CGUs to which goodwill has been allocated are grouped so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal management purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Evolve Education Group Annual Report 2018 | 41 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 3. Significant Accounting Policies (continued) (m) Employee Benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits and annual leave are recognised in respect of services provided by employees up to the reporting date and measured based on expected date of settlement. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. The liabilities for wages and salaries and annual leave expected to be settled within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Defined contribution plan (KiwiSaver) A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. (n) Expenses Operating lease payments Payments made under operating leases are recognised in the Consolidated Statement of Comprehensive Income on a straight-line basis over the term of the lease. Lease incentives received are recognised in the Consolidated Statement of Comprehensive Income over the lease term as an integral part of the total lease expense. Finance expenses Finance expenses comprise interest expense on borrowings and establishment fees. All borrowing costs are recognised in the Consolidated Statement of Comprehensive Income using the effective interest method. Share issue costs Certain costs have been incurred in relation to the issue of shares. These costs are directly attributable to the Group issuing equity instruments and include amounts paid to legal, accounting and other professional advisers. These costs have been accounted for as a deduction from equity. (o) Consolidated Statement of Cash Flows The following are the definitions of the terms used in the Consolidated Statement of Cash Flows: • Cash includes cash on hand, bank current accounts and any bank overdrafts. • Operating activities include all transactions and other events that are not investing or financing activities. • • Investing activities are those activities relating to the acquisition, holding and disposal of businesses, property, plant and equipment and of investments. Financing activities are those activities that result in changes in the size and composition of the equity structure of the Group. This includes both equity and debt not falling within the definition of cash. Dividends paid and financing costs are included in financing activities. 42 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 3. Significant Accounting Policies (continued) (p) Segment Reporting An operating segment is a component of an entity that engages in business activities from which it may earn and incur expenses, whose operating results are regularly reviewed by the entity’s Chief Operating Decision Maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the Group, has been identified as the Chief Executive Officer. (q) Earnings Per Share Basic and diluted earnings per share Basic and diluted earnings per share is calculated by dividing the profit attributable to the owners of the Company by the weighted average number of ordinary shares outstanding during the financial period. (r) Share Based Payments Certain senior management receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). The cost of equity- settled transactions with employees is measured by reference to the fair value at grant date. The cost of equity-settled transactions is recognised, together with a corresponding increase to the share based payments reserve within equity, over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the best estimate of the number of equity instruments that will ultimately vest. The expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. (s) Goods and Services Tax All amounts are shown exclusive of Goods and Services Tax (GST) including items disclosed in the Consolidated Statement of Cash Flows, except for trade receivables, included within other current assets, and trade payables that are stated inclusive of GST. (t) Comparative balances Comparative balances within the Consolidated Statement of Comprehensive Income, Consolidated Statement of Cash Flows and its related notes have been reclassified to conform with changes in presentation and classification adopted in the current period. The impact of these changes were not material. Evolve Education Group Annual Report 2018 | 43 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 4. Segment Information The Group has two reportable operating segments, as described below, which are the strategic business models the Group invests in within the early childhood education (“ECE”) industry in New Zealand. The Group operates entirely within New Zealand. Each segment is managed separately. For each of the segments, the Group’s Chief Executive Officer (“CEO” and the “Chief Operating Decision Maker”) reviews internal management reports at least on a monthly basis. The following summary describes the current operations in each of the Group’s reportable segments: ECE Centres – generally purpose built facilities that offer all day or part-day early childhood services, and Home-based ECE – involves an independent educator delivering services to a small group of children in a home setting and is supported by a registered teacher coordinator who oversees the children’s learning progress. No operating segments have been aggregated to form the above reportable operating segments. The Group accounting policies are applied consistently to each reporting segment. Other operations include ECE Management, a non-reportable segment, whereby the Group provides management and back-office expertise to ECE centres but it does not own the centre. This activity does not meet any of the quantitative thresholds for determining reportable segments and as such it has been included as an unallocated amount. Unallocated amounts also represent other corporate support services, acquisition and integration costs. The Group’s corporate and management costs include certain financing income and expenditure and taxation that are managed on a Group basis and are not allocated to operating segments. Information regarding the results of each reportable segment is included below. Performance is measured based on NZ GAAP measures of profitability and in relation to the Group’s segments, segment profit before income tax. In addition to GAAP measures of profitability, the Group also monitors its profitability using non-GAAP financial measures (that is, earnings before interest, tax, depreciation and amortisation (“EBITDA”)) and underlying EBITDA, as described below and as included in the internal management reports that are reviewed by the Group’s CEO. EBITDA is not defined by NZ GAAP, IFRS or any other body of accounting standards and the Groups’ calculation of this measure may differ from similarly titled measures presented by other companies. This measure is intended to supplement the NZ GAAP measures presented in the Group’s financial information. Underlying EBITDA reflects a number of adjustments that are defined as: • • • Acquisition expenses – in acquiring the businesses and net assets in Note 11 the Group incurred certain expenses directly related to those acquisitions including agents’ commissions, legal fees, financing fees and financial, tax and operational due diligence fees. Integration expenses – third party costs associated with the integration of the businesses acquired. In 2017, they included the employment costs of the Group’s acquisition and integration team. As fewer centres have been acquired in 2018, no employment costs have been allocated to integration expenses for this year. Material non-recurring items – one off or non recurring in nature. These are items that have not occurred in the recent years and are not forecast to occur in the future, such as impairment expense and PORSE GST settlement. 44 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 4. Segment Information (continued) 31 March 2018 Revenue Total income Operating expenses Underlying EBITDA Acquisition expenses Integration expenses Material non-recurring items: PORSE GST Settlement Impairment expense EBITDA Depreciation Amortisation Earnings before interest and tax Net finance expense ECE Centres Home- based ECE Unallocated Consolidated Note $'000 $'000 $'000 $'000 137,999 20,558 137,999 20,558 396 396 158,953 158,953 (109,994) (19,677) 28,005 881 (7,651) (7,255) (137,322) 21,631 - - - - (102) (39) (102) (39) 6 - (3,000) 9,12,13 (957) (12,933) - - 27,048 (15,052) (7,396) 9 12 (2,373) (60) 24,615 - (173) (218) (15,443) - (76) (341) (7,813) (1,594) (3,000) (13,890) 4,600 (2,622) (619) 1,359 (1,594) Reportable segment profit/(loss) before tax 24,615 (15,443) (9,407) (235) Total assets Total liabilities 218,364 3,289 3,441 225,094 (22,947) (9,289) (36,283) (68,519) Included within Revenue is revenue from the Ministry of Education totalling $108.0m for the year (2017: $104.5m). Evolve Education Group Annual Report 2018 | 45 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 4. Segment Information (continued) 31 March 2017 Total revenue Other income Total income Operating expenses Underlying EBITDA Acquisition expenses Integration expenses EBITDA Depreciation Amortisation Earnings before interest and tax Net finance expense ECE Centres Home- based ECE Unallocated Consolidated Note $'000 $'000 $'000 $'000 126,495 24,060 24 - 884 160 151,439 184 126,519 24,060 1,044 151,623 (95,542) (21,449) 30,977 2,611 (7,041) (5,997) (124,032) 27,591 - - - - (714) (624) (714) (624) 30,977 2,611 (7,335) 26,253 9 12 (1,715) (60) (249) (244) 29,202 2,118 - - (63) (298) (7,696) (1,262) (2,027) (602) 23,624 (1,262) Reportable segment profit/(loss) before tax 29,202 2,118 (8,958) 22,362 Total assets Total liabilities 204,561 16,819 3,342 224,722 (22,491) (10,369) (23,191) (56,051) Other income for the year ended March 2017 includes $160k from the reversal of a contingent consideration provision relating to the acquisition of an ECE centre in 2015. 5. Disclosure of Items in the Consolidated Statement of Comprehensive Income Other expenses $'000 Included in other expenses are: Audit fees Directors’ fees Other items Total other expenses Note 26 25 YEAR YEAR 31 MARCH 2018 31 MARCH 2017 213 479 3,426 4,118 205 385 3,968 4,558 Other items includes corporate and support office costs not already disclosed separately. They include travel expenses, legal costs not relating to the acquisition of businesses in Note 11, consultancy costs and general office expenses. 46 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 5. Disclosure of Items in the Consolidated Statement of Comprehensive Income (continued) Building occupancy expenses Building occupancy expenses of $23.0m (2017: $20.3m) include $21.1m (2017: $18.6m) of expenditure in relation to minimum operating lease payments. Employee benefits expense $'000 Wages and salaries Kiwisaver contributions Payments to agency contractors Other employee benefits expense Total employee benefits expense Net finance expense $'000 Interest received Bank deposits Total interest received Interest expense Interest on borrowings Total interest expense Net finance expense 6. PORSE GST Settlement YEAR YEAR 31 MARCH 2018 31 MARCH 2017 87,078 2,205 1,612 1,278 92,173 78,078 1,946 1,029 1,622 82,675 YEAR YEAR 31 MARCH 2018 31 MARCH 2017 47 47 (1,641) (1,641) (1,594) 104 104 (1,366) (1,366) (1,262) During the year the Group reached formal agreement with the Inland Revenue Department (IRD) in respect of various taxation matters relating to the Group’s wholly owned PORSE In Home Childcare business (PORSE). The settlement agreement with the IRD requires PORSE to pay $3.0 million to the IRD and ensures that all current areas of discussion between IRD and the Group are closed off. The Group previously reported this matter as a contingent liability as at 31 March 2017, then recorded a $3.0 million provision in the Consolidated Statement of Financial Position in its interim report for the six months ended 30 September 2017. $1.5m of the total amount payable has been paid as at 31 March 2018, with the remaining balance due in the year to 31 March 2019. Evolve Education Group Annual Report 2018 | 47 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 7. Taxation Income tax expense The major components of income tax expense for the period are: $'000 Current income tax: Current income tax expense Prior year adjustments Deferred tax: Relating to origination and reversal of temporary differences Prior year adjustments Total income tax expense Reconciliation of tax expense Tax expense is reconciled to accounting profit as follows: $'000 Profit before income tax At statutory income tax rate of 28% Non-assessable income and non-deductible expenses for tax purposes: Impairment of goodwill PORSE GST settlement Non-deductible expenses Prior year adjustments Total income tax expense YEAR YEAR 31 MARCH 2018 31 MARCH 2017 4,988 (214) 4,774 (943) 147 (796) 3,978 6,609 (184) 6,425 (106) 170 64 6,489 YEAR YEAR 31 MARCH 2018 31 MARCH 2017 (235) (66) 3,236 840 35 (67) 3,978 22,362 6,261 - - 242 (14) 6,489 48 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 7. Taxation (continued) Deferred tax Deferred tax relates to the following: $’000 Property, plant and equipment Intangible assets Employee entitlement provisions Other timing differences Deferred tax benefit/ (expense) Net deferred tax assets Imputation credits 31 MARCH 2018 31 MARCH 2017 Consolidated Statement of Comprehensive Income Arising from Aquisition of Businesses Consolidated Statement of Financial Position Consolidated Statement of Comprehensive Income Arising from Aquisition of Businesses Consolidated Statement of Financial Position 80 587 26 103 796 - - - - - 1,363 (942) 921 294 1,636 (48) 66 58 (140) (64) 118 - - - 118 1,283 (1,529) 895 191 840 Imputation credits available for use in subsequent reporting periods is $11,111,764 (2017: $9,053,076), including imputation credits that will arise from the payment of the amount of the provision for income tax. No dividends are provided for or receivable at balance date that would affect the available imputation credits at balance date. 8. Cash and Cash Equivalents $'000 Cash at banks and on hand Short-term deposits Total cash and cash equivalents AS AT AS AT 31 MARCH 2018 31 MARCH 2017 3,647 1,715 5,362 1,968 2,127 4,095 Cash at banks earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and 3 months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. Evolve Education Group Annual Report 2018 | 49 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 9. Property, Plant and Equipment 31 March 2018 Land Buildings Plant and Equipment Office Furniture and Fittings Leasehold Improve- ments Motor Vehicles Work in Progress Total Note $’000 Cost Opening balance Additions/Transfers Acquisition of businesses 11 Disposals Closing Balance Depreciation and impairment Opening balance Depreciation charge for period Disposals Impairment expense 13 Closing balance - - 453 7,796 1,939 313 278 10,779 725 2,195 - - - - 208 66 (12) 689 1,301 642 (93) 54 (68) (117) 17 - 93 5,228 - - 762 (290) 725 2,195 715 9,034 3,226 213 371 16,479 - - - - - - (165) (4,332) (444) (18) (148) (1,763) (636) - - 5 - 63 9 (174) (166) (96) (57) 68 (39) (18) (308) (6,206) (1,237) (124) - - - - - (5,037) (2,622) 145 (379) (7,893) Net book value 725 2,177 407 2,828 1,989 89 371 8,586 In the current year, $2.9m of centre land and buildings were acquired. The land and buildings were previously leased by the Group for centre operational purposes. 31 March 2017 Land Buildings Plant and Equipment Office Furniture and Fittings Leasehold Improve- ments Motor Vehicles Work in Progress Total Note $’000 Cost Opening balance Additions/Transfers Acquisition of businesses Disposals Closing Balance Depreciation and impairment Opening balance Depreciation charge for period Disposals Closing balance Net book value - - - - - - - - - - - - - - - - - - - - 276 6,996 931 419 371 8,993 92 90 (5) 655 1,100 466 19 44 21 (321) (111) (171) (137) 1,754 44 - 640 (608) 453 7,796 1,939 313 278 10,779 (72) (3,094) (153) (172) (94) (1,502) (364) 1 264 73 (165) (4,332) (444) (67) 143 (96) - - - - (3,491) (2,027) 481 (5,037) 288 3,464 1,495 217 278 5,742 A $1.6m reclassification adjustment between cost and accumulated depreciation has been made to the opening balances in the comparative period. There is no impact to the overall net book value of property, plant and equipment. 50 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 10. Group Information Information about subsidiaries The consolidated financial statements of the Group include: Name Principal Activities Country of Incorporation Balance Date Equity Interest Evolve Education Group 1 Limited ECE centre owner Evolve Education Group 2 Limited ECE centre owner Evolve Education Group 3 Limited ECE centre owner Evolve Education Group 4 Limited ECE centre owner Evolve Education Group 5 Limited ECE centre owner Evolve Education Group 6 Limited Non-trading Evolve Management Group Limited Investment company ECE Management Limited Management services Lollipops Educare Holdings Limited Investment company Lollipops Educare Limited Evolve corporate office Lollipops Educare Centres Limited ECE centre owner Lollipops Educare (Hastings) Limited ECE centre owner Lollipops Educare (Birkenhead) Limited ECE centre owner Evolve Home Day Care Limited Investment company Au Pair Link Limited Home-care provider PORSE In Home Childcare (NZ) Limited PORSE Franchising (NZ) Limited PORSE Education & Training (NZ) Limited For Life Education & Training (NZ) Limited 11. Business Combinations Home-care provider Provides services to PORSE franchisees Education provider Education provider training training and and NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ 31 March 31 March 31 March 31 March 31 March 31 March 31 March 31 March 31 March 31 March 31 March 31 March 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 31 March 100% 31 March 31 March 31 March 100% 100% 100% 31 March 100% 31 March 100% 31 March 100% During the 12 months ended 31 March 2018 the Group acquired 7 ECE centres from several separate vendors, for a combined purchase price of $9.9m. Total net assets acquired were $1.0m resulting in goodwill on acquisition of $8.9m. Total acquisition costs incurred during the period were $102k and these are included in the Statement of Comprehensive Income and cash flows from operating activities in the Statement of Cash Flows. No cash was acquired. A summary of the net assets acquired is included in the following table. Evolve Education Group Annual Report 2018 | 51 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 201811. Business Combinations (continued) Asset and liabilities acquired and consideration paid Assets Other current assets Property, plant and equipment Software Funding receivable Liabilities Employee entitlements Other current liabilities Total identifiable net assets at fair value Goodwill arising on acquisition Purchase consideration transferred Purchase consideration $'000 7 762 3 398 1,170 (15) (118) (133) 1,037 8,855 9,892 9,892 The goodwill of $8.9m predominantly comprises the future earnings potential of bringing together a group of ECE centres under one centrally managed group. Goodwill is allocated to each of the segments identified at Note 13, as appropriate. At balance date, the acquisitions have contributed revenue of $7.2m and a net profit after tax of $465k to the Group’s results before allowing for upfront acquisition expenses and integration costs. As the acquisitions were made at different times during the year it is anticipated these acquisitions would have contributed revenue of $9.5m and a net profit after tax of $665k (excluding upfront and non-recurring acquisition costs of $102k and integration expenses of $39k, but including interest on the purchase price) had they all been acquired on 1 April 2017. 52 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 12. Intangible Assets 31 March 2018 $’000 Cost Opening balance Additions Acquisition of businesses 11 Disposals Closing Balance Amortisation and impairment Opening balance Amortisation for period Disposals Impairment expense 13 Closing balance Net book value 31 March 2017 $’000 Cost Opening balance Additions Acquisition of businesses Customer Lists Syllabus Material Management Contracts Software Brands Goodwill Total Note 301 200 372 1,576 4,787 206,094 213,330 - - - - - - - - - 402 3 - - - - - 402 8,855 8,858 (81) (81) 301 200 372 1,981 4,787 214,868 222,509 (175) (117) (217) (75) - (27) (50) - (33) (93) - - (700) (401) - - - - - - - (1,209) (619) - (212) (1,683) (11,556) (13,511) (277) (200) (310) (1,313) (1,683) (11,556) (15,339) 24 - 62 668 3,104 203,312 207,170 Customer Lists Syllabus Material Management Contracts Software Brands Goodwill Total Note 301 200 372 1,458 4,787 184,346 191,464 - - - - - - 118 - - - - 118 21,748 21,748 Closing Balance 301 200 372 1,576 4,787 206,094 213,330 Amortisation and impairment Opening balance Amortisation for period Disposals Closing balance Net book value (100) (75) - (67) (50) - (124) (93) - (316) (384) - (175) (117) (217) (700) - - - - - - - - (607) (602) - (1,209) 126 83 155 876 4,787 206,094 212,121 Evolve Education Group Annual Report 2018 | 53 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 201813. Impairment Testing of Goodwill and Intangible Assets With Indefinite Lives Goodwill and brands acquired through business combinations with indefinite lives have been allocated, for impairment testing, to the cash generating units (“CGUs”) below, which are also the operating segments. Brands are also assessed for impairment separately. 31 March 2018 $’000 Goodwill Brands with indefinite useful lives 31 March 2017 $’000 Goodwill ECE Centres Home-based ECE ECE Management Total 202,646 3,104 - - 666 203,312 - 3,104 ECE Centres Home-based ECE ECE Management Total 194,828 10,600 666 206,094 Brands with indefinite useful lives 3,104 1,683 - 4,787 Impairment expense In the current year the Group recognised an impairment expense of $13.9m. The expense recognised the full impairment of Home-based ECE’s brands ($1.6m), goodwill ($10.6m), other intangible assets ($0.3m) and property, plant and equipment ($0.4m), totalling $12.9m and was calculated using the value in use basis (using a discount rate of 15.4%). Declining enrolments have reduced the revenue and profitability of this division since the date of acquistion by the Group. Subsequent to year end the Company decided to commence a sales process for the PORSE business unit, which comprises the majority of the Home-based ECE division. It is anticipated that some part of the impaired asset value may be recovered upon completion of a successful sales process. In addition, an impairment of $1.0m was recognised in respect of the ECE Centres division. Prior to year end, the Group decided to close the operation of a centre. ECE Centres - Goodwill The Group performed its annual impairment test at balance date. The recoverable amount of a cash generating unit (CGU) is determined based on value-in-use calculations which require the use of assumptions. The calculations use cash flow projections based on financial budgets covering a five year period. 54 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 13. Impairment Testing of Goodwill and Intangible Assets With Indefinite Lives (continued) Key assumptions used in value in use calculations The key “base” assumptions used in the calculation of value in use for ECE Centres are: • • • • Revenue growth through the forecast period Expense growth through the forecast period Discount rates Growth rates used to extrapolate cash flows beyond the forecast period The table below sets out the key assumptions for ECE Centres: Revenue growth attributable to price (% per annum on average) Revenue growth attributable to increase in enrolment (% per annum on average) Total revenue growth (% per annum on average) Expense growth (% per annum on average) Pre-tax discount rates (%) Long term growth rate (%) 31 MARCH 2018 31 MARCH 2017 Centres Centres 1.5% 0.7% 2.2% 2.1% 15.4% 2.0% 1.0% 1.0% 15.4% 2.0% Revenue - Revenue is received from the Ministry of Education and parents/caregivers, which in turn is based on occupancy. It is assumed the Ministry of Education continues to support ECE to the value of approximately 65% of ECE revenue earned. If the Government reduces its funding it could lead to the increased requirement of parents and caregivers to make up the difference. If Government funding was to decrease, management would need to initiate appropriate responses to maintain profitability. The assumptions reflect the impact of future increases in funding as announced by the Government. Expenses - The estimate of percentage growth in expenses includes the weighted average of expected increase in wages and other operating expenses such as operating lease costs. Management forecasts other expenses based on the current structure of business, adjusting for inflationary increases and expected increases in occupancy but not reflecting any further cost savings measures. Pre-tax discount rates – The discount rates represent the current market assessment of the risks specific to the CGU, taking into account the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and its operating segments and is derived from its weighted average cost of capital (WACC). The WACC takes into account both the cost of debt and equity. The cost of equity is derived from the expected return on investment by the Group’s investors using the capital asset pricing model. The cost of debt is based on the interest-bearing borrowings the Group is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data. Adjustments to the discount rate are made to factor in the specific amount and timing of the future tax flows in order to reflect a pre-tax discount rate. Long term growth rate – This rate is based on current inflation rates in New Zealand and forecast or assumed increase in revenues from parents/caregivers and the Government. The rate used is not inconsistent with the long term growth rate experienced industry-wide. Management are not aware of any information to suggest that the growth assumptions are at risk. Evolve Education Group Annual Report 2018 | 55 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 13. Impairment Testing of Goodwill and Intangible Assets With Indefinite Lives (continued) Sensitivity to changes in key assumptions ECE Centres - Goodwill The recoverable amount of the ECE centres CGU is $211m (2017: $234m). This exceeds the carrying amount of the CGU as at 31 March 2018 by $7.9m (2017: $39.1m) The most sensitive assumption in the calculation of value in use for the ECE Centres CGU is revenue growth. The following summarises the effect of a change in the revenue “base” assumptions, with all other assumptions remaining constant: $’000 Enrolment growth +0.5% above base Enrolment growth -0.5% under base Price growth +0.5% above base Price growth -0.5% below base ECE Centres - Brands Headroom/ (Impairment) 25,800 (3,480) 33,170 (16,972) The recoverable amount of the ECE Centres was $4.7m (2017: $3.7m) at balance date. The increase in headroom is primarily attributable to an increase in the number of centres trading under the Lollipops brand. The assessment is based on the discounted estimated royalty payments that have been avoided as a result of the brands being owned (“relief from royalty method”) using revenue projections from the Group’s financial forecasts covering a 12-month period. The pre-tax discount rate applied to cash flow projections is 15.4% (2017: 15.4%) and cash flows beyond the one year period are extrapolated using a 2% (2017: 2%) terminal growth rate that is not inconsistent with the long term growth rate experienced industry-wide. As the recoverable value was in excess of the carrying value management did not identify an impairment for these brands. The calculation of relief from royalty for ECE Centres brands is most sensitive to the following assumptions: • • • • Revenue growth - as above, revenue is received from the Ministry of Education and parents/caregivers. Royalty rate - the relief from royalty method assumes a royalty rate of 1%. Discount rates – the assumptions relating to discount rates are discussed above. Long term growth rate – terminal growth rates have been discussed above. The recovery amount of brands will equal its carrying amount if any one of the key assumptions change to the following, under the assumption that all other factors remain constant: Revenue growth (% per annum on average) Royalty rate (% per annum on average) Pre-tax discount rates (%) Long term growth rate (%) 56 | Evolve Education Group Annual Report 2018 -34.50% 0.70% 22.30% -2.80% Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 14. Trade and Other Payables $’000 Trade payables Amounts accrued in respect of business combinations Goods and services tax payable Other payables Total trade and other payables AS AT 31 MARCH 2018 AS AT 31 MARCH 2017 1,506 - 5,550 2,963 877 203 5,324 3,972 10,019 10,376 Trade payables are unsecured and are usually paid within 30 days of recognition. The carrying amount of trade and other payables are considered to be same as their fair values, due to their short term nature. 15. Funding Received in Advance Represents Ministry of Education funding received in advance net of amounts owing but not received. The amount is shown as a current liability consistent with the period the funding covers. Funding is received three times per year on 1 March, 1 July and 1 November. Each funding round includes 75% of the estimated funding for the four months ahead. At 31 March 2018 funding received in advance relates to April to June 2018. Funding receivable relates to the remaining 25% of funding, adjusted for any changes in occupancy levels, in respect of February and March 2018. $’000 Funding received in advance Funding receivable Total funding received in advance 16. Employee Entitlements $’000 Employee leave provisions Accrued wages and salaries Other employee entitlements Total employee entitlements AS AT 31 MARCH 2018 AS AT 31 MARCH 2017 21,474 (3,610) 17,864 21,853 (3,801) 18,052 AS AT 31 MARCH 2018 AS AT 31 MARCH 2017 3,069 3,547 220 6,836 2,999 3,363 220 6,582 Evolve Education Group Annual Report 2018 | 57 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 17. Issued Capital Authorised shares Ordinary shares authorised, issued and fully paid Opening balance Ordinary shares issued: 31 MARCH 2018 31 MARCH 2017 Number $’000 Number $’000 178,281,256 158,106 177,579,018 157,364 Issue of shares in relation to dividend reinvestment plan (“DRP”) Less share issue costs relating to shares issued under DRP Executive share based payment 1,179,340 1,058 702,238 - - (15) - - - 655 (12) 99 Closing balance 179,460,596 159,149 178,281,256 158,106 18. Capital Management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Capital consists of share capital and deficits/accumulated profits of the Group as well as available cash and cash equivalents. The Board of Directors monitors the return on capital as well as the level of cash and dividends to ordinary shareholders. The Group manages its capital structure and makes adjustments in light of changes in economic conditions and the requirements of any financial covenants. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. Dividend Policy The current dividend policy of the Group is to pay dividends between 40% and 60% of net profit after tax in respect of the preceding period subject to the discretion of the Board. Financial Covenants The Group’s capital management, amongst other things, aims to ensure that it meets its financial covenants attached to any interest bearing loans and borrowings that define capital structure requirements. The specific covenants relating to financial ratios the Group is required to meet are: • Gearing ratio (i.e. net debt to EBITDA) • Fixed cover charges ratio (i.e. EBIT plus lease expense to lease expenses plus net interest) Breaches in meeting the financial covenants could permit the bank to immediately call loans and borrowings. There have been no breaches in the financial covenants of any interest-bearing loans and borrowings in the current or prior period. 19. Dividends Dividends paid during the year Interim dividend for the year ended 31 March 2018 Final dividend for the year ended 31 March 2017 Interim dividend for the year ended 31 March 2017 Final dividend for the year ended 31 March 2016 58 | Evolve Education Group Annual Report 2018 2018 2017 Cent per share Cent per share 2018 $’000 2017 $’000 2.50 2.50 5.00 4,455 4,471 8,926 2.50 2.38 4.88 4,451 4,226 8,677 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 19. Dividends (continued) Policies Dividends are paid in cash in accordance with the dividend policy of the Group. The dividends paid were fully imputed. Supplementary dividends Supplementary dividends of $0.4m (2017: $0.6m) were paid to shareholders not tax resident in New Zealand on which the Company received a foreign investor tax credit entitlement. Dividend reinvestment plan Under the Company’s dividend reinvestment plan, holders of ordinary shares may elect to reinvest the net proceeds of cash dividends payable or credited to acquire further fully paid ordinary shares in the Company. In respect of the year ended 31 March 2018, 1,179,340 shares with a total value of $1.1m were issued in lieu of cash dividends (2017: $0.7m). 20. Earnings Per Share (EPS) Basic and diluted EPS amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. The following reflects the income and share data used in the basic and diluted EPS computations: YEAR 31 MARCH 2018 YEAR 31 MARCH 2017 (Loss)/Profit attributed to ordinary equity holders of the parent ($’000s) (4,213) 15,873 Weighted average number of ordinary shares for basic and diluted EPS 178,948,343 178,007,882 Basic (and diluted) earnings per share (expressed as cents per share) (2.4) 8.9 There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorisation of these financial statements. 21. Financial Assets and Liabilities Financial risk management objectives The Group’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Group’s overall level of financial risk is minimal and risk management is carried out by senior finance executives and the Board of Directors. Market risk Foreign currency risk The Group is not exposed to any significant foreign currency risk. Price risk The Group is not currently exposed to any significant price risk. Evolve Education Group Annual Report 2018 | 59 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 21. Financial Assets and Liabilities (continued) Interest rate risk The Group’s main interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The effective interest rate for the current year is 4.06% (2017: 4.42%). An increase or decrease of ±1% in interest rates will result in a ±$405K (2017: ±$309K) effect on profit/ loss before tax. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of cash and cash equivalents as well as the use of loans. At balance date the Group had drawn $32.3m (2017: $20.2m) of the Group’s $90.0m lending facilities exposing the Group to interest rate risk. Exposure to interest rate risk is reduced by applying surplus cash against borrowings until such time that the cash is required. This significantly reduces the company’s average drawn debt balance during the year. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provision for impairment of those assets, as disclosed in the Consolidated Statement of Financial Position and Notes to the Consolidated Financial Statements. The Group has no significant credit risk exposure. The Standard & Poors credit ratings of the banks where the Group holds cash are all [AA-] (source: www. rbnz.govt.nz). Liquidity risk Liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements The Group’s financing arrangements comprise the following facilities: • Senior revolving facility - provided by ASB totalling $30.0 million for general corporate and working capital purposes. The facility expires on 30 April 2019. Subsequent to balance date, this facility has been amended and extended to 30 April 2022 (Note 27). • Acquisition facility - provided by ASB totalling $60.0 million for funding of future acquisitions. It expires on 30 April 2019. Subsequent to balance date, this facility has been amended and extended to 30 April 2022 (Note 27). • Lease guarantee facility - provided by ASB for $3.0 million for bonds required for certain leasehold properties. The facilities are secured by way of a first ranking general security agreement over all present and future assets and undertakings of the Group, together with an all obligations cross guarantee and indemnity. The Group was in compliance with all bank covenants during the period. 60 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 21. Financial Assets and Liabilities (continued) Amounts drawn against the senior revolving and acquisition facilities are: $’000 Facility Limits Senior revolving facility Acquisition facility Total lending facilities Utilisation Senior revolving facility Acquisition facility Total borrowings Total unused facilities AS AT 31 MARCH 2018 AS AT 31 MARCH 2017 30,000 60,000 90,000 - 32,300 32,300 30,000 60,000 90,000 - 20,200 20,200 57,700 69,800 The terms of the acquisition facility allow the Group to temporarily apply surplus cash against drawings under the facility to ensure efficient use of cash during the working capital cycle. Cash applied against the facility in this manner is available to be redrawn. Remaining contractual maturities The contractual maturity for the Group’s financial instrument liabilities (that is, trade payables) is disclosed at Note 14 and in terms of bank borrowings, above. The contractual maturities are based on the undiscounted cash flows of financial liabilities based on the expiry of the facility. Fair value of financial instruments The carrying value of financial assets and financial liabilities presented represent a reasonable approximation of fair value. 22. Net Debt Reconciliation This sets out an analysis of net debt movement for the current year: $’000 Net debt as at 1 April 2017 Bank borrowings drawn Bank borrowings repaid Cash flows Net debt as at 31 March 2018 Cash and cash equivalents Borrowings due after 1 year Total 4,095 - - 1,267 5,362 (20,200) (117,500) 105,400 - (16,105) (117,500) 105,400 1,267 (32,300) (26,938) Net debt as defined in the financial covenants (note 18) also includes any amounts utilised under the Group’s lease guarantee facility (note 24). Evolve Education Group Annual Report 2018 | 61 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 23. Reconciliation of (Loss)/Profit After Tax to Net Operating Cash Flows $’000 (Loss)/Profit after tax Adjustments for: Depreciation and amortisation Impairment expense Loss on disposal Finance expense Deferred tax Changes in operating assets and liabilities: Working capital movements: Increase/(decrease) in funding received in advance (Increase)/decrease in other current assets Increase/(decrease) in trade and other payables (Increase)/decrease in current income tax receivables Increase/(decrease) in current income tax liabilities Increase/(decrease) in PORSE GST settlement payable Increase/(decrease) in employee entitlements Other items: YEAR 31 MARCH 2018 YEAR 31 MARCH 2017 (4,213) 15,873 3,241 13,890 134 1,641 (796) (188) 136 (357) (552) (841) 1,500 254 2,629 - - 1,366 64 1,734 (611) 1,963 - (445) - 510 Business combination payment classified as investing Net cash flows from operating activities 467 14,316 (533) 22,550 24. Commitments and Contingencies Operating lease commitments – Group as lessee The Group has entered into commercial leases on its premises, motor vehicles and IT equipment. Future minimum rentals payable under non-cancellable leases at balance date are: $’000 Within one year After one year but not more than five years More than five years Total Guarantees YEAR 31 MARCH 2018 YEAR 31 MARCH 2017 21,224 63,583 53,880 20,500 62,004 51,179 138,687 133,683 $2,385,870 (2017: $2,325,915) of the lease guarantee facility disclosed in Note 21 has been utilised. 62 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 25. Related Party Transactions Parent entity Evolve Education Group Limited is the parent entity. Identity of Related Parties Related parties of the Group are: • The Board of Directors comprising Norah Barlow, Alistair Ryan, Gráinne Troute (appointed 1st May 2017), Anthony Quirk (appointed 2nd August 2017), Lynda Reid (appointed 2nd August 2017) and Mark Finlay (ceased his directorship 17th August 2017). • Mark Finlay was appointed Chief Executive Officer on 1st November 2017 and had been acting in this capacity since 25th August 2017. • LEP Limited, LEDC Limited, LEP Construction Limited, LEP1 Limited, LEP2 Limited, LEDC1 Limited, Little Wonders Childcare (Aoraki) Limited, Little Wonders Childcare (Timaru) Limited, Little Wonders Childcare (Cromwell) Limited, Little Wonders Childcare (St Kilda) Limited, Little Wonders Childcare (Roslyn) Limited, Little Wonders Childcare (Oamaru) Limited, and Wildfire Consultants Limited, companies that are all associated with Mark Finlay. Related party transactions and related party relationships that have ceased during the current year or in the prior year are: • Greg Kern ceased his directorship on 17th August 2017. • Kern Group (Paddington) Pty Limited and Kern Group NZ Limited, companies associated with Greg Kern. • Alan Wham resigned as Chief Executive Officer on 15th September 2017. • Shares issued pursuant to the Company’s dividend reinvestment plan to Alan Wham (2018: 14,056 shares valued at $13,714, 2017: 27,214 shares valued at $25,857) • Vivek Singh ceased to be key management personnel in June 2016. Related party transactions arising during the year: • Transactions between the Company and its Directors, members of its key management and certain employees can be summarised as follows: • Directors’ remuneration - The Directors’ fees pool is currently $500,000 per annum (plus GST, if any), with the amount of fees paid during the period disclosed in the table below. The Directors are also entitled to be paid for reasonable travel, accommodation and other expenses incurred by them in connection with their attendance at Board or Shareholder meetings, or otherwise in connection with the Group’s business. Mark Finlay, the Group’s Chief Executive Officer, no longer receives directors’ fees following his cessation of his directorship on 17th August 2017. $’000 Alistair Ryan Norah Barlow Gráinne Troute Anthony Quirk Lynda Reid Greg Kern Mark Finlay Total Directors' Remuneration YEAR 31 MARCH 2018 YEAR 31 MARCH 2017 128 90 82 56 53 37 33 479 90 135 - - - 80 80 385 Evolve Education Group Annual Report 2018 | 63 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 25. Related Party Transactions (continued) Related party transactions arising during the year (continued): • Directors’ indemnity and insurance – the Company has entered into a Deed of Indemnity and Access by Deed Poll under which it has granted indemnities in favour of, and maintains insurance for, its present and future directors’ (and directors’ of related companies) and certain employees of the Company, in each case to the extent permitted by the Companies Act 1993, the Securities Act 1978 and the Financial Markets Conduct Act 2013. • Other transactions with parties related to the Directors’ of the Group: • Companies associated with Mark Finlay are the landlord of the Group’s head office and fourteen of the Group’s ECE centres. Rent of $2,208,000 (2017: $1,161,000 relating to six ECE centres and the head office) has been paid by the Group to the companies associated with Mark Finlay during the period. To facilitate the acquisition of six centre businesses in the year ended 31 March 2018, Mark Finlay and associated interests, acquired the premises out of which these businesses operate and lease these premises to the Group. A further commitment to make future rent payments of $24,235,000 (2017: $3,942,00) over the next 2 to 12 years (depending on the term of each lease) is included in Note 24. • Management fee income received from centres related to Mark Finlay of $17,500 (2017: $72,698). • Fees for services other than rent paid to various companies related to Mark Finlay were $68,872 (2017: $74,516). • Dividends of $1,067,000 (2017: $1,042,000) were paid to Mark Finlay. • Shares were issued pursuant to the company’s dividend reinvestment plan to Alan Wham (14,056 shares valued at $13,714), Alistair Ryan and Norah Barlow (4,641 shares each valued at $4,038 each). • On 1 September 2017, the Group acquired one centre from LEDC Limited, a company that Mark Finlay is a director of and shareholder in, for $1,600,000. • As at balance date, the Group had committed to the lease of two new development centres where LEP2 Limited, a company associated to Mark Finlay, will be the landlord. • Compensation of key management personnel of the Group: $’000 Short-term employee benefits Total compensation paid to key management personnel YEAR 31 MARCH 2018 YEAR 31 MARCH 2017 1,000 1,000 865 865 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to key management personnel. 64 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 25. Related Party Transactions (continued) Related party transactions arising during the year (continued): • Shareholding interests of Directors and key management of the Company are: Units of shares Mark Finlay Norah Barlow Alistair Ryan Kern Group NZ Limited & Gregory Kern Alan Wham Vivek Singh AS AT 31 MARCH 2018 AS AT 31 MARCH 2017 21,347,382 21,347,382 90,390 90,390 - - - 85,749 85,749 2,347,808 589,518 321,555 21,528,162 24,777,761 During the year Norah Barlow and Alistair Ryan increased their shareholdings via electing to receive shares under the Group’s dividend reinvestment plan. 26. Auditor’s Remuneration During the year the following fees were paid or payable for services provided by the Group’s auditor, PricewaterhouseCoopers: $’000 Audit services: Audit of Group consolidated financial statements PORSE assurance engagements Total audit services Other services provided by PricewaterhouseCoopers: Taxation compliance services Consultancy services Total other services YEAR 31 MARCH 2018 YEAR 31 MARCH 2017 183 30 213 40 - 40 175 30 205 43 8 51 In the prior year, consultancy services relate to advice regarding executive remuneration. Evolve Education Group Annual Report 2018 | 65 Evolve Education Group Annual Report 2016 | 1Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 27. Events After the Reporting Period Dividend On 28 May 2018 the Board approved a fully imputed final dividend of $3.6m or 2.0 cents per share in respect of the year ended 31 March 2018. The dividend is payable on 28 June 2018. Sale of PORSE Subsequent to balance date, the Company decided that it will commence a sale process for the Company’s wholly- owned PORSE in-home childcare and training business. Financing Arrangements Subsequent to balance date the terms of the financing arrangements provided by ASB were amended. The key changes are as follows: • • • The Senior Revolving facility totalling $30.0m was amended to $25.0m. The Acquisition facility totalling $60.0m was amended to $70.0m. The expiry date of the facilities was extended from 20 April 2019 to 30 April 2022. CEO Appointment On 27 May 2018 Roseanne Graham was appointed to the position of Chief Executive Officer of the Company, replacing Mark Finlay at a date to be agreed. 66 | Evolve Education Group Annual Report 2018 Notes to the Consolidated Financial StatementsFOR THE YEAR ENDED 31 MARCH 2018 Independent auditor’s report T o the shareholders of Evolve Education Group Limited T he consolidated fi nancial statements comprise: • the consolidated statement of fi nancial position as at 31 March 2018; • • • • the consolidated statement of comprehensive income for the year then ended; the consolidated statement of movements in equity for the year then ended; the consolidated statement of cash fl ows for the year then ended; and the notes to the consolidated fi nancial statements, which include signifi cant accounting policies. Our opinion In our opinion, the consolidated fi nancial statements of Evolve Education Group Limited (the Company), including its subsidiaries (the Group), present fairly, in all material respects, the fi nancial position of the Group as at 31 March 2018, its fi nancial performance and its cash fl ows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards (IFRS). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs NZ) and International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated fi nancial statements section of our report. W e believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our opinion. W e are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners (PES 1) issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfi lled our other ethical responsibilities in accordance with these requirements. Ou r fi rm carries out other services for the Group in the areas of other audit related assurance engagements, agreed procedures over prudential fi nancial reporting and tax compliance services. The provision of these other services has not impaired our independence as auditor of the Group. PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz Evolve Education Group Annual Report 2018 | 67  Our audit approach Overview An audit is designed to obtain reasonable assurance whether the fi nancial statements are free from material misstatement. Overall group materiality: $1.0 million, which represents approximately 5% of a 3-year average profi t before tax adjusted for impairment and the Porse GST settlement in the year ended 31 March 2018. We chose profi t before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users. We have excluded impairment losses recognised and the one-off Porse GST settlement, as these are non-recurring items that are not part of normal business operations. We applied a 3-year average of profi t before tax due to the volatility experienced in the Group’s earnings over this time, arising from acquisition activity and fl uctuations in operational performance. W e have determined that there is only one key audit matter being the impairment assessment of goodwill. Materiality The scope of our audit was infl uenced by our application of materiality. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated fi nancial statements as a whole as set out above. These, together with qualitative considerations, helped us to determine the scope of our audit, the nature, timing and extent of our audit procedures and to evaluate the eff ect of misstatements, both individually and in aggregate on the consolidated fi nancial statements as a whole. Audit scope We designed our audit by assessing the risks of material misstatement in the consolidated fi nancial statements and our application of materiality. As in all of our audits, we also addressed the risk of management override of internal controls including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform suffi cient work to enable us to provide an opinion on the consolidated fi nancial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. Key audit matter Key audit matters are those matters that, in our professional judgment, were of most signifi cance in our audit of the consolidated fi nancial statements of the current year. These matters are addressed in the context of our audit of the consolidated fi nancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. PwC 68 | Evolve Education Group Annual Report 2018  Key audit matter How our audit addressed the key audit matter Impairment assessment of goodwill As disclosed in Note 12, the Group has goodwill of $203.3 million as at 31 March 2018, which was recognised on business acquisitions in the current and prior years. Of this balance, $202.6 million relates to the ECE Centres cash-generating unit (CGU). During the year, the Group fully impaired the goodwill balance of $10.6 million in the Home-based ECE business due to underperformance and a continued decline in child enrolments for this CGU. Our audit focused on assessing the carrying value of the goodwill in the ECE Centres CGU due to the judgements and estimates that are involved in determining whether the recoverable amount of the CGU exceeds the carrying value of the CGU’s assets and liabilities. In determining the recoverable amount management use a discounted cash fl ow model on a value-in-use basis. M anagement considers the recoverable amount calculations are most sensitive to the following key assumptions: • Revenue growth from enrolment and price changes through the forecast period; • Expense growth through the forecast period; • Discount rate; and • Growth rates used to extrapolate cash fl ows beyond the forecast period. R efer to note 13 of the consolidated fi nancial statements where impairment testing of goodwill is discussed, including the impact on the recoverable amount from small changes in the enrolment and price growth assumptions. The assessment of goodwill involves signifi cant judgement. We tested management’s value-in-use calculations including the inputs and mathematical accuracy of the model and compared it to the relevant net asset value of the CGU. We also assessed the key estimates and assumptions made by management as follows: • G ained an understanding of the business process applied by management in determining whether there are any indicators of impairment in the value of goodwill; • O btained an understanding of management’s forecasting and budgeting process and reviewed the past years' actual performance against budget performance to determine the rigor and accuracy of the budgeting process; • Wh ere appropriate, we understood the key changes between the performance for the year to 31 March 2018 and the budget for the year ending 31 March 2019, in particular key movements in revenue and expenses. We considered these based on: past performance; subsequent changes that have been made within the business; and the increased levels of ECE funding announced by the New Zealand Government on 17 May 2018, eff ective from 1 January 2019; • Re viewed management’s sensitivity analysis over the key assumptions and also considered alternative possible scenarios and their potential impact; • E ngaged our internal valuation expert to assess the terminal growth rates and discount rates used against those used by similar market participants and determine whether the rates were within a reasonable range, and • Con sidered whether the disclosures in the consolidated fi nancial statements were in compliance with the requirements of the accounting standards. Bas ed on the results of our procedures we have nothing to report. PwC Evolve Education Group Annual Report 2018 | 69  Information other than the fi nancial statements and auditor’s report T he Directors are responsible for the annual report. Our opinion on the consolidated fi nancial statements does not cover the other information included in the annual report and we do not, and will not express any form of assurance conclusion on the other information. At the time of our audit, there was no other information available to us. I n connection with our audit of the consolidated fi nancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated fi nancial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. Re sponsibilities of the Directors for the consolidated fi nancial statements Th e Directors are responsible, on behalf of the Company, for the preparation and fair presentation of the consolidated fi nancial statements in accordance with NZ IFRS and IFRS, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated fi nancial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated fi nancial statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Aud itor’s responsibilities for the audit of the consolidated fi nancial statements Our objectives are to obtain reasonable assurance about whether the consolidated fi nancial statements, as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs NZ and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to infl uence the economic decisions of users taken on the basis of these consolidated fi nancial statements. A fur ther description of our responsibilities for the audit of the fi nancial statements is located at the External Reporting Board’s website at: https: //www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit- report-1/ This d escription forms part of our auditor’s report. PwC 70 | Evolve Education Group Annual Report 2018  Who we report to This report is made solely to the Company’s shareholders, as a body. Our audit work has been undertaken so that we might state those matters which we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed. T he engagement partner on the audit resulting in this independent auditor’s report is Richard Day. For and on behalf of: Chart ered Accountants 28 Ma y 2018 Auckland PwC Evolve Education Group Annual Report 2018 | 71 Corporate Governance and Statutory Information Corporate Governance Evolve Education Group Limited (the “Company”) is a New Zealand based and incorporated owner and provider of ECE services whose fully paid ordinary shares are listed on the NZX Main Board and ASX. The Company trades under the ticker EVO on both the NZX and ASX. The acquisition of securities in the Company may be limited under New Zealand law by the Takeovers Code (which restricts the acquisition of control rights of more than 20% of the Company other than via a takeover offer under the Code) or the effect of the Overseas Investment Act 2005 (which restricts the acquisition of New Zealand assets by overseas persons). The Company’s Board is committed to upholding the highest standards in corporate governance, business behaviour and accountability in order to promote investor confidence. Consistent with this, the Board has adopted and complied with the Corporate Governance Code set out in the NZX Listing Rules except as noted below under Principle 3, and, from listing, has approved various corporate governance policies and charters. To promote high standards of corporate governance and ethical business conduct, the Company has a clear vision, a set of overarching values, and a range of key policies and procedures to guide the actions of the Company, its Board, senior management and its employees in all areas of the business. Copies of key policies are available on the Company’s website (www.evolveeducation.co.nz). On 31 May 2016, the Company changed its listing category on the ASX to that of an ASX Foreign Exempt Listing and, as a result, it is exempt from complying with the majority of the ASX Listing Rules. Instead the Company is required to primarily comply with the NZX Listing Rules as its home exchange, including in relation to corporate governance. Principle 1 – Code of Ethical Behaviour Recommendation 1.1: The board should document minimum standards of ethical behaviour to which the issuer’s directors and employees are expected to adhere. Code of Conduct The Board recognises the need to observe the highest standards of corporate practice and business conduct. Accordingly, the Board has adopted a formal Code of Conduct to be followed by all directors, senior management and employees. The key aspects of this code are to: • • • • act with honesty, integrity and fairness and in the best interests of the Company and in the reasonable expectations of shareholders; act in accordance with all applicable laws, regulations, policies and procedures; have responsibility and accountability; and use the Company’s resources and property properly. Recommendation 1.2: An issuer should have a financial product dealing policy which applies to employees and directors. Share Ownership The Company’s Securities Trading Policy details the Company’s policy on, and rules for, dealing in shares and other securities in the Company. The Securities Trading Policy applies regardless of whether the Company’s securities are quoted on NZX or ASX and provides that insider trading is prohibited at all times. The policy applies to all directors, officers and employees of the Company, with further more specific and stringent rules also applying to trading in the Company’s securities by directors and certain senior employees, or employees performing certain functions. 72 | Evolve Education Group Annual Report 2018 Corporate Governance and Statutory Information The Policy also prescribes certain ‘black-out’ periods in which it is not permissible, subject to a limited number of exceptions, for any officer or employee of the Company to deal in the Company’s securities. The table of directors’ shareholdings is included in the Disclosures section page 87. Principle 2 – Board Composition and Performance Recommendation 2.1: The Board and issuer should operate under a written charter which sets out the roles and responsibilities of the board. The board charter should clearly distinguish and disclose the respective roles and responsibilities of the board and management. Board Charter The Board has adopted a Board Charter which is to be read in conjunction with the constitution of the Company, the Companies Act 1993, the NZX Listing Rules, and the ASX Listing Rules as they apply to entities listed in the ASX Foreign Exempt category. The Board Charter specifies that the Board is the ultimate decision-making body of the Company and is responsible for setting the tone which determines the culture to permeate the Company’s relationships with shareholders, investors, employees, customers, suppliers and the local and business communities. Further, the Board is responsible for setting the strategic direction of the Company and it is responsible for selecting a Chief Executive Officer who is charged with operating the business. The Board also advises, oversees and counsels the CEO, and is ultimately responsible for monitoring the performance of the Company on behalf of all shareholders. The Board Charter provides guidance on a number of other areas for the Board, including values, Board responsibilities and delegated authorities, responsibilities of individual directors, conflicts of interest, independent advice and compliance with laws and policies. Role of the Board The Board has ultimate responsibility for ensuring that the Company is properly managed and to protect and enhance shareholders’ interests. The Board’s key responsibilities include setting and overseeing the execution of the Company’s strategy and supervising management in the operation of the Company’s business. In addition to this, the Board is responsible for: • monitoring the financial performance of the Company, including approving its dividend policies and financial forecasts; • approving transactions relating to acquisitions and divestments and capital expenditure above delegated authority limits; • monitoring the Company’s compliance and risk management systems; • • • • providing a specific governance focus on risks relating to the Company’s physical operations, health and safety policy, and risk mitigation programmes; adopting reporting and disclosure policies and procedures, and monitoring the integrity of such procedures; establishing and overseeing succession plans for senior management; and providing timely and complete communications to shareholders. Evolve Education Group Annual Report 2018 | 73 Evolve Education Group Annual Report 2016 | 1Corporate Governance and Statutory Information Delegation The Board has delegated authority for the operations and administration of the Company to the Chief Executive Officer, assisted by senior management. The CEO manages the Company in accordance with the strategy, plans and delegations approved by the Board. The Board will ensure that, at all times, it has implemented appropriate procedures for the assessment of senior management’s performance. All policies and delegated limits of authority are reviewed on a regular basis. Performance Management The Board has established a Remuneration and People Committee which is responsible for evaluating the performance of the CEO, and makes recommendations to the Board in relation to remuneration and incentive arrangements for the CEO. During the reporting period, a formal review of the senior management team performance was undertaken by the CEO. The CEO’s conclusions and recommendations were then reviewed by the Remuneration and People Committee, and were taken into consideration when setting remuneration and incentive arrangements for the senior management team. The performance of the Company’s CEO and senior management is measured against set criteria including the Company’s financial performance, the Company’s accomplishment of its strategic objectives and other non-quantitative objectives as determined by the Board and Remuneration and People Committee at the beginning of the year. Recommendation 2.2: Every issuer should have a procedure for the nomination and appointment of directors to the board. Composition of the Board The Company’s constitution provides for the Board to consist of a minimum of three directors and a maximum of eight directors. The current composition of the Board and details of the skills, qualifications, experience, expertise and special responsibilities of each current Director is disclosed under the Board of Director profiles. Selection and Role of Chairperson The Chair of the Board will be appointed by the directors from time to time, and the terms of office will be at the Board’s discretion. The Chair must be an Independent Director. The role and responsibilities of the Chair include: • providing leadership to the Board and to the Company; • ensuring the efficient organisation and conduct of the Board; • monitoring Board performance annually; • • • • facilitating Board discussions to ensure core issues facing the Company are addressed; briefing all directors in relation to issues arising at Board meetings; facilitating the effective contribution and on-going development of all directors; promoting consultative and respectful relations between Board members and between the Board and management; and • chairing Board and shareholder meetings. Director Independence The Company’s constitution specifies the minimum number of independent directors to be two or, if there are eight or more directors, three or one-third of the total number of directors. Norah Barlow, Lynda Reid, Anthony Quirk, Gráinne Troute and Alistair Ryan are independent directors, within the meaning of the NZX Listing Rules. 74 | Evolve Education Group Annual Report 2018 Corporate Governance and Statutory Information While the Board believes that all boards need to exercise independent judgement, it also recognises that the need for independence is to be balanced with the need for relevant skills, industry experience and a workable board size. The Board believes that it has recruited directors with the skills, experiences and characters necessary to discharge the Board’s duties. Conflicts of Interest The Company’s Conflict of Interest Policy provides guidance regarding the impartial conduct of directors, and identifying and impartially managing any conflicts of interest. Where a Director has a conflict of interest, the Director is obliged to disclose their conflict to the Board, and enter it in the Interests Register, in accordance with the Board Charter. The Conflict of Interest Policy also addresses the extent to which an interested Director may participate in and be present at meetings when the conflict matter is being dealt with. Nomination and Appointment The procedures for the appointment and removal of directors are ultimately governed by the Company’s constitution. The Board has established a Remuneration and People Committee whose role is to identify and recommend to the Board individuals for nomination as members of the Board taking into account such factors as it deems appropriate, including experience, qualifications, judgement and the ability to work with other directors. The Board recognises the importance of succession planning and this is considered by the Board and Remuneration and People Committee on an ongoing basis. Recommendation 2.3: An issuer should enter into written agreements with each newly appointed director establishing the terms of their appointment. On appointment, each new director signs a written agreement that outlines the terms of their appointment. The agreement covers: expected time commitments, the role of the Board, remuneration, independence requirements, disclosure requirements, shareholding qualification requirements, confidentiality obligations, indemnity and insurance provisions, intellectual property rights and cessation of appointment. Evolve also has written agreements with executives that set out the terms of their employment. Recommendation 2.4: Every issuer should disclose information about each director in its annual report or on its website, including a profile of experience, length of service, independence and ownership interests. Evolve’s Director biographies can be found on page 14. Evolve Director ownership interests can be found on page 87 of this annual report. Evolve Education Group Annual Report 2018 | 75 Evolve Education Group Annual Report 2016 | 1Corporate Governance and Statutory Information Recommendation 2.5: An issuer should have a written diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving diversity (which, at a minimum, should address gender diversity) and to assess annually both the objectives and the entity’s progress in achieving them. The issuer should disclose the policy or a summary of it. Diversity Policy The Company has adopted a diversity policy and is committed to being an inclusive workplace that embraces and values diversity while always upholding the principle of meritocracy. The Board believes that embracing diversity in its workforce contributes to the achievement of its corporate objectives (including optimising financial performance in a competitive labour market) and enhances its reputation. It assists the Company to recruit and retain the right people from a diverse pool of talented candidates, which in turn should assist the Company to: • make more informed and innovative decisions, drawing on the wide range of ideas, experiences, approaches and perspectives that employees from diverse backgrounds, with differing skill sets, bring to their roles; and • better represent the diversity of its stakeholders and markets. In order to have a properly-functioning diverse workplace, discrimination, harassment, vilification, dishonesty, inappropriate behaviour and victimisation will not be tolerated within the Company. Gender Diversity As noted above, the Board is responsible for monitoring the Company’s performance in meeting objectives set out in the Diversity Policy. Information relating to the current representation of female employees of the Company, including holding senior executive positions and on the Board is as follows: Position Board Senior Management* Company-wide As at 31 March 2018 Men 2 (40%) Women 3 (60%) 3 (43%) >96% 4 (57%) <4% As at 31 March 2017 Men 4 (80%) Women 1 (20%) 3 (43%) >96.5% 4 (57%) <3.5% *Senior management includes the CEO and employees who report directly to the CEO. As at 31 March 2018 the senior management team consisted of seven positions. At balance date the Group employs 2,187 women which represents 96% of the workforce (FY17: 2,406 women which represented 96.5% of the workforce). Recommendation 2.6: Directors should undertake appropriate training to remain current on how to best perform their duties as directors of an issuer. Board Access to Information and Advice All directors have access to the senior management team to discuss issues or obtain information on specific areas in relation to items to be considered at Board meetings or other areas as considered appropriate. Key executives and managers are invited to attend and participate in appropriate sessions at Board meetings. Directors have unrestricted access to the Company’s records and information. 76 | Evolve Education Group Annual Report 2018 Corporate Governance and Statutory Information Directors are entitled to have access to external auditors, without management present, to seek explanations or additional information and to seek independent professional advice with the Chair’s consent, which will not be unreasonably withheld or delayed, and which will be at the Company’s expense, to assist them in carrying out their responsibilities. Director Education Directors are responsible for ensuring that they remain current in understanding their duties as directors and sector issues. Recommendation 2.7: The board should have a procedure to regularly assess director, board and committee performance. The Chair discusses individual performance with directors, while the Board and Board sub-committees self-evaluate their performance against their charter responsibilities, with a commitment to identifying any opportunities for improvement. Recommendation 2.8: The Chair and the Chief Executive should be different people The positions of Chair and Chief Executive of Evolve are held by different people. Principle 3 – Board Committees The Board has established two sub-committees to assist with the execution of the Board’s responsibilities – the Audit and Risk Committee and the Remuneration and People Committee. These committees review and analyse detailed information, policies and strategies which fall within their areas of responsibility and, where appropriate, make recommendations to the full Board. The Committees do not take action or make decisions on behalf of the Board unless specifically authorised to do so by the Board. The Board may establish additional committees of directors as required. Recommendation 3.1: An issuer’s audit committee should operate under a written charter. Membership on the audit committee should be majority independent and comprise solely of non-executive directors of the issuer. The chair of the audit committee should not also be the chair of the board. Audit and Risk Committee The Audit and Risk Committee is responsible for overseeing the risk management, treasury, insurance, accounting and audit activities of the Company, reviewing the adequacy and effectiveness of internal controls, reviewing the performance of external auditors, reviewing the consolidated financial statements, and making recommendations on financial and accounting policies. The current members of the Audit and Risk Committee are Norah Barlow, Anthony Quirk (Chair appointed October 2017) and Alistair Ryan. The Board is of the belief that the Audit and Risk Committee is appropriately constituted having regard to the scale and complexity of the Company’s business and the particular expertise and experience of each current member. Recommendation 3.2: Employees should only attend audit committee meetings at the invitation of the audit committee. Under the Audit & Risk Committee Charter, the Chief Executive, Chief Financial Officer and other employees attend committee meetings by invitation. Evolve Education Group Annual Report 2018 | 77 Evolve Education Group Annual Report 2016 | 1Corporate Governance and Statutory Information Recommendation 3.3: An issuer should have a remuneration committee which operates under a written charter (unless this is carried out by the whole board). At least a majority of the remuneration committee should be independent directors. Management should only attend remuneration committee meetings at the invitation of the remuneration committee. Remuneration and People Committee The Remuneration and People Committee is responsible for considering new appointments to the Board, overseeing management succession planning, establishing employee incentive plans, reviewing and approving remuneration arrangements for employees, recommending to the Board the remuneration of directors and seeing that the Company and the Board have in place, and follow, policies, procedures and practices with the objective that all laws, rules and requirements applicable to the Company and the directors are complied with. Under the Remuneration and People Committee charter, the CEO, other executive staff, or such other parties may be asked to attend any meeting of the Committee as considered necessary to provide appropriate information, explanation and assistance as required. No individual employee is permitted to be present when their performance and/or remuneration arrangements are being discussed. The Committee may ask any party to withdraw from any part of any meeting. The current members of the Remuneration and People Committee are Gráinne Troute (Chair appointed 19 May 2017), Lynda Reid, and Norah Barlow. (Greg Kern Chair until 19 May 2017). Recommendation 3.4: An issuer should establish a nomination committee to recommend director appointments to the board (unless this is carried out by the whole board), which should operate under a written charter. At least a majority of the nomination committee should be independent directors. Evolve does not have a separate nomination committee as its functions are carried out by the full Board in line with the responsibilities under the Evolve Board Charter. The procedures for director removals and appointments are governed by the company’s constitution and the requirements of the NZX Listing Rules. Recommendation 3.5: An issuer should consider whether it is appropriate to have any other board committees as standing board committees. All committees should operate under written charters. An issuer should identify the members of each of its committees, and periodically report member attendance. The board does not consider it necessary to have any other standing board committees. Board and Committee Meetings The Board has established a regular schedule of board and committee meetings in order to carry out its obligations under its Board Charter. A summary of the directors’ attendances at each of the Board and Committee meetings between 1 April 2017 and the date of approving the financial statements (that is, 28 May 2018), as compared to the number of scheduled meetings that each Director was eligible to attend (in brackets) is shown in the table below. Norah Barlow Mark Finlay Greg Kern Alistair Ryan Alan Wham Gráinne Troute Anthony Quirk Lynda Reid 78 | Evolve Education Group Annual Report 2018 Board 12 (12) 4 (4) 4 (4) 12 (12) 4 (4) 11 (11) 8 (8) 8 (8) Audit and Risk Committee Remuneration and People Committee 5 (5) - 2 (2) 5 (5) - - 3 (3) - 3 (3) 1 (1) 1 (1) - - 2 (2) - 2 (2) Corporate Governance and Statutory Information In addition to scheduled Board meetings, the Board also held other meetings and teleconferences to discuss other company matters as required. Recommendation 3.6: The board should establish appropriate protocols that set out the procedure to be followed if there is a takeover offer for the issuer including any communication between insiders and the bidder. It should disclose the scope of independent advisory reports to shareholders. These protocols should include the option of establishing an independent takeover committee, and the likely composition and implementation of an independent takeover committee. In the event of a takeover, the board may form a subcommittee, comprised of non-interested directors which will have the authority to make biding decisions in respect of the process, including: • • • retaining legal and financial advisers, appointing an independent adviser for the purposes of the Takeovers Code, and approving any announcements or communications relating to the potential transaction. Evolve is in the process of adopting more formal takeovers protocol to document this and expects to be able to confirm full compliance as at 31 March 2019. Principle 4 – Reporting and Disclosure Recommendation 4.1: An issuer’s board should have a written continuous disclosure policy. The Board has adopted a Continuous Disclosure Policy to seek to ensure that timely and balanced disclosures are communicated to the market in accordance with the Company’s continuous disclosure obligations under the NZX and ASX Listing Rules. The Company changed its ASX listing category from a Standard Listing to an ASX Foreign Exempt Listing effective from the commencement of trading on 31 May 2016. As an ASX Foreign Exempt Listing, the Company is required to immediately provide ASX with all of the information that it provides to NZX that is, or is to be, made public. Recommendation 4.2: An issuer should make its code of ethics, board and committee charters and the policies recommended in the NZX Code, together with any other key governance documents, available on its website. Key governance documents are available to investors and stakeholders on Evolve’s website. They include the Continuous Disclosure Policy, Conflicts of Interest Policy, Trading Policy and Guidelines, Diversity Policy, Risk Management Policy, Shareholders Communications Policy, Dividend Policy and Board and Committee Charters. Recommendation 4.3: Financial reporting should be balanced, clear and objective. An issuer should provide non- financial disclosure at least annually, including considering material exposure to environmental, economic and social sustainability risks and other key risks. It should explain how it plans to manage those risks and how operational or non-financial targets are measured. Evolve publishes audited interim and full-year financial statements that are prepared in accordance with relevant financial standards. Each year, non-financial information is disclosed in the annual report. Material risks are discussed (including how those risks are managed and how non-financial targets are measured) and are also covered in this Corporate Governance Statement (see Principle 6). Evolve Education Group Annual Report 2018 | 79 Evolve Education Group Annual Report 2016 | 1Corporate Governance and Statutory Information In addition to interim and full-year financial statements, and annual reporting, Evolve regularly publishes investor presentations, including six-monthly result announcements. These presentations provide readers with regular updates on the progress against Evolve’s strategy, areas of the company’s environmental, social and governance performance and longer-term sector developments. The Company considers that it does not currently have any material exposure to environmental, economic or social sustainability risks. Principle 5 – Remuneration Recommendation 5.1: An issuer should recommend director remuneration to shareholders for approval in a transparent manner. Actual director remuneration should be clearly disclosed in the issuer’s annual report. The Chairperson receives $135,000 per annum. The non-executive directors each receive $80,000 per annum. The Chair of the Audit and Risk Committee and Remuneration and People Committee receives an additional $10,000 per annum. The directors’ fees currently total $475,000 per annum. However, the Company has set the Director fee pool for all directors at $500,000 per annum in aggregate to allow further payments to be made to directors should additional work be required and allow for some level of increase and for Committee work, if appropriate. The directors are also entitled to be paid for reasonable travel, accommodation and other expenses incurred by them in connection with their attendance at Board or shareholder meetings, or otherwise in connection with the Company’s business. Director Remuneration Statement The Company’s directors holding office during the year ended 31 March 2018 are listed below. Pursuant to section 21(1)(f) of the Companies Act 1993, the total amount of remuneration and other benefits received by each Director during the year ended 31 March 2018 are provided below. ($000’s) Alistair Ryan Norah Barlow Gráinne Troute Anthony Quirk Lynda Reid Greg Kern Mark Finlay Alan Wham Total Directors’ Fees Cash Salary and Other Payments Total 128 90 82 56 53 37 33 - 479 - - - - - - - 718 718 128 90 82 56 53 37 33 718 1,197 Directors of Subsidiary Companies The remuneration of employees acting as directors of subsidiaries is disclosed in the relevant banding of remuneration set out under the heading “Employee Remuneration” below. During the year ended 31 March 2018 employees did not receive additional remuneration for acting as directors of subsidiary companies. 80 | Evolve Education Group Annual Report 2018 Corporate Governance and Statutory Information Recommendation 5.2: An issuer should have a remuneration policy for remuneration of directors and officers, which outlines the relative weightings of remuneration components and relevant performance criteria. Overall Remuneration Philosophy The Board is committed to an executive remuneration framework that is focused on achieving a high performance culture and linking executive pay to the achievement of the Company strategy and business objectives which, ultimately, create sustainable long-term value for shareholders. As part of ensuring that management is motivated to create and deliver sustainable shareholder wealth, the Board utilises a Remuneration and People Committee which operates under the delegated authority of the Board. The Committee ensures that rewards for executives are strongly aligned with the Company’s performance. The Company is committed to ensuring clarity and transparency about its remuneration policy and practice. The objectives of the Committee are to: • • • • establish a clear framework for oversight and management of the Company’s remuneration structures, policies, procedures and practices; consider and recommend new appointments to the Board and oversee management succession planning; fairly and responsibly reward directors and senior management and other employees of the Company having regard to the performance of the Company, the performance of these officers and employees and the general pay environment; and implement policies, procedures and practices for the Company and Board to ensure compliance with all laws, rules and regulations which are applicable to the Company and the directors, including the Companies Act 1993 (Companies Act), the Constitution, the NZX Listing Rules, and the ASX Listing Rules as they apply to entities listed in the ASX Foreign Exempt category. The number of committee meetings and attendance records of committee members is specified on page 78. The performance of all directors and senior management is reviewed periodically in accordance with the terms of the Remuneration and People Committee Charter. Executive Remuneration The Company’s total remuneration policy for the senior management team provides the opportunity for them to be paid, where performance merits, at the market median for equivalent market-matched roles. In determining an executive’s total remuneration, external benchmarking is undertaken to ensure comparability and competitiveness, along with consideration of an individual’s performance, skills, expertise and experience. The Remuneration and People Committee reviews and approves annual performance appraisal outcomes for all members of the senior management team reporting to the CEO and utilises market information and trends when considering and confirming remuneration arrangements. External benchmarking may be conducted independently, to provide industry specific data to assist the Remuneration and People Committee in approving appropriate levels of remuneration for these executives. The annual remuneration review process requires “one over one” approval (approval from a higher authority than the person or committee recommending the remuneration). This means that approval of the Board is required for any changes to the CEO’s remuneration, on recommendation by the Remuneration and People Committee. Further, recommendations from the CEO in relation to remuneration of the senior management team require Remuneration and People Committee approval. Evolve Education Group Annual Report 2018 | 81 Evolve Education Group Annual Report 2016 | 1Corporate Governance and Statutory Information Total executive remuneration may incorporate fixed and variable components. Executive remuneration may contain any or all of the following: • • • • fixed remuneration; performance-based remuneration; equity-based remuneration; and termination payments. The Company has adopted a performance share rights long-term executive incentive scheme for the CEO and the senior management. Recommendation 5.3: An issuer should disclose the remuneration arrangements in place for the CEO in its annual report. This should include disclosure of the base salary, short term incentives and long term incentives and the performance criteria used to determine performance based payments. CEO Remuneration Alan Wham held the position of CEO and Managing Director until 15 September 2017. He had a base salary of $450,000 per annum (gross) and was entitled to the use of a mobile telephone, laptop and car park. Mr Wham received a payment of $451,625 at the end of his employment. Mr Wham received a short term incentive payment of $25,000 and was granted a long term incentive to a value of $110,000 which lapsed upon cessation of his employment. Mark Finlay held the position of CEO from 15 September 2017 and was entitled to the use of a mobile telephone, laptop and car park. As a substantial shareholder in the Company Mr Finlay elected to have nil base salary during the period to 31 March 2018. Subsequent to this date Mr Finlay’s base salary is $320,000 per annum with no short or long term incentive. The Company reimburses the CEO for any expenses reasonably incurred by him in the performance of his duties under his employment agreement. There is no prescribed limit on the expenses that can be reimbursed to the CEO, but all expenses must be incurred in accordance with expense policies authorised by the Board. Employee Remuneration The number of employees or former employees (including employees holding office as directors of subsidiaries, but not including Alan Wham who was a Director of the Company) who received remuneration and other benefits (including share-based payments) valued at or exceeding $100,000 during the year ended 31 March 2018 are specified below. Remuneration Band $100,001 - $110,000 $110,001 - $120,000 $120,001 - $130,000 $130,001 - $140,000 $140,001 - $150,000 $150,001 - $160,000 $180,001 - $190,000 $200,001 - $210,000 $230,001 - $240,000 $280,001 - $290,000 Total Total 3 2 1 2 1 1 1 1 1 1 14 In the case of businesses acquired, the employee remuneration details above relates to remuneration and benefits paid from the date the Company acquired those businesses. 82 | Evolve Education Group Annual Report 2018 Corporate Governance and Statutory Information Principle 6 – Risk Management Recommendation 6.1: An issuer should have a risk management framework for its business and the issuer’s board should receive and review regular reports. A framework should also be put in place to manage any existing risks and to report the material risks facing the business and how these are being managed. The Company views effective risk management as key to achieving and maintaining its operational and strategic objectives. The directors of the Company are responsible for reviewing and ratifying the risk management structure, processes and guidelines which are to be developed, maintained and implemented by management. The active identification of risks and implementation of mitigation measures is a primary responsibility of management. The Board has delegated certain activities to the Audit and Risk Committee and has adopted a Risk Management Policy. The Audit and Risk Committee is responsible for ensuring there are adequate policies in relation to risk management, compliance and internal control systems. The committee monitors the Company’s risk management by overseeing management’s actions in the evaluation, management, monitoring and reporting of material operational, financial, compliance and strategic risks. Management reports on risk management at each meeting of the Board and the Audit and Risk Committee. The Company does not have an internal audit function, but through the steps outlined above, the Board ensures the Company is reviewing, evaluating and continually improving the effectiveness of its risk management and internal control processes. Recommendation 6.2: An issuer should disclose how it manages its health and safety risks and should report on their health and safety risks, performance and management. As a leading provider of ECE the safety of our employees and children is paramount. As is best practice, appropriate governance structures have been established at the Board level to ensure that matters such as health and safety risk for staff, contractors and our children is effectively governed and managed. The Board has adopted measures that will allow the Company to monitor and affect proactive identification of risks and events to ensure continuous improvement, and ultimately, a reduction in the rate of accidents. A group wide Health and Safety Management system which accommodates all aspects of the Company’s health and safety requirements has been implemented. Principle 7 – Auditors Recommendation 7.1: The board should establish a framework for the issuer’s relationship with its external auditors. The Audit and Risk Committee is also responsible for considering the independence of the external auditor and any potential conflicts of interest. The Audit and Risk Committee reviews policies for the provision of non-audit services by the external auditor and, where applicable, the framework for pre-approval of audit and non-audit services. Under the Audit and Risk Committee Charter, the Committee is responsible for recommending the appointment and assessing the performance of the external auditor. Further information about the non-audit services provided during the year ended 31 March 2018 is set out in note 26 of the financial statements included in this annual report. Evolve Education Group Annual Report 2018 | 83 Evolve Education Group Annual Report 2016 | 1Corporate Governance and Statutory Information In combination with the establishment of the Audit and Risk Committee, the Board has approved a Risk Management Policy because the Company views effective risk management as key to achieving and maintaining its operational and strategic objectives. The Risk Management Policy is available on the Company’s website (www.evolveeducation.co.nz). Recommendation 7.2: The external auditor should attend the issuer’s Annual Meeting to answer questions from shareholders in relation to the audit. Evolve’s external auditor is invited to the annual shareholder meetings. The Chair of the Board announces the auditor’s attendance and shareholders can ask questions of them should they wish. Recommendation 7.3: Internal audit functions should be disclosed. The company has not established an internal audit function. Principle 8 – Shareholder Rights and Relations Recommendation 8.1: An issuer should have a website where investors and interested stakeholders can access financial and operational information and key corporate governance information about the issuer. Key investor information can be found at www.evolveeducation.co.nz/investor-relations/investor-information. Recommendation 8.2: An issuer should allow investors the ability to easily communicate with the issuer, including providing the option to receive communications from the issuer electronically. The Board recognises the importance of keeping investors informed by communicating information in a timely, clear and accurate way, whether positive or negative. The Company is committed to providing a high standard of communication to its shareholders so that they have sufficient information to make informed assessments of the Company’s value and prospects. The Board has adopted a Shareholder Communications Policy to promote effective communication with shareholders and encourage effective participation at general meetings. The Shareholder Communications Policy requires the Company to: • • ensure its website (www.evolveeducation.co.nz) is maintained and updated within a reasonable timeframe; ensure Shareholder communications are distributed in accordance with the Companies Act 1993 and the NZX Listing Rules, and the ASX Listing Rules as they apply to entities listed in the ASX Foreign Exempt category; and • ensure it will use available channels and technologies to communicate widely and promptly to shareholders. The Shareholder Communications Policy outlines specific requirements and guidelines relating to the communication of and access to the Company’s annual meetings including access to the external auditor, annual report, share registry access, communication of full-year and half-year results, corporate governance, media releases, and investor and analyst briefings. The Company’s Shareholder Communications Policy is designed to ensure that communications with shareholders and all other stakeholders are managed efficiently. 84 | Evolve Education Group Annual Report 2018 Corporate Governance and Statutory Information The Company currently keeps shareholders informed through: • • • • the Annual Report; the Interim Report; the Annual Meeting of shareholders; disclosure to the NZX and ASX in accordance with the Company’s Shareholder Communications Policy and Continuous Disclosure Policy; and • the Investor Announcements section on the Company website. The Chair, CEO and CFO are the points of contact for shareholders. The Board considers the Annual Report to be an essential opportunity for communicating with shareholders. The Company publishes its annual and interim results and reports electronically on the Company’s website. Investors may also request a hard copy of the Annual Report by contacting the Company’s share registrar, Link Market Services Limited. Contact details for the registrar appear at the end of this report. The Company considers the Annual Meeting to be a valuable element of its communications programme. The meeting will provide an opportunity for shareholders to raise questions about the governance, operations, and management of the Company. The Company’s external auditors will also attend the annual meeting, and are available to answer questions relating to the conduct of the external audit and the preparation and content of the Auditor’s Report. Recommendation 8.3: Shareholders should have the right to vote on major decisions which may change the nature of the company in which they are invested Evolve is committed to timely and balanced disclosure, which includes advising shareholders on any major decisions. Evolve follows the mandatory listing rule requirements relating to change in the essential nature of the business, including major transactions under the Companies Act 1993. Recommendation 8.4: Each person who invests money in a company should have one vote per share of the company they own equally with other shareholders. Evolve conducts voting at its annual shareholder meetings by way of poll and on the basis of one share, one vote. Recommendation 8.5: The board should ensure that the annual shareholders notice of meeting is posted on the issuer’s website as soon as possible and at least 28 days prior to the meeting. Evolve’s Notice of Meeting will be made available at least 28 days prior to the meeting. Evolve Education Group Annual Report 2018 | 85 Evolve Education Group Annual Report 2016 | 1Corporate Governance and Statutory Information Disclosure of Directors’ Interests Section 140(1) of the New Zealand Companies Act 1993 requires a Director of a company to disclose certain interests. Under subsection (2) a Director can make disclosure by giving a general notice in writing to the company of a position held by a Director in another named company or entity. Details of directors’ general disclosures entered in the relevant Interests Register for the Company during the year to 31 March 2018 are as follows: Director Anthony Quirk Position Director Chairman Trustee Deputy Chairman Director Gráinne Troute Director Director Alistair Ryan Director-ceased Director-ceased Director Company Milford Asset Management New Zealand Water Polo Graeme Dingle Foundation Wellington Board Compass Housing New Zealand New Zealand Local Government Funding Agency Tourism Holdings Limited Summerset Group Holdings Limited Lewis Road Creamery Limited New Zealand Racing Board Kiwibank Limited There were no entries in the Interests Register for Norah Barlow and Lynda Reid during the year. Disclosure of Directors’ Interests in share transactions Directors disclosed the following acquisitions and disposals of relevant interests in shares during the year ended 31 March 2018: Norah Barlow: • Issue of 2,045 shares by the Company on 21 June 2017 under the Company’s dividend reinvestment plan. • Issue of 2,596 shares by the Company on 20 December 2017 under the Company’s dividend reinvestment plan. Alistair Ryan: • Issue of 2,045 shares by the Company on 21 June 2017 under the Company’s dividend reinvestment plan. • Issue of 2,596 shares by the Company on 20 December 2017 under the Company’s dividend reinvestment plan. Alan Wham: • Issue of 14,056 shares by the Company on 21 June 2017 under the Company’s dividend reinvestment plan. Greg Kern: • Sale of 2,286,495 shares in the Company on 25 May 2017. Anthony Quirk, Gráinne Troute, and Lynda Reid: • Nil 86 | Evolve Education Group Annual Report 2018 Corporate Governance and Statutory Information Disclosure of Directors’ Interests in Shares Directors disclosed the following relevant interests in shares as at 31 March 2018: Director Norah Barlow Alistair Ryan Number of Shares in which a relevant interest is held 90,390 90,390 Indemnities and Insurance The Company has entered into a Deed of Indemnity and Access by Deed Poll under which it has granted indemnities in favour of, and maintains insurance for, its present and future directors (and directors of related companies) and certain employees of the Company, in each case to the extent permitted by the Companies Act 1993. Company Disclosures Stock Exchange Listings The Company is listed on both the New Zealand and Australian stock exchanges. ASX approved a change in the Company’s ASX admission category from a Standard Listing to an ASX Foreign Exempt Listing, effective from the commencement of trading on 31 May 2016. The Company continues to have a full listing on the NZX Main Board, and the Company’s shares remain listed on the ASX. The Company is primarily regulated by the NZX, complies with the NZX Listing Rules, and is exempt from complying with most of the ASX Listing Rules (based on the principle of substituted compliance). Dividend Policy Dividends and other distributions with respect to the Shares are made at the discretion of the Board and depend on a number of factors, including: • • current and anticipated profitability; current and medium-term capital expenditure requirements; • working capital requirements; • • • current capital structure, having regard to the risks presented by short and medium term economic and market conditions and estimated financial performance; available imputation credits; and solvency requirements. The payment of dividends is not guaranteed and the Company’s dividend policy may change. No guarantee can be given about future dividends or the level of imputation of such dividends (if any) as these matters will depend upon future events including the profitability, growth opportunities, and financial and taxation position of the Company, and the Board’s discretion. For the financial year ended 31 March 2018, the Company authorised the following dividends: • • an interim dividend of 2.50 cents per share paid on 20 December 2017; and a final dividend of 2.00 cents per share to be paid on 28 June 2018. The last date for the receipt of an election notice to participate in the Company’s dividend reinvestment plan is 5:00pm on the business day following the record date for a dividend. Net Tangible Assets The Company’s net tangible assets as at 31 March 2018 were ($0.29) per share (31 March 2017 ($0.25) per share). Due to the nature of the Company’s business, intangible assets are a major component of total assets. Accordingly the net assets per security is considered a more useful measure and as at 31 March 2018 it was $0.87 (2017: $0.95). Evolve Education Group Annual Report 2018 | 87 Evolve Education Group Annual Report 2016 | 1Corporate Governance and Statutory Information Donations The Company made donations of $2,732 during the year ended 31 March 2018 (31 March 2017 $2,671). Credit Rating The Company has no credit rating. NZX and ASX Waivers On 9 December 2016, NZX Regulation granted Evolve a waiver from NZX Main Board Listing Rule 8.1.7 in respect of the Evolve Group Performance Share Rights Plan (the Plan) to allow Evolve to change the number of underlying securities under the Plan in certain circumstances. The waiver was granted on the conditions that: • • the Plan is submitted to NZX Regulation for approval under Listing Rules 6.1.1 and 6.1.2(e); and if it is necessary to make an adjustment to the number of underlying securities under the Plan, then: • • Evolve will provide NZX Regulation with at least 10 Business Days’ notice prior to the adjustment that sets out a description of the circumstances giving rise to the adjustment, the proposed adjustment to the share rights, and a copy of advice from an independent party that the adjustment is fair and reasonable to Evolve and its shareholders; and the directors of Evolve certify to NZX Regulation that they are satisfied with the advice from the independent party and, in their opinion, the proposed amendment to the share rights is fair and reasonable to Evolve and its shareholders. Annual Meeting The Company’s Annual Meeting of shareholders will be held in Auckland on 31 July 2018 at 3 pm. 88 | Evolve Education Group Annual Report 2018 Shareholder Information Analysis of Shareholding at 30 April 2018 Size of holding 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total Number of Number of Shareholders % Shares 122 354 328 591 85 8.24 23.92 22.16 39.94 75,427 1,121,059 2,632,871 18,053,950 5.74 157,577,289 Holding Quantity % 0.04 0.62 1.47 10.07 87.80 1,480 100 179,460,596 100.00 Twenty Largest Shareholders at 30 April 2018 Name New Zealand Central Securities Depository Limited Leveraged Equities Finance Limited FNZ Custodians Limited JBWERE (Nz) Nominees Limited Forsyth Barr Custodians Limited Scottfin Ece Limited Mark Finlay & Geoffrey Hosking Brispot Nominees Pty Ltd Merrill Lynch (Australia) Nominees Pty Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited Russell Thompson & Geoffrey Hosking UBS Nominees Pty Ltd FNZ Custodians Limited Custodial Services Limited Mark Finlay & Mark Dobson Trustee Company Limited JBWERE (Nz) Nominees Limited Millar Capital Fund Limited Kevin Glen Douglas & Michelle Mckenney Douglas Alan Hugh Wham & Fiona Elizabeth Wham & Hauraki Independent Tr Svcss Ltd Total - twenty largest shareholders Total number of shares on issue Number of Shares % of Shares 53,518,163 22,619,257 13,639,773 10,089,202 8,874,031 6,105,450 4,938,542 4,835,608 2,473,866 2,316,349 2,178,028 1,942,069 1,692,861 1,660,754 1,550,000 1,208,840 982,431 800,000 785,000 603,574 29.82 12.60 7.60 5.62 4.94 3.40 2.75 2.69 1.38 1.29 1.21 1.08 0.94 0.93 0.86 0.67 0.55 0.45 0.44 0.34 142,813,798 179,460,596 79.58% Evolve Education Group Annual Report 2018 | 89 Evolve Education Group Annual Report 2016 | 1 Shareholder Information New Zealand Central Securities Depository Limited (NZCSD) provides a custodian depository service that allows electronic trading of securities to its members and does not have a beneficial interest in these shares. As at 30 April 2018, the shareholdings in the Company held through NZCSD were: Name HSBC NOMINEES (NEW ZEALAND) LIMITED JPMORGAN CHASE BANK ACCIDENT COMPENSATION CORPORATION NATIONAL NOMINEES NEW ZEALAND LIMITED BNP PARIBAS NOMINEES NZ LIMITED CITIBANK NOMINEES (NZ) LIMITED TEA CUSTODIANS LIMITED HSBC NOMINEES (NEW ZEALAND) LIMITED PRIVATE NOMINEES LIMITED Total - shares held by NZCSD Number of Shares % of NZCSD Held by NZCSD Shares 15,564,165 11,042,964 8,469,274 8,436,956 6,839,130 2,109,310 852,228 138,982 65,154 29.08 20.63 15.83 15.76 12.78 3.94 1.59 0.26 0.13 53,518,163 100.00% Substantial Shareholders According to notices given under the Financial Markets Conduct Act 2013, the following persons were substantial shareholders in the ordinary shares of the Company (being the only class of quoted voting products) at the balance date in respect of the number of shares set opposite their names. Name Geoffrey Hosking* Mark Finlay** Regal Funds Management Pty Limited National Australia Bank Limited Paradice Investment Management Pty Limited Salt Funds Management Limited Accident Compensation Corporation Total number of shares on issue Number of Shares 23,395,611 21,347,382 29,827,904 13,162,417 10,505,000 19,649,333 9,298,562 179,460,596 % of Shares 13.12 11.97 16.62 7.30 5.89 10.95 5.18 * Geoffrey Hosking as trustee of the Mark Finlay Investment No. 2 Trust together with the other trustee (Mark Finlay) are the registered holders and beneficial owners of 20,138,542 shares. Geoffrey Hosking as trustee of the 111 Investment Trust together with the other trustee (Russell Thompson) are the registered holders and beneficial owners of 3,257,069 shares. **Mark Finlay as trustee of the Mark Finlay Investment No. 2 Trust together with the other trustee (Geoffrey Hosking) are the registered holders and beneficial owners of 20,138,542 shares. Mark Finlay as trustee of the HR Finlay Family Trust together with the other trustee (Mark Dobson Trustee Company Limited) are the registered holders and beneficial owners of 1,208,840 shares. 90 | Evolve Education Group Annual Report 2018 Subsidiary Company Directors The following persons held office as Directors of the Company’s subsidiaries during the year ended 31 March 2018 or, in the case of acquired subsidiaries, from the date of acquisition: Company Name Evolve Group 1 Limited Evolve Group 2 Limited Evolve Group 3 Limited Evolve Group 4 Limited Evolve Group 5 Limited Evolve Group 6 Limited Evolve Management Group Limited ECE Management Limited Lollipops Educare Holdings Limited Lollipops Educare Limited Lollipops Educare Centres Limited Lollipops Educare (Hastings) Limited Lollipops Educare (Birkenhead) Limited Evolve Home Day Care Limited Au Pair Link Limited Directors Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 31 August 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 31 August 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 31 August 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 31 August 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 31 August 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 31 August 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Evolve Education Group Annual Report 2018 | 91 Evolve Education Group Annual Report 2016 | 1Subsidiary Company Directors PORSE In-home Childcare (NZ) Limited PORSE Franchising (NZ) Limited PORSE Education & Training (NZ) Limited For Life Education & Training (NZ) Limited Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Alan Wham (ceased 15 September 2017) Stephen Davies Fay Amaral (appointed 26 June 2017) Disclosure of Subsidiary Directors Interests Section 140(1) of the New Zealand Companies Act 1993 requires a director of a company to disclose certain interests. Under subsection (2) a director can make disclosure by giving a general notice in writing to the company of a position held by a director in another named company or entity. In addition to the directorships in the Company and in fellow subsidiary companies (as applicable) referred to above, there were no directors’ general disclosures entered in the relevant Interests Register for the Company’s subsidiaries during the year to 31 March 2018. 92 | Evolve Education Group Annual Report 2018 Corporate Directory Evolve Education Group Limited Registered Office Level 2 54 Fort Street Auckland 1010 New Zealand Phone: +64 9 377 8700 Solicitors Chapman Tripp Level 35, ANZ Centre 23 – 29 Albert Street Auckland 1010 Phone: +64 9 357 9000 Contact Details in Australia C/- Minter Ellison Rudd Watts Level 40, Governor Macquarie Tower 1 Farrer Place Sydney, New South Wales 2000 Phone: +61 2 9921 8888 Directors Alistair Ryan (Chair, since 1 June 2017) Norah Barlow (Chair, until 31 May 2017) Anthony Quirk (appointed 2 August 2017) Lynda Reid (appointed 2 August 2017) Gráinne Troute (appointed 1 May 2017) Senior Management Team Mark Finlay – Chief Executive Officer Stephen Davies – Chief Financial Officer Paul Matthews – Chief Information Officer Fay Amaral – Chief Operating Officer Kerry Henderson – General Manager, PORSE Morgan Holyoake - General Manager, Au Pair Link Auditor PricewaterhouseCoopers 188 Quay Street Auckland 1142 Phone: +64 9 355 8000 New Zealand Share Registrar Link Market Services Limited Level 11, Deloitte Centre 80 Queen Street Auckland 1010 Phone: +64 9 375 5998 Australian Share Registrar Link Market Services Limited Level 12 680 George Street Sydney, New South Wales 2000 Phone: +61 1300 554 474 Banker and Lender ASB Bank Limited 12 Jellicoe Street Auckland 1140 Phone: +64 9 337 4819 Evolve Education Group Annual Report 2018 | 93 Evolve Education Group Annual Report 2016 | 1 

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