Experience... Internet Lotteries Lotteries around the world are experiencing strong sustainable growth thanks to the internet and the right combination of people, technology and experience at Jumbo. Annual Report 2014 Experience... ...the benefits of the internet New Markets Younger Demographics Retailer Opportunity Dynamic Games Responsive Marketing ...is what Jumbo has! 100% pure internet lottery experience since 2000 Over 1.7 million happy internet customers Helped raise over $100M for worthwhile causes Proud supporter of NASPL, WLA and APLA Front Cover: Photos of Jumbo Staff have been used to create a collage of the Jumbo logo. Table of Contents Introduction Highlights Milestones 05 Letter from the CEO 12 Products and Innovation 22 06 Business Overview 14 Leadership Team 24 09 Global Growth Strategy 16 Financial Report 28 Letter from the Chairman 10 Online Transition 18 Directors’ Report 30 Auditor’s Independence Declaration Corporate Governance Statement Financial Statements Notes to the Financial Statements 47 Directors’ Declaration 99 48 Independent Auditor's Report 100 53 Additional Information 102 57 Corporate Directory 104 4 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Jumbo Interactive head office in Brisbane, Australia. (This property is not an asset of the group). INTRODUCTION 5 Introduction Jumbo Interactive Limited (ASX:JIN) is an internet lottery business with operations in Australia and Germany. Currently in an expansion phase, Jumbo has been actively pursuing further opportunities in the USA, Latin America, Asia and Europe. The internet has brought positive change to the world lottery industry with some countries already showing strong sustainable growth as a result. However the vast majority of national lotteries are still at the cusp of this adoption and it is Jumbo’s belief that most will join the revolution in the next few years. Jumbo’s goal is to be at the forefront of this growth trend. With experience dating back to 2000 when Jumbo sold its first lottery ticket on the internet, Jumbo is uniquely positioned to partner with any national lottery around the world. 2013-14 was an important year for Jumbo with the launch of its first international website Jumbolotto.de in Germany. This adds to Jumbo’s success in Australia where www.OzLotteries.com delivered its 14th record year of ticket sales, maintaining its unbroken run. Brief History It is rare for an internet business to have a history so long. Jumbo Interactive was listed on the Australian Stock Exchange in 1999 as an e-commerce business with an online shopping mall. Shortly after this in 2000, laws were changed to permit the sale of lottery tickets on the internet in Australia, so Jumbo started selling charity art union games online. In 2005 Jumbo expanded into national lotteries with the acquisition of the OzLotteries.com website. After enjoying impressive domestic growth, in 2009 Jumbo began to actively explore international online lottery opportunities and in the 2013 financial year, succeeded in securing agreements in Germany, Mexico and the USA. Jumbo will continue this growth strategy to achieve its vision of becoming the global leader in the online lottery industry. Core values of innovation, sustainable growth and respect for all stakeholders have provided the foundations for Jumbo’s success into the future. 6 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Highlights 5 Year Sales on www.OzLotteries.com as at 30 June (Australia) Sales Prizes & Jackpots Year: 09/10 10/11 11/12 12/13 13/14 Continual growth of www.OzLotteries.com over 5 years despite fluctuating prizes & jackpots Younger Demographics as at 30 June (Australia) Internet Lottery Player 35% 30% 25% 20% 15% 10% 5% Total Lottery Players* Internet Lotteries are attracting a younger demographic Age: 18-25 25-35 35-50 50-65 65+ * Source: Roy Morgan Research Single Source Lottery Players Profile Australians 18+ Apr13-Mar14 HIgHLIgHTs 7 280% Significantly increased Social Presence Growth in Social Presence as at 31 July 70THOUSAND LIKES 20K 40K 60K 80K 13/14 12/13 11/12 Customer Accounts Growth as at 30 June 1.72MILLION ACCOUNTS 10% Continuing customer growth 1.3M 1.4M 1.5M 1.6M 1.7M 1.8M 13/14 12/13 11/12 8 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 8 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Jumbo Interactive Munich office in Germany (This property is not an asset of the group). MILEsTONEs 9 Milestones Over the last 12 months, Jumbo has made significant progress in its strategy of growth through international expansion. Jumbolotto.de launches in Germany Connection to all 16 states in Germany Eurojackpot reaches a record €56 million bolstering initial signups 2013 Jul Sep Dec 2014 Apr Jun Agreement Continuation Tatts Reseller Agreement in VIC & NSW continued. 1,720,000 We reached 1.7 Million Customer Accounts 10 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Letter from the Chairman Focus on Germany The focus to date has been in Germany where all sixteen länder (states) have been signed up and an office established. LETTER fROM THE CHAIRMAN 11 Dear Shareholder As we are currently expanding our online lottery games internationally, this has had a short term effect on the current year’s results, and depending on the speed with which we expand, it may continue into the current financial year. However this has not had a negative effect on our growth in sales and if all goes to plan will increase not only our gross sales but diversify our markets to overseas countries. The focus to date has been in Germany where all sixteen länder (states) have been signed up and an office established to service our customers from this country. In addition Mexico continues to be a focus for the future along with other overseas countries. Mr. Mike Veverka, the founder and CEO of the Company, will elaborate more on the activities of the group in his letter, however I would like to acknowledge the effort that has gone into the growth of the company by our dedicated management and team. Our staff now stands at approximately 100 employees working mostly from Brisbane but with a percentage working in the countries where we are focusing our future growth. The team, which is led by Mike, are extremely dedicated and on behalf of the board, I would like to thank Mike and the management team for their continued support and loyalty to the growth of the company. I would also like to thank the board for their support and our loyal shareholders who are now enjoying the rewards of our continued dividend policy which over the next few years is expected to increase as we make headway into other countries. David K Barwick Chairman 12 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Letter from the CEO Growth despite jackpot fluctuations The growth of internet lotteries has never been so evident as last year when sales from our flagship website increased as jackpots decreased. Dear Shareholder, In 2014, Australian jackpots did not reach the same level as in 2013 which was the year that had the record $100 million OzLotto jackpot. Despite this 18% decline in jackpots, sales on our flagship website www.OzLotteries.com still managed to improve 4% and customer accounts increased 10% to 1.72 million. This demonstrates that internet lotteries continue to grow and gain in popularity even during natural fluctuations in prizes and jackpots. Midway through the year marked the launch of our German website www.Jumbolotto.de based on our new generation lottery platform. This was the culmination of two years planning and efforts to establish an international business to complement our successful Australian business. Jumbo’s new generation lottery platform is also a significant achievement and will prepare the company for future growth in further geographical areas. Although this achievement is not as visible as our other achievements, it is nonetheless very significant. The new software platform gives us increased capacity, features and speed to market that will underpin our future growth. I wish to publicly thank the efforts of our entire team in delivering this software platform as well as our other achievements in Australia and Germany and I look forward to exciting developments ahead. Mike Veverka CEO and Founder LETTER fROM THE CEO 13 14 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Business Overview The global lottery industry is in the midst of change as the internet brings in a new wave of players and innovation. Most countries have yet to fully adopt these changes but those that have embraced the internet have reported positive results. excitement and benefits of internet lotteries is undeniable and future-proofs growth for decades to come. A younger demographic is a key benefit for lotteries. The phenomenal growth of mobile internet has brought a generation of young people comfortable with purchasing their daily goods on their mobile. As this generation enter the lottery market, they naturally expect to use their ever-present companion, their mobile phone, to buy their tickets. Jumbo has solid data demonstrating this trend towards mobile devices with 39% of sales now coming through a mobile device. As a pure internet-only seller of lottery tickets, Jumbo’s customer profile is naturally skewed towards a younger demographic with 30% in the 25 to 35 year old age group compared to just 13% in the same age group opting for traditional lottery sales mediums. In Germany, for example, sales have begun an upward trend reversing the previous decline after the 2012 deregulation of the industry which allowed internet sales. In Australia, where the internet has been a part of the lottery industry since 2000, sales have shown resilience in years where prizes and jackpots have naturally fluctuated down giving the government a much more steady source of revenue for worthwhile causes. This wave of change is where Jumbo Interactive has focused its attention and is delivering solutions to and partnering with local lottery operators. Jumbo is also working with a number of lotteries that have not yet legislated internet lottery sales in the belief that the benefits will outweigh the challenges and ultimately approval will be given. At that point Jumbo begins work as an authorised e-retailer in close cooperation with the lottery operator helping to steer away from the pitfalls and deliver on the promises that the internet brings. One of these pitfalls is the proliferation of unregulated internet lottery e-retailers. These are websites that purport to sell official lottery tickets but in fact do not have the correct approvals. They thrive on customer naivety as they are often unaware of the risks involved and put at risk any prizes due to them. Jumbo helps construct a regulated internet lottery e-retailer framework that gives legitimate businesses a way to sell tickets online, protecting consumers and driving unregulated operators out of the industry. The fact that unregulated internet lottery e-retailers even exist is testament to the demand that exists to buy lottery tickets on the internet. The convenience, BUsINEss OVERVIEw 15 16 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Global Growth Strategy Germany Jumbo achieved its goal of connecting to all 16 länder (states) before July 2014 becoming the only e-reseller in Germany with these connections developed entirely in-house. The focus has now shifted towards marketing and building the customer database to reach sustainable profitability. With an estimated 6.4 million lottery players going online by 2020, the market is sufficiently large to achieve this. The German lottery market has actually been in a decline up until the 2012 deregulation of the industry. Total ticket sales have trended downwards from €8.0 billion (AU$11.5 billion) to €6.5 billion (AU$9.4 billion) over the seven year period leading up to deregulation in 2012. Since then this trend has reversed and has begun an upward climb to an estimated €12 billion (AU$17.3 billion) by 2020. The internet Australia The Australian lottery industry has seen impressive growth over the past decade driven by product innovation and a sustainable adoption of internet technologies. Australians have been able to purchase their lottery tickets for over a decade via a variety of internet technologies that include the web, mobile and social media. In the past year sales have been impacted by a natural down cycle in prizes and jackpots. However the full effect of this impact has been lessened by the internet which has brought growth through new markets. To illustrate this point, Jumbo’s flagship website, www.OzLotteries.com, recorded 4% growth in a year when prizes and jackpots were down 18% over the previous year. This was due to new markets opened by the internet, in particular the younger demographic. Natural down cycles are eventually followed by natural up cycles and with a customer database that has grown 10% to 1.72 million accounts in the past year, Jumbo is well placed to deliver stronger growth when those larger prizes and jackpots arrive. is driving this growth with internet sales expected to exceed traditional sales in 2020. Source: Deutscher Lotto & Totoblock (DLTB) lotteries, Deutscher Lottoverband (DLV), Leibnitz University Hanover Other factors are also contributing to overall growth in Germany: 1. Catch-up from previous years of overly- restrictive regulations. 2. Advances in multi-jurisdictional games. The Eurojackpot is a relatively new game which was launched in 2012 and covers 14 countries reaching an audience of 240 million people. Compared to the longer established Euromillions which reaches an audience of 217 million people, it is clear the Eurojackpot has significant growth potential. 3. Increasing lottery participation rates. Germany lags behind its neighbouring countries such as France and the UK in terms of percentage of the population that plays the lottery and also average customer spend. This is seen as a significant driver for growth in the German lottery market. 4. Clamp down on unregulated internet lottery e-retailers. The complex nature of European law gives rise to websites purporting to sell official lottery tickets without the correct approvals in place. Now that a regulatory framework is in place and regulated internet lottery e-retailers such as Jumbo are operational, the government is expected to act and bring customers back to regulated channels. 5 Year Sales on www.OzLotteries.com Sales Prizes & Jackpots Year: 09/10 10/11 11/12 12/13 13/14 Continual growth of www.OzLotteries.com over five years despite fluctuating prizes & jackpots gLOBAL gROwTH sTRATEgy 17 Mexico Jumbo announced in 2012 its intention to establish internet lottery operations in Mexico. With a population of 120 million people, supportive legislation and a culture that enjoys playing lotteries, the opportunity is significant. After completing development of Jumbolotto.mx, delays were encountered in the launch which ultimately led to Jumbo’s decision to terminate its agreements with Sorteo Games in March 2014. The opportunity in Mexico remains significant so efforts were made to find a solution. Significant progress has been made and management is hopeful of a launch in the 2015 financial year. USA The legislative progress in the USA to allow more states to sell lotteries online has been moving forward, albeit at a slow pace. Jumbo has been actively helping a number of state lotteries convince their state legislators that internet lotteries are in the best interests of the state. Management remains optimistic that more states will permit online sales and that Jumbo can develop a good business in partnership with those state lotteries. In the meantime, Jumbo has made progress through its 50% joint venture in Lotto Points Plus. This business provides interactive and physical enhancements to traditional lottery retailers via the LotteryRewards.com website. To date this joint venture has successfully signed agreements with Hess Corporation and Tops Friendly Markets, two major retail chains in the USA. Following on from its initial success, the joint venture has begun a capital raising round to accelerate the rollout of its proven business model.. Australia Germany Next... 18 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Online Transition Digital disruption has transformed many industries including travel, accommodation and retail sales. Lotteries are also going through an online transition and customers around the world are enjoying the quick, easy and convenient way to purchase their regular lottery tickets online. OzLotteries.com websites visits Desktop Smartphone Tablet Smartphones and tablets are gaining mass market appeal, enabling customers to buy online anywhere at any time. Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 ONLINE TRANsITION 19 39 of tickets are now purchased on a mobile device 20 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Funding for charity and worthwhile causes Jumbo understands clearly the driving force behind all lotteries around the world is the need for a reliable and sustainable source of funding for local charities and worthwhile causes. This understanding has been earned from 14 years in the industry and has shaped Jumbo’s business model. Our goals are the same as the lotteries goals - to provide reliable and sustainable funding for local charities and worthwhile causes. This can only be achieved through long term partnerships, responsible marketing and commission-based remuneration. Local customer expectations and stakeholder concerns are researched and used to shape activities to ensure a healthy long term partnership. Jumbo is proud to support the WLA (World Lottery Association), NASPL (North American Association of State and Provincial Lotteries) and APLA (Asia Pacific Lottery Association) and is an enthusiastic participant at all events. fUNDINg fOR CHARITy AND wORTHwHILE CAUsEs 21 fUNDINg fOR CHARITy AND wORTHwHILE CAUsEs 21 Jumbo staff raising money for local charities 22 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Products and Innovation Customers who play their favourite lottery at Jumbo are treated with the best available technology, care and excitement available anywhere in the world. Jumbo is the only internet lottery company with a platform fully developed in-house and is therefore able to keep pace with the rapid advancements on the internet. Mobile Five years ago, 100% of Jumbo’s customers bought their tickets via a web page sitting at a desk. Today 39% of all customers are now buying tickets on their phone, on the move or relaxing with friends. The phenomenal growth of internet-enabled mobile devices now means customers can be alerted to upcoming draws in time to buy their tickets. Then after each draw another alert is sent with the winning numbers and prizes. Jumbo has led the industry in apps for both Apple and Android devices and continues to invest in research and development of new features. PRODUCTs AND INNOVATION 23 Social Media Lotteries are a social pastime by nature which makes it perfect for the rapid rise in popularity of social media. Jumbo has seen explosive growth in the OzLotteries.com Facebook page with the number of “likes” tripling to over 70,000. Jumbo is developing more products designed for social media to stay at the forefront of this worldwide trend. New Technologies As the various industries and technologies converge, new style lottery games will be needed and Jumbo is addressing these needs today. New games involving digital instants, new interfaces and group play are being researched and developed to keep Jumbo at the forefront of this rapidly changing industry. Retailer The unique e-retailer system enables traditional retailers to participate in internet sales and grow in-store foot traffic simultaneously. Jumbo understands the importance of existing traditional retailers and has created a harmonious business model which addresses the many issues these retailers face as well as the convenience on the internet that customers demand. Smart Signs is one example where physical signs advertising upcoming draws can be used to direct customers to complete their purchase on their mobile phone but still reward the retailer owning that sign. 24 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Leadership Team The board and management team have the skills and ability to deliver Jumbo’s vision of being the leading global lottery e-retailer. LEADERsHIP TEAM 25 Left to right Brian J. Roberts; David Todd; Kate Waters; Xavier Bergade; Bill Lyne; Mike Veverka; David Barwick; Brad Board; Fernando Carrillo; Gerhard J. Sparrer. 26 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 David Barwick Chairman and Non-Executive Director David Barwick has over 40 years experience in the management and administration of publicly listed companies in Australia and North America. During this period David has held the positions of Chairman, Managing Director or President of over 30 public companies with strengths in strategic planning, restructuring and financing entities. He is currently Chairman of Jumbo Interactive Limited as well as of Metallica Minerals Limited. Bill Lyne Non-Executive Director and Company Secretary BCom, CA, FICSA, FGIA, FAICD, F Fin Bill Lyne is the Principal of Australian Company Secretary Service that provides secretarial, corporate compliance and governance services to public company clients in a wide range of industries. Prior to this, Bill was Company Secretary and CFO of First Australian Building Society, having previously spent many years in credit and lending positions in merchant banking. Bill holds a Bachelor of Commerce and is a Chartered Accountant. He is a Fellow of the Institute of Chartered Secretaries & Administrators (UK), Governance Institute of Australia, and the Australian Institute of Company Directors. He also has life membership with the Financial Services Institute of Australasia. Mike Veverka Chief Executive Officer & Executive Director BEng (Hons) Mike Veverka is CEO and founder of Jumbo Interactive. He has a proven track record in business and computing, establishing several successful startups to meet new consumer demands for online products. His entrepreneurial flair and ambition for innovation were displayed at the age of fifteen when he created and sold his first software package to Hewlett Packard. Mike worked as a design engineer and computer programmer before founding ‘Squirrel Software Technologies’ that provided some of Australia’s first internet services and e-commerce software. As founder and leader, Mike plays a pivotal role in the growth strategy, innovation and promotion of Jumbo. David Todd Chief Financial Officer MBA, GradDipACG, CAIB(SA), BCom, FGIA, FICSA David has extensive capabilities in business administration with strengths in credit risk management and international business. His experience in financial management spans 25 years in the banking industries of South Africa, New Zealand and Australia, and small cap and SME environments. David holds a Bachelor of Commerce, a Master of Business Administration, an Associate Diploma in Banking, and a Graduate Diploma of Advanced Corporate Governance. He is a Fellow of the Governance Institite of Australia and a Fellow of the Institute of Chartered Secretaries and Administrators (UK). David brings a wealth of commercial expertise to Jumbo Interactive as Chief Financial Officer. Kate Waters Head of HR & Lottery Operations - Australia DipBus, DipHR Kate has progressed through the ranks of Jumbo over the past seven years to become a member of the Key Management Personnel. Her extensive role involves managing Jumbo's Head Office & Australian business' human resource needs ensuring team harmony and productivity. This also includes premises management and travel as well as work place health and safety responsibilities. Kate has recently absorbed the role of Head of Australian Lottery Operations which involves oversight of day to day customer management procedures and customer service for OzLotteries.com. LEADERsHIP TEAM 27 Brad Board Chief Marketing Officer Brad has significant experience in marketing lotteries online in his role as Chief Marketing Officer at Jumbo Interactive. He has provided strategic direction for the successful growth of the Oz Lotteries brand and product in Australia, and has negotiated mutually beneficial lottery e-retail agreements for Jumbo Interactive internationally. Brad is responsible for marketing strategy across all channels and ensures that the online experience and service offering delivered by Jumbo effectively engages and satisfies customers in Australia and internationally. Xavier Bergade Chief Technology Officer As Chief Technology Officer, Xavier ensures that Jumbo’s technology services are continually improving and innovating while remaining secure for customer transactions. Recently Xavier has been responsible for the adaptation of the successful Australian OzLotteries.com website to other markets. JumboLotto websites in Mexico and Germany will soon be live and available for online lottery purchases for customers in these markets. Ensuring capabilities for customer purchases on any device demands that websites continually evolve as new mobile and computer products are released to market with unprecedented frequency. Brian J. Roberts President, North America DipEC Cert(OM) Brian has extensive experience in lotteries and gaming, software development and production and is a recognised creative innovator. His experience in the lottery and gaming industry spans over 40 years with senior roles including Director of Creative Content Development at GTECH, COO and Senior Vice President of Marketing at On-Point Technology Systems, President of LotoMark and Vice President of Lottery Operations at International Totalizator and Lottery Systems. Brian has developed, implemented and managed gaming systems across many international jurisdictions. He holds over twenty issued and pending gaming industry USA patents. Gerhard J. Sparrer Managing Director, Germany Gerhard was responsible for successfully building up Stanleybet Germany, a subsidiary of leading European gaming group Stanleybet International that provides virtual, sports and lottery products. He is a serial entrepreneur starting several successful high-tech companies. His previous roles include co-founder and CEO of Maxxio Technologies AG, and Managing Director of a Siemens Group company, Datentechnik Intercom GmbH. Gerhard has extensive experience in and knowledge of the European gaming market. He has a pioneering spirit, commitment to new technology and a willingness to satisfy customers. Fernando Carrillo Country Manager, Mexico BEcon Fernando has worked in the Mexican and Latin American lottery industry for over six years. Prior to joining Jumbo, he managed the nationwide lottery network as Mexico’s General Manager for Gtech. Before working in the gaming industry, Fernando managed e-business and data for Telmex, the biggest telecommunications company in Latin America. His studies in management, leadership and strategy at the Kellogg School of Management (Northwestern University) complement Fernando’s broader knowledge of economics, finance and operations management. 28 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Financial Report Sales and customer accounts on Jumbo's flagship website www.OzLotteries.com grew 4% and 10% respectively at a time when prizes and jackpots went through a natural downcycle and were 18% lower then the previous year. fINANCIAL REPORT 29 30 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Directors’ Report The Directors of Jumbo Interactive Limited (the Company), present their report on the consolidated entity (the Group), consisting of Jumbo Interactive Limited and the entities it controlled at the end of, and during, the financial year ended 30 June 2014. Directors The following persons were Directors of the Company during the whole of the financial year and up to the date of this report, unless otherwise stated: • David K Barwick (Non-Executive Chairman) • Mike Veverka (Chief Executive Officer) • Bill Lyne (Non-Executive Director) Company Secretary The following person held the position of Company Secretary at the end of the financial year: Mr Bill Lyne – refer to Information on Directors for details. Principal Activities and Significant Changes in Nature of Activities The principal activity of the Group during the financial year was the retail of lottery tickets through the internet and mobile devices, sold both in Australia and eligible overseas jurisdictions. There were no significant changes in the nature of the Group’s principal activities that occurred during the financial year. Dividends Details of dividends paid to members of the Company during the financial year are as follows: Final dividend of 1.5 cent per share on ordinary shares for the year ended 30 June 2013 paid on 27 September 2013 Interim dividend of 1.5 cent per share on ordinary shares for the year ended 30 June 2014 paid on 28 March 2014 In addition to the above dividends, on 22 August 2014, the directors declared a final ordinary dividend for the financial year ended 30 June 2014 of 1.5 cents per ordinary share (2013: 1.5 cents per ordinary share) to be paid on 26 September 2014, a total estimated distribution of $658,540 based on the number of ordinary shares on issue at 22 August 2014. As the dividend is fully franked, there are no income tax consequences for the owners of Jumbo Interactive Limited relating to this dividend. Operating and Financial Review for the Year Information on the operations and financial position of the Group and its business strategies and prospects for future financial years is set out below. Operating Results The Company reports revenue on a net revenue inflow basis where it considers that it acts more as an Agent than as a Principal such as the sale of lottery tickets. The gross amount received for the sale of goods and rendering of services is advised as Total Transaction Value (TTV) for information purposes. Refer to Note 2(d) for details. The Company reports a slight decline in overall revenue and profit as a result of an 18% decrease in major prizes and jackpot activity in Australia (aggregate Division 1 OZ Lotto and Powerball jackpots of $15 million or more) compared to the previous year during which time there was relatively higher activity. The consolidated profit of the Group amounted to $2,784,958 (2013: $2,982,157), after providing for income tax $1,781,676 (2013: $2,333,761) – refer Note 6 for tax expense details, which is a 6.6% decrease on the results reported for the year ended 30 June 2013. Net reportable operating revenues decreased 4.2% to $24,133,876 (2013: $25,191,215) and TTV decreased by 2.6% to $106,295,739 (2013: $109,086,062). $653,290 $658,540 $1,311,830 DIRECTORs’ REPORT 31 Other revenue, being mainly interest on cash, decreased by 3.4% to $1,070,897 (2013: $1,108,744) due to lower average cash and cash equivalent balances and lower average interest rates and an easing in the strengthening of the AUD foreign exchange rate during the 2014 financial year compared to the 2013 financial year. There was a once-off increase in other income of approximately $150,000 relating to a make-good provision that was subsequently reversed. Group earnings before interest, tax, depreciation and amortisation decreased by $711,228 from $6,681,262 to $5,970,034. Although there was a small contribution to TTV and revenue from Germany, the decline in overall TTV and revenue was due to lower large jackpot activity in Australia and slight reduction in margin. A small increase in the gross profit margin in Australia resulted from more direct sales than affiliate sourced sales compared to 2013. The commencement of business in Germany and ongoing efforts in Mexico exceeded the reduced expenses in Australia, leading to an overall reduction in profits. The number of large jackpots on offer is a significant driver of sales. The sales trend over the last two financial year periods in the context of such jackpots is summarised as follows: TTV Reported Revenue OZ Lotto/ Powerball fy 2014 $106.2 million $24.1 million fy 2013 $109.1 million $25.2 million Number of jackpots of $15 million or more Average Division One jackpot of $15 million or more Peak Division One jackpot during the financial year period Aggregate Division One jackpots of $15 million or more during the financial year period 36 $25.7 million $70 million $925million 39 $29.0 million $100 million $1,130 million Like-for-Like Underlying Financial Forecasts of Core Operations Below is a summary of the financial results, and to provide the user a like-for-like comparison of core operating activities, including adjustments for non-core activities. The lower level of large jackpot activity in the current financial year compared to 2013 led to a small reduction in TTV. This, together with a small decline in margin, lowered revenue slightly and has had a reducing effect on like-for-like NPAT of core operations of approximately $750,000. A relative increase in customer acquisition spending resulted in increased marketing expenses with a reducing effect of approximately $150,000 on like-for-like NPAT of core operations. TTV Reported Revenue International expansion costs Like-for-like Revenue EBITDA International expansion costs1 Like-for-like EBITDA of core operations Reported Profit After Tax International expansion costs1 Changed treatment of customer acquisition costs2 Tax concession overclaim3 Like-for-like NPAT of core operations fy 2014 $m 106.2 24.1 Nominal 24.1 6.0 3.2 9.2 2.8 3.0 0.1 - 5.9 fy 2013 $m 109.1 25.2 - 25.2 6.7 3.5 10.2 3.0 2.5 0.8 0.5 6.8 yoy change % (2.7) (4.4) - (4.4) (10.4) (8.6) (9.8) (6.7) 20.0 (87.5) (100.0) (13.2) 1 these costs relate to international expansion activities including depreciation on international website development costs. As noted previously, the Company continues to focus on securing offshore expansion opportunities. These expenses relate to general marketing costs to find target jurisdictions as well as increased employee costs and establishment costs in jurisdictions that have been signed. To date, the Company has been successful in expanding into Germany and has plans to enter more international markets in the future. All these expenses have been fully recognised in the Group’s consolidated profit and loss and funded from operating cash flows with significant payback opportunities expected in the years ahead. 32 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 2 previously, customer acquisition costs were capitalized and amortised over an 18 month period. From 1 July 2012, these costs are expensed as they are incurred. This changed treatment does not affect Net Cash Flows and will reduce the variance between reported Net Profit After Tax and Operating Cash Flows. 3 the Company undertakes a large R&D program with regards to its proprietary website developments. When the 2012 income tax return was just finalised, some R&D costs were identified that are non-deductible for tax purposes that were incorrectly claimed over the past four years. This had the effect of carried forward income tax losses being fully utilised earlier than previous with a consequential adjusted tax payable in the 2013 financial year of $6,065 for the period to 2011 and $552,033 for 2012. Further discussion on the Group’s operations now follows: Review of Operations a. Internet Lotteries Segment The Company continues to make significant investment in its internet intellectual properties, notably OzLotteries.com and during the current financial year www.Jumbolotto.de, as well as its customer database and management of same. The 2.2% decline in net reportable operating revenues to $23,845,402 (2013: $24,403,335) was due the 2.2% lower TTV of $105,795,770 (2013: $108,267,254) which in turn was a result of lower jackpot activity this financial year compared to 2013. These investments, investments in staff and improvements to underlying technology, as well as ongoing efforts to expand into overseas markets have increased the operating costs. This has resulted in a decrease of 16.6% in operating profit contribution to $5,301,703 (2013: $6,354,472). Australia Lower large jackpot activity reduced TTV and revenues, and reduced expenses led to an improved operating profit. TTV for the financial year was $105,706,982 (2013: $108,267,952), Revenues $23,836,781 (2013: $24,403,335) and operating profit $6,765,422 (2013: $6,354,472), whilst still bearing costs of approximately $2.6 million relating to international expansion activities (2013: approximately $3.5 million). Germany The German website www.Jumbolotto.de went live 23 December 2013. Since then, efforts have been concentrated on optimising the website, expanding staff numbers and skills, and testing and identifying marketing channels. The business is now well placed for growth with planned significant investment in customer acquisitions and the website over the next few years. TTV for the financial year was $88,788 (2013: $nil) generating revenue of $8,621 and an operating loss of $1,114,642 (2013: loss $6,008). Mexico Although the website www.Jumbolotto.mx was delivered, it did not become operational as expected due to events beyond the Company’s control relating to its business partner. Expectations are that the website will be operational in the current financial year. The fair value of the approximate $2.5 million investment in Sorteo Games Inc., USA was reduced to $nil due to uncertainty with regards to future cash flows of that company. Refer Notes 9 and 15 for further details. The operating loss for Mexico was $349,077 (2013: $nil). b. All Other Segments This segment consists of the sale of non-lottery products and services and is primarily an exploration in leveraging off the current lottery customer database. Revenues decreased to $508,749 (2013: $866,479) following rationalisation of the product range with a resulting operating profit of $12,883 (2013: loss $84,962). c. Summary of Results The results for the Group are summarised below: 2014 $ $106.3 million $5,970,034 $2,784,958 2013 $ 109.1 million 6,681,262 2,982,157 2012 $ 100.3 million 10,515,449 6,743,525 2011 $ 75.9 million1 7,024,8101 4,834,455 2010 $ 66.0 million1 2,392,566 (7,311,048)2 Total Transaction Value EBITDA PROFIT - NPAT 1 Continuing operations. 2 After impairment losses of $8,290,292. DIRECTORs’ REPORT 33 Five Year Asset Growth Cash at Bank1 Net Assets NTA 2014 $ $25.4 million $19.8 million $11.8 million 2013 $ 24.5 million 20.5 million 13.8 million 2012 $ 21.7 million 18.1 million 11.3 million 2011 $ 11.8 million 10.1 million 3.7 million 2010 $ 9.5 million 6.4 million 0.4 million 1 Includes cash held under term deposit and customer account balances payable (refer to Note 11: Cash and Cash Equivalents and Note 20: Trade and Other Payables for details). Five Year Share Price Analysis PROFIT - NPAT EPS Share Price Shares on Issue Market Cap 2014 $ $2,784,958 6.4¢ 130.0¢ 43.9 million $57.1 million 2013 $ 2,982,157 6.9¢ 150.0¢ 43.6 million 65.3 million 2012 $ 6,743,525 16.7¢ 105.0¢ 42.4 million 44.5 million 2011 $ 4,834,4552 12.1¢2 37.0¢ 39.5 million 14.6 million 2010 $ (7,311,048)1 (17.0¢)1 27.0¢ 43 million 11.6 million 1 After impairment losses of $8,290,292. 2 After impairment reversal $1,258,354 and voluntary administration expenses $1,224,339. Financial Position The net assets of the Group have decreased by $691,688 from 30 June 2013 to $19,817,537. This decrease is largely due to the decline in fair value of the available-for-sale financial asset to $nil, notwithstanding a reasonable operating performance of the Group. The Group’s working capital, being current assets less current liabilities, has improved marginally from $11,315,057 in 2013 to $11,553,705 in 2014. Non-current assets decreased by $1,252,181 to $8,547,487 due mainly to the abovementioned decline in fair value that more than offset the increased investment in intangible assets. The Directors believe the Group is in a sound financial position to expand and grow its current operations. Significant Changes in State of Affairs Significant changes in the state of affairs of the Group for the financial year were as follows: a. Decrease in non-current assets of $1,252,181 as a result of: A change in the fair value of investment in Sorteo Games Inc., USA (see Note 16: Available-for-sale financial assets for details) Investment in website development costs net of amortisation (see Note 19: Intangible Assets for details) Changes in other non-current assets b. Decrease in reserves in Equity (see Note 24: Contributed Equity for details): A change in the fair value of investment in Sorteo Games Inc., USA and recognised through Other Comprehensive Income (see Note 16: Available-for-sale financial assets for details) $ (2,530,054) 1,489,657 (211,784) (1,252,181) $ (2,530,668) (2,530,668) 34 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Likely Developments, Key Business Strategies and Future Prospects The Company continues its efforts to grow its core domestic lottery market in Australia while respecting responsible gaming commitments and the needs of all industry stakeholders, including other lottery channels. The following lottery agreements are held with the Tatts Group: • Victoria (five years which expired 30 June 2013 – extended on a 30 days’ notice basis); • New South Wales (five years which expired 4 December 2013 – extended on a 30 days’ notice basis); • South Australia (five years expiring 29 December 2016); and • Northern Territory (five years expiring 27 September 2017) The Company has a strong relationship with Tatts and continues to pursue renewal of the expired agreements for further five year periods. The domestic internet lottery market represents 7% of the total domestic lottery market compared to overseas lottery markets which have recorded strong growth such as the more mature markets of UK and Finland where internet market share has reached 15% and 30% respectively. Based on this, there is still good growth potential in the domestic market. In addition to the ongoing focus on its core domestic market, the Company continues to actively pursue opportunities in international markets in: • the USA where the North America lottery market is $60 billion; • Mexico where the lottery market is $1.3 billion; and • Europe The Company continues with its 50/50 owned New York based joint venture company established in November 2012 to provide new generational lottery solutions incorporating internet, physical merchandising and lottery affinity/loyalty programs to US retailers. Sales in the $10 billion German lottery market, selling the national lottery games in Germany to its residents, commenced in December 2013 through the licence obtained during the year and subsequent agreements signed with the 16 länder (states). New products and technologies are being developed to take advantage of the trend towards social media, interactive gaming and e-retailing, which is expected to have the Company well placed in the domestic market and give it a competitive edge in the international markets. Although the costs to establish these overseas businesses will depress profits for the next two years approximately, the Group will be well placed for strong results in the medium to long term. Matters Subsequent to the End of the Financial Year There were no material events after the balance sheet date. Environmental Regulation The Group’s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or Territory. DIRECTORs’ REPORT 35 Information on Directors David K Barwick Experience Appointed as a Board member on 30 August 2006 and Chairman on 7 November 2007. David Barwick is an accountant by profession with over 40 years experience in the management and administration of publicly listed companies both in Australia and North America. During this period David has held the position of Chairman, Managing Director or President of over 30 public companies covering a broad range of activities. Other current directorships1 Current Director and Chairman of Metallica Minerals Limited (since 11 March 2004). Interest in shares and options2 None Special responsibilities Chairman (non-executive); Chair of the Nomination and Remuneration Committee; and member of the Audit and Risk Management Committee. Former directorships (in the last three years)3 Previous Director and Chairman of MetroCoal Limited (from 6 July 2007 to 30 June 2012), previous Chairman and Director of Orion Metals Limited (from 28 November 2008 to 30 September 2012), and previous Director and Chairman of Planet Metals Limited (since 9 June 2009 to 4 September 2013). Mike Veverka Qualifications Bachelor of Engineering (Honours) Experience Mike Veverka has been Chief Executive Officer and Director of Jumbo Interactive Limited since the restructuring of the Company in September 1999. Mike was instrumental in the development of the e-commerce software that is the foundation to the various Jumbo operations. Mike was the original founder of subsidiary Benon Technologies Pty Ltd in 1995 when development of the software began. Mike also established a leading internet service provider in Queensland which operated successfully for three years before being sold. Mike is regarded as a pioneer in the Australian internet industry with many successful internet endeavours to his name. Mike graduated with an Honours degree in engineering in 1987. Other current directorships1 None Interest in shares and options2 9,060,471 ordinary shares in Jumbo Interactive Limited. Special responsibilities Chief Executive Officer Former directorships (in the last three years)3 None 36 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Bill Lyne Qualifications Bachelor of Commerce; Chartered Accountant Experience Appointed as a board member on 30 October 2009. Bill Lyne is the principal of Australian Company Secretary Service, providing company secretarial, compliance and governance services to public companies. He is currently company secretary of two other publicly listed companies, is a former secretary and/or director of a number of other listed companies, and has a wealth of experience in corporate governance principles and practices. Bill is a fellow of Governance Institute of Australia and has been a presenter at GIA courses in company secretarial practice. Other current directorships1 None Interest in shares and options2 None Special responsibilities Chair of the Audit and Risk Management Committee; member of the Nomination and Remuneration Committee; and Company Secretary. Former directorships (in the last three years)3 None 1 Current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 2 Includes transactions since the end of the reporting date up to and including the date of the Directors’ Report. 3 Directorships held in the last three years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Meetings of Directors The number of meetings of the Board of Directors (including board committees) held during the year ended 30 June 2014 and the number of meetings attended by each Director is set out below: Board Audit and Risk Management Committee Nomination and Remuneration Committee Name David Barwick Mike Veverka Bill Lyne Eligible to attend Attended 16 15 16 16 15 16 Eligible to attend 6 - 6 Attended 6 - 6 Eligible to attend 5 - 5 Attended 5 - 5 Share Options Unissued ordinary shares of the Company under option at the date of this report are as follows: Date options granted 14 December 2011 3 September 2013 6 November 2013 7 August 2014 Expiry date 14 December 2014 3 September 2018 6 November 2018 3 September 2018 Exercise price of shares $0.70 $4.00 $4.00 $4.00 Number under option 300,000 2,300,000 400,000 100,000 3,100,000 The holders of these options do not have any rights under the options to participate in any share issue of the Company or of any other entity. During or since the financial year ended 30 June 2014, the following ordinary shares of Jumbo Interactive Limited were issued on the exercise of options granted. No amounts are unpaid on any of the shares. Employees Employees grant date 15 February 2011 14 December 2011 Issue price of shares 50 cents 70 cents Number of shares issued 150,000 200,000 350,000 DIRECTORs’ REPORT 37 During or since the end of the financial year, 1,750,000 options were granted and 100,000 options were cancelled by Jumbo Interactive Limited to the following Directors and key management personnel, including the five most highly remunerated officers, of the Group as part of their remuneration Name Mike Veverka Brad Board David Todd Xavier Bergade Kate Waters1 Position Director KMP KMP KMP KMP Number of options granted 400,000 350,000 350,000 350,000 200,000 1,650,000 Number of ordinary shares under option 400,000 350,000 350,000 350,000 200,000 1,650,000 1300,000 options were granted 3 September 2013 and 100,000 options were cancelled 7 August 2014 due to a change in remuneration structure subsequent to the financial year end. For details of options issued to directors and executives as remuneration, refer to the Remuneration Report. Remuneration Report (Audited) This report details the nature and amount of remuneration for each Key Management Person, including each director of Jumbo Interactive Limited. a. Policy for determining the nature and amount of KMP remuneration The Remuneration Policy of Jumbo Interactive Limited has been designed to align director and Key Management Personnel (KMP) objectives with shareholder and business objectives by providing a remuneration component and offering specific incentives based on key performance areas affecting the Group’s financial results. The Board of Jumbo Interactive Limited believes the Remuneration Policy to be appropriate and effective in its ability to attract and retain the best directors and KMP to run and manage the Group, as well as create goal congruence between directors, executives and shareholders. The Board’s policy for determining the nature and amount of remuneration for Board members and KMP of the Group is as follows: • The Remuneration Policy, setting the terms and conditions for the directors and KMP, was developed by the Nomination and Remuneration Committee and approved by the Board. • All KMP receive a base salary (which is based on factors such as individual performance skills, level of responsibilities, experience and length of service), superannuation, options (by invitation) and performance incentives. • Performance incentives are generally only paid once predetermined key performance measures have been met. • The Board reviews KMP packages annually by reference to the Group’s performance, executive performance and comparable information from industry sectors and other listed companies in similar industries. The performance of KMP is measured against criteria agreed annually with each KMP and is based predominantly on the Group’s profits and shareholder value. All bonuses and incentives must be linked to predetermined performance criteria. Any changes must be justified by reference to measurable performance criteria. The policy is designed to attract the highest calibre of KMP and reward them for performance that results in long term growth in shareholder wealth. Refer below for further details of performance based remuneration. KMP are also entitled to participate in the employee share option arrangements. The Directors and KMP receive a superannuation guarantee contribution required by the government, which is currently 9.50% (9.25% up to 30 June 2014) and do not receive any other retirement benefits. Some individuals, however, may choose to sacrifice part of their salary to increase payments towards superannuation. All remuneration paid to Directors and KMP is valued at the cost to the Company and expensed. Options are valued using the Black-Scholes, Binomial or Monte Carlo Simulation methodologies. 38 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Fixed compensation Fixed compensation consists of a base salary as well as employer contributions to superannuation funds. Compensation levels are reviewed annually by the Board through a process that considers individual and overall performance of the Group, and with reference to other KMP of comparable companies. If considered necessary, external consultants provide analysis and advice to ensure the Directors’ and KMP compensation is competitive in the market place. Performance linked compensation Performance linked compensation includes short term incentives only and is designed to reward KMP for superior performance. The short term incentive (STI) is an “at risk” bonus provided in the form of cash. The Group does not have long term incentives (LTI) such as the issue of ordinary shares or the grant of options over ordinary shares as a part of performance linked compensation due to the relatively small market capitalisation of the Company, the concentrated shareholding of the Company which could become further concentrated under such a scheme, and the desire of the Board to limit shareholding dilution to as low a level as possible. The Board did not exercise any discretion on the payment of bonuses. Non-executive Directors The Board policy is to remunerate non-executive Directors at market rates for comparable companies for time, commitment and responsibilities. The Board determines payments to the non-executive Directors and reviews their remuneration annually based on market practice, duties and accountability. Independent external advice may be sought if required. The maximum aggregate amount of fees that can be paid to non-executive Directors is subject to approval by shareholders at the Annual General Meeting. The total compensation for all non-executive Directors, last voted upon by shareholders at the 2009 AGM, is not to exceed $250,000 per annum and is set with reference to other non-executive Directors of comparable companies. Fees for non-executive Directors are not linked to the performance of the Group. Fees are paid as follows and comprise cash and statutory superannuation: Chairman of Board Non-executive Directors Membership of Audit and Risk Management Committee and Nomination and Remuneration Committee Chairman of Audit and Risk Management Committee Chairman of Nomination and Remuneration Committee $76,475 $54,625 No additional fees No additional fees No additional fees Performance Based Remuneration As part of the KMP remuneration package there is a performance based component, consisting of key performance indicators (KPI). The intention of this program is to facilitate goal congruence between executives with that of the business and shareholders. These KPI are set annually, with a certain level of consultation with KMP to ensure buy-in. The KPI target areas the Board believes hold greater potential for group expansion and profit, covering both financial and non-financial as well as short and long- term goals. The level set for each KPI is based on combination of an improvement on the previous year results, budgeted figures and market sector standards (Consumer Discretionary Sector – ASX code: XDJ). Performance in relation to the KPI is assessed annually by the Board, with bonuses being awarded depending on the number and deemed difficulty of the KPI achieved. Following the assessment, the KPI are reviewed by the Board in light of the desired and actual outcomes, and their efficacy is assessed in relation to the Group’s goals and shareholder wealth before the KPI are set for the following year. In determining whether or not a KPI has been achieved, the Company bases the assessment on audited figures. Performance conditions linked to remuneration The Group seeks to emphasise reward incentives for results and continued commitment to the Group through the provision of various “at risk” cash bonus reward schemes. Short term incentive bonus Incentive payments are based on the achievement of financial targets of profit, return on equity and total shareholder return and non-financial targets of strategic benefit such as signing of lottery agreements both domestically and internationally. Payments of incentives for the 2014 financial year result were based on the Group’s overall financial performance (with some KPIs being achieved) and commercialisation of the Germany licence and agreements. DIRECTORs’ REPORT 39 Long term incentive bonus Options are issued to KMP as part of their remuneration at the discretion of the Board. These options are not issued based upon performance criteria, but are issued to increase goal congruence between KMP, directors and shareholders. Company Performance, Shareholder Wealth, and Directors’ and KMP Remuneration The following table shows the total transaction value and profits/(loss) for the last five years for the listed entity, as well as the share price at the end of the respective financial years. Analysis of the figures shows an increase in profits each year, except 2010 when an impairment of the software division was recognised (this division was subsequently closed in the 2011 financial year) and the current year. The lower profit in 2013 was due to (i) a change in the treatment of customer acquisition costs and (ii) increased costs relating to international expansion. The latter has led to agreements being secured in Mexico, USA and Germany during the financial year which are expected to have a positive contribution to profits in future financial years. The general improvement in the Company’s performance over the past five years has been reflected in the Company’s share price with an increase each year. The Board is of the opinion that these results can be attributed, in part, to the Remuneration Policy and is satisfied with the upwards trend in shareholder wealth over the past five years. Total Transaction Value Net profit/(loss) – overall operations Net profit/(loss) – continuing operations Net profit/(loss) – discontinued operations Share price at year end Dividends paid per share Total shareholder return Earnings per share Return on capital employed – overall operations Return on capital employed – continuing operations Return on capital employed – discontinued operations 1 Continuing operations. 2 This is after a one-off impairment expense of $348,585. 3 This is after a one-off impairment expense of $7,941,707. 2014 $106.3 mil $ 2,784,958 $ 2,784,958 - 130.0¢ 3.0¢ (11.3%) 6.4¢ 14.1% 14.1% - 2013 $109.1 mil $ 2,982,157 $ 2,982,157 - 150.0¢ 3.5¢ 46.2% 6.9¢ 14.5% 14.5% - 2012 $100.3 mil $6,743,525 $6,476,516 $267,0095 105.0¢ 1.5¢ 187.8% 16.7¢ 37.3% 35.8% 1.5% 2010 2011 $66.0 mil1 $75.9 mil1 ($7,311,048) $4,834,455 $3,260,7972 $4,932,851 ($98,396)4 ($10,571,845)3 27.0¢ 0.5¢ 27.9% (17.0¢) (114.6%) 51.1% (165.7%) 37.0¢ 0.5¢ 38.9% 12.1¢ 47.9% 48.9% (1.0%) 4 This is after reversal of impairment expense $1,258,354, loss on loss of control of subsidiary placed into voluntary administration $639,644 and expenses relating to the voluntary administration expenses $584,695. 5 This is only the tax effect of the subsidiary placed into voluntary administration. b. Key Management Personnel The following persons were key management personnel of the Group during the financial year: David K Barwick Chairman (non-executive) Mike Veverka Director and Chief Executive Officer Bill Lyne Non-executive Director and Company Secretary David Todd Chief Financial Officer Xavier Bergade Chief Technology Officer Kate Waters Head of Human Resources and Lottery Operations - Australia Brad Board Chief Marketing Officer 40 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Details of Remuneration Details of compensation of key management personnel of Jumbo Interactive Limited Group are set out below: 2014 short term employee benefits Post employment benefits Cash salary, fees and leave $ Cash bonus $ Non-monetary benefits $ superannuation $ Directors David Barwick Mike Veverka Bill Lyne Bill Lyne – as Company Secretary Other key management personnel David Todd Xavier Bergade Kate Waters Brad Board Total key management personnel remuneration 70,000 372,463 50,000 21,238 200,000 200,000 130,000 165,769 1,209,470 - 45,000 - - 22,500 24,900 10,790 16,650 119,840 - - - - - - - - 6,475 25,000 4,625 - 20,581 20,803 13,023 16,874 107,381 1 Includes share based payments over the remaining term on those options exercised during the financial year. 2013 short term employee benefits Post employment benefits Cash salary, fees and leave $ Cash bonus $ Non-monetary benefits $ superannuation $ Long term benefits Long service leave Termination benefits $ share based payments Options1 $ Proportion of remuneration that is performance based % % of value of remuneration that consists of options Directors David Barwick Mike Veverka Bill Lyne Bill Lyne – as Company Secretary Other key management personnel David Todd Xavier Bergade Kate Waters Brad Board2 Total key management personnel remuneration 70,000 378,605 50,000 25,691 200,000 200,000 130,000 120,577 1,174,873 - 124,500 - - 62,250 63,750 29,575 51,188 331,263 - - - - - - - - 6,300 25,000 4,500 - 23,603 23,738 14,362 15,459 112,962 1 Includes share based payments over the remaining term on those options exercised during the financial year. 2 Brad Board became a member of KMP on 19 December 2012. Long term benefits Long service leave Termination benefits $ share based payments Options1 $ Proportion of remuneration that is performance based % % of value of remuneration that consists of options 6,909 3,838 3,838 2,495 3,838 20,918 $ - - - $ - - - 5,273 5,158 2,922 2,359 25,891 71,691 1,529,300 Total $ 76,475 472,788 54,625 21,238 258,947 263,450 166,618 215,159 Total $ 76,300 541,245 54,500 25,691 291,126 295,635 181,737 189,583 23,416 - - - 12,028 13,909 10,310 12,028 - - - - - 2,989 4,878 10,828 1,655,817 - - - - - - - - - - - - - - - - - - % - - - 5.0 4.6 5.3 6.2 6.6 % - 1 - - - 1 3 - 9.5 - - - 8.7 9.5 6.5 7.7 23 - - - 21 22 16 27 10,179 2,961 Details of Remuneration Details of compensation of key management personnel of Jumbo Interactive Limited Group are set out short term employee benefits Cash salary, fees and Non-monetary Cash bonus benefits superannuation Post employment benefits Long term benefits Long service leave $ Termination benefits $ - 6,909 - - 3,838 3,838 2,495 3,838 20,918 - - - - - - - - - 1 Includes share based payments over the remaining term on those options exercised during the financial year. short term employee benefits Cash salary, fees and Non-monetary Cash bonus benefits superannuation Post employment benefits Long term benefits Long service leave $ Termination benefits $ - 10,179 - - 5,273 5,158 2,922 2,359 25,891 - - - - - - - - - below: 2014 Directors David Barwick Mike Veverka Bill Lyne Bill Lyne – as Company Secretary Other key management personnel David Todd Xavier Bergade Kate Waters Brad Board Total key management personnel remuneration 2013 Directors David Barwick Mike Veverka Bill Lyne Bill Lyne – as Company Secretary Other key management personnel David Todd Xavier Bergade Kate Waters Brad Board2 Total key management personnel remuneration leave $ 70,000 372,463 50,000 21,238 200,000 200,000 130,000 165,769 1,209,470 leave $ 70,000 378,605 50,000 25,691 200,000 200,000 130,000 120,577 1,174,873 $ - - - $ - - - 45,000 22,500 24,900 10,790 16,650 119,840 124,500 62,250 63,750 29,575 51,188 331,263 $ - - - - - - - - $ - - - - - - - - $ - $ - 6,475 25,000 4,625 20,581 20,803 13,023 16,874 107,381 6,300 25,000 4,500 23,603 23,738 14,362 15,459 112,962 1 Includes share based payments over the remaining term on those options exercised during the financial year. 2 Brad Board became a member of KMP on 19 December 2012. DIRECTORs’ REPORT 41 share based payments Options1 $ - 23,416 - Total $ 76,475 472,788 54,625 - 21,238 12,028 13,909 10,310 12,028 258,947 263,450 166,618 215,159 71,691 1,529,300 share based payments Options1 $ - 2,961 - Total $ 76,300 541,245 54,500 - 25,691 - 2,989 4,878 - 291,126 295,635 181,737 189,583 10,828 1,655,817 Proportion of remuneration that is performance based % % of value of remuneration that consists of options % - 9.5 - - 8.7 9.5 6.5 7.7 - 5.0 - - 4.6 5.3 6.2 6.6 Proportion of remuneration that is performance based % % of value of remuneration that consists of options % - 23 - - 21 22 16 27 - 1 - - - 1 3 - 42 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 c. Cash bonuses Key management personnel are also entitled to a short-term cash incentive based on performance criteria described in section (a) to this Remuneration Report. These were paid out on 23 December 2013 and 28 August 2014. Details of these short-term incentives recognised as remuneration, forfeited or available for vesting in later years is outlined below: KMP David Barwick Bill Lyne Mike Veverka David Todd Xavier Bergade Kate Waters Brad Board Included in remuneration $ n/a n/a 45,000 22,500 24,900 10,790 16,650 forfeited in year $ n/a n/a 195,000 97,500 95,100 41,210 73,350 Available for vesting in future years1 $ n/a n/a 28,000 14,000 12,000 - - 1 bonuses totalling $54,000 that have been accrued and were included in the 2013 financial year compensation details have not yet been paid, and are now expected to be paid in the 2015 financial year. d. Options and rights granted as remuneration Options are issued to key management personnel as part of their remuneration at the discretion of the Board. The options are not necessarily issued based upon performance criteria, but are issued to selected executives of the Company and its subsidiaries to increase goal congruence between executives, directors and shareholders. No. options/ rights granted No. options/ rights vested fair value per option at grant date Exercise Price Amount paid or payable for options Expiry date Date exercisable 2014 Directors Mike Veverka 400,000 400,000 Other key management personnel David Todd Xavier Bergade Brad Board Kate Waters1 350,000 350,000 350,000 200,000 1,250,000 $0.334 $4.00 $0.170 $0.170 $0.170 $0.170 $4.00 $4.00 $4.00 $4.00 - - - - - - - - - - - - - 6 Nov 2018 6 Nov 2013 3 Sept 2018 3 Sept 2018 3 Sept 2018 3 Sept 2018 3 Sep 2013 3 Sep 2013 3 Sep 2013 3 Sep 2013 1300,000 options were granted 3 September 2013 and 100,000 options were cancelled 7 August 2014 due to a change in remuneration structure subsequent to the financial year end. Options will vest in key management personnel when the share price equals the exercise price, as measured by the five business day moving average, and on condition that they are currently employed by the Jumbo Interactive Limited Group at the time of vesting. If the key management person leaves before their options vest, then the options will lapse immediately. In the event of retirement or retrenchment, the options will lapse one month after the event and if deceased, the options will lapse three months after the event. e. Equity instruments issued on exercise of remuneration options Details of equity instruments issued during the period to key management personnel as a result of options exercised that had previously been granted as compensation are as follows: 2014 Other key management personnel Xavier Bergade Number of shares issued on exercise of options Number of options exercised Amount paid per share $ Amount unpaid per share 150,000 150,000 150,000 150,000 0.50 - DIRECTORs’ REPORT 43 f. Value of options to key management personnel Details of the value of options exercised and lapsed during the year to key management personnel as part of their remuneration are summarised below: grant details for the financial year ended 30 June 2014 Overall Date No. Other key management personnel Value per option at grant date1 $ Exercised2 No. Value at date Exercised3 $ Lapsed No. Lapsed $ Vested No. Vested % Unvested % Lapsed % Xavier Bergade 15 Feb 2011 150,000 150,000 0.065 150,000 150,000 226,500 226,500 - - - - - - - - - - - - 1 The value of options granted during the period differs from the expense recognised as part of each key management person’s remuneration in (c) above because the value is the grant date fair value calculated in accordance with AASB 2 Share-Based Payment. 2 All options exercised resulted in the issue of ordinary shares in Jumbo Interactive Limited on a 1:1 basis. All persons exercising options paid the applicable exercise price. 3 The value of the options that have been exercised during the year as shown in the above table was determined as the intrinsic value of the options at exercise date i.e. the excess of the market value at exercise date over the strike price of the option. g. Equity instruments held by key management personnel Options and rights holdings Details of options and rights held indirectly or beneficially by key management personnel are as follows: granted as remuneration during the year Exercised during the year Other changes during the year Balance at 1 July 2013 Balance at 30 June 2014 Vested at 30 June 2014 Total vested and exercisable at 30 June 2014 Total vested and unexercisable at 30 June 2014 Mike Veverka David Todd - - 400,000 350,000 - - Xavier Bergade 150,000 350,000 (150,000) Kate Waters Brad Board - - 300,000 350,000 - - 150,000 1,750,000 (150,000) - - - - - - 400,000 350,000 350,000 300,000 350,000 1,750,000 - - - - - - - - - - - - - - - - - - Shareholdings Details of ordinary shares held directly, indirectly or beneficially by key management personnel and their related parties are as follows: 30 June 2014 Mike Veverka David Todd Xavier Bergade Kate Waters Brad Board Balance at 1 July 2013 granted as remuneration during the year Issued on exercise of options during the year Other changes during the year1 Balance at 30 June 2014 9,290,221 20,000 - - - 9,310,221 - - - - - - - - 150,000 - - (229,750) - - - - 9,060,471 20,000 150,000 - - 150,000 (229,750) 9,230,471 1 includes on-market transactions and acquisitions under the dividend reinvestment plan. 44 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 h. Other transactions and balances Consolidated group 2014 $ 2013 $ Transactions between related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. Elegant Properties Pty Ltd and Rosch Realty Pty Ltd are solely owned by Mr Mike Rosch, the father of Mr Mike Veverka, the CEO and executive director of the Company. Elegant Properties Pty Ltd rented an office from the Group and provided services during this financial year and Rosch Realty Pty Ltd provided an agent service during the previous financial year. Office rent received Sales commission paid Services paid 10,236 - 2,613 4,550 6,000 17,018 Mrs Julie Rosch, the mother of Mr Mike Veverka, the CEO and Executive Director of the Company, is engaged as a full time employee within the Group. Salary and superannuation 81,938 79,864 i. Employment contracts of directors and KMP The employment conditions of non-executive directors are formalised by letters of appointment and KMP are formalised in contracts of employment. The employment contracts stipulate a range of terms and conditions. The Company may terminate an employment contract without cause by providing written notice or making payment in lieu of notice, based on the individual’s annual salary component. A termination payment may or may not be applicable dependent on the particular circumstances. Termination payments are generally not payable on resignation or dismissal for serious misconduct. In the instance of serious misconduct the Company can terminate employment at any time. Any options not exercised before or on the date of termination will lapse. The policy of the Company is that service contracts are generally unlimited in term. Unless otherwise stated, service agreements do not provide for pre-determined compensation values or the manner of payment. Compensation is determined in accordance with the general remuneration policy outlined above. The manner of payment is determined on a case by case basis. Mike Veverka Contract term: Ongoing Base salary: Base salary for the year ending 30 June 2014 of $360,000, plus superannuation, plus incentive bonus potential of up to 66.66% of base subject to KPI achievement and Nomination and Remuneration Committee approval, to be reviewed annually by the Nomination and Remuneration Committee. Termination payments: Payment on early termination by the Group, other than for gross misconduct, equal to 12 months base salary plus bonus. David Todd Contract term: Ongoing Base salary: Base salary for the year ending 30 June 2014 of $200,000, plus superannuation, plus incentive bonus potential of up to 60% of base subject to KPI achievement and Nomination and Remuneration Committee approval, to be reviewed annually by the Nomination and Remuneration Committee. Termination payments: Payment on early termination by the Group, other than for gross misconduct, equal to six months base salary. DIRECTORs’ REPORT 45 Xavier Bergade Contract term: Ongoing Base salary: Base salary for the year ending 30 June 2014 of $200,000, plus superannuation, plus incentive bonus potential of up to 60% of base subject to KPI achievement and Nomination and Remuneration Committee approval, to be reviewed annually by the Nomination and Remuneration Committee. Termination payments: Payment on early termination by the Group, other than for gross misconduct, equal to six months base salary. Kate Waters Contract term: Ongoing Base salary: Base salary for the year ending 30 June 2014 of $130,000, plus superannuation, plus incentive bonus potential of up to 40% of base subject to KPI achievement and Nomination and Remuneration Committee approval, to be reviewed annually by the Nomination and Remuneration Committee. Termination payments: Payment on early termination by the Group, other than for gross misconduct, equal to six months base salary. Brad Board Contract term: Ongoing Base salary: Base salary for the year ending 30 June 2014 of $200,000, plus superannuation, plus incentive bonus potential of up to 60% of base subject to KPI achievement and Nomination and Remuneration Committee approval, to be reviewed annually by the Nomination and Remuneration Committee. Termination payments: Payment on early termination by the Group, other than for gross misconduct, equal to six months base salary. End of Remuneration Report Indemnifying Officers or Auditor During the financial year, the Company paid a premium in respect of a contract insuring directors, secretaries and executive officers of the Company and its controlled entities against a liability incurred as director, secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer of the Company or any of its controlled entities against a liability incurred as such an officer. No indemnity has been provided to, or insurance paid on behalf of, the auditor of the Group. 46 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Non-Audit Services During the financial year, the following fees for non-audit services were paid or payable to the auditor, BDO, or their related practices: Taxation services Amounts paid or payable to a related practice of BDO Tax compliance services - tax returns Transfer pricings Other tax advice Other services Amounts paid or payable to a related practice of BDO Accounting advice Total fees for non-audit services Consolidated 2014 $ 2013 $ 27,212 58,594 12,000 37,345 - 29,693 - 97,806 3,180 70,218 On the advice of the Audit and Risk Management Committee, the Directors are satisfied that the provision of non-audit services, during the year, by the auditor (or by another person or firm on behalf of the auditor), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. On the advice of the Audit and Risk Management Committee, the Directors are satisfied that the provision of non-audit services by the auditor, as set out above, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the Audit and Risk Management Committee to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the non-audit services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. Proceedings on Behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Auditor’s Independence Declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is attached to this report. This report is made in accordance with a resolution of the Directors. David K Barwick Chairman Brisbane 28 August 2014 AUDITOR’s INDEPENDENCE DECLARATION 47 Auditor’s Independence Declaration Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au Level 10, 12 Creek St Brisbane QLD 4000 GPO Box 457 Brisbane QLD 4001 Australia Level 10, 12 Creek St Brisbane QLD 4000 GPO Box 457 Brisbane QLD 4001 Australia DECLARATION OF INDEPENDENCE BY TIMOTHY KENDALL TO THE DIRECTORS OF JUMBO INTERACTIVE LIMITED DECLARATION OF INDEPENDENCE BY TIMOTHY KENDALL TO THE DIRECTORS OF JUMBO INTERACTIVE LIMITED • any applicable code of professional conduct in relation to the audit. As lead auditor of Jumbo Interactive Limited for the year ended 30 June 2014, I declare that, to the best of my knowledge and belief, there have been no contraventions of: • the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. As lead auditor of Jumbo Interactive Limited for the year ended 30 June 2013, I declare that, to the DECLARATION OF INDEPENDENCE BY TIMOTHY KENDALL TO THE DIRECTORS OF JUMBO best of my knowledge and belief, there have been no contraventions of: INTERACTIVE LIMITED • • As lead auditor of Jumbo Interactive Limited for the year ended 30 June 2013, I declare that, to the This declaration is in respect Jumbo Interactive Limited and the entities it controlled during the best of my knowledge and belief, there have been no contraventions of: period. • • the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. This declaration is in respect Jumbo Interactive Limited and the entities it controlled during the period. This declaration is in respect Jumbo Interactive Limited and the entities it controlled during the period. T J Kendall T J Kendall Director Director BDO Audit Pty Ltd Brisbane, 28 August 2014 T J Kendall BDO Audit Pty Ltd Director Brisbane, 28 August 2013 BDO Audit Pty Ltd Brisbane, 28 August 2013 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. 48 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Corporate Governance Statement Introduction This statement summarises the corporate governance practices that have generally applied in Jumbo Interactive Ltd (the Company) throughout the reporting period except where otherwise stated. It is structured along the same lines as the ASX Corporate Governance Council’s Principles and Council Recommendations, with sections dealing in turn with each of the Council’s corporate governance Principles and addressing the Council’s Recommendations. This statement and the charters, codes and policies referred to herein are posted on the Company’s website www.jumbointeractive.com and shareholders and other interested readers are welcome to refer to them. The Board will keep its corporate governance practices under review. 1. Lay solid foundations for management and oversight The Council’s first Principle states that companies should “establish and disclose the respective roles and responsibilities of board and management”. The Company has adopted a formal Board Charter that sets out the functions reserved to the Board and those delegated to the Chief Executive Officer. This enables the Board to provide strategic guidance for the Company and effective oversight of management. The Company provides new Directors with a letter on appointment which details the terms and conditions of their appointment, provides clear guidance on what input is required by them, and includes materials to assist with induction into the Company. The Company has a similar approach for all senior executives whereby they are provided with a formal letter of appointment setting out their terms of office, duties, rights and responsibilities as well as a detailed job description. The Board has delegated responsibilities and authorities to the CEO and other executives to enable management to conduct the Company’s day to day activities. Matters which exceed defined authority limits require Board approval. The Board is also responsible for the performance of the Company’s executives, which is reviewed against appropriate measures and the performance of the Company as a whole, and through an annual appraisal process. 2. Structure the Board to add value In its second Principle the Council states that companies should “have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties”. The Company’s Board is so structured, and its Directors adequately discharge their responsibilities and duties for the benefit of shareholders. The Board presently comprises only two non-executive Directors (David Barwick, Chairman and Bill Lyne, also the Company Secretary) and the Chief Executive Officer (Mike Veverka). Fundamental requirements for Jumbo Directors are a deep understanding of business management and financial markets and such experience, complemented where possible with industry knowledge, are desirable attributes for Board membership. All Board members meet the fundamental requirements, and bring a diverse range of skills and backgrounds. Additionally, Mr Veverka has had a very long involvement in key sections of the Company and brings considerable relevant expertise and knowledge to the Board. The Board formally meets monthly throughout the year, and informally at least every six to eight weeks to address issues that may arise outside of the monthly meetings. CORPORATE gOVERNANCE sTATEMENT 49 The qualifications, experience and relevant expertise of each Board member and their terms in office are set out in the Directors’ Report section of the Company’s Annual Report. All Directors, apart from the CEO, are subject to re-election by rotation at least every three years at the Company’s annual general meeting. The Board’s view is that an independent Director is a non-executive Director who does not have a relationship affecting independence on the basis set out in the Council’s guidelines and meets materiality thresholds agreed by the Board as equating to payments to them or related parties of 5% of the Company’s annual revenue. The Board considers that David Barwick and Bill Lyne both meet this criterion. On the other hand, Mike Veverka is considered to not be independent because he is a substantial shareholder in the Company (i.e. holds more than 5% as defined in Section 9 of the Corporations Act) and is an Executive Officer of the Company. Consequently, the current structure meets the Council’s Recommendation that the majority of the Board should be independent, and the Board also considers the current composition is appropriate given the Company’s and the Directors’ backgrounds and the current and foreseeable structure and size of the Company. The Board has established a Nomination and Remuneration Committee which operates under a Board approved Nomination and Remuneration Committee Charter. In accordance with the Council’s Recommendations the Nomination and Remuneration Committee Charter requires it to have three non- executive Directors, with a majority being independent.. However, at the present time it has only two members, being the non-executive Directors, David Barwick (as the Chair) and Bill Lyne, both of whom have relevant experience and appropriate technical expertise. The qualifications of the Committee and meeting attendances are set out in the Directors’ Report section of the Company’s annual report. The performance of the Board, its Committees and the Directors is reviewed periodically by the Committee. The Committee’s principal evaluation benchmark is the Company’s financial performance compared to similar organisations and the industry in which it operates; but other than that no formalised annual evaluation process has yet been established for individual Directors given the small size of the Board. Details of Committee meeting attendances are set out in the Directors’ Report section of the Company’s Annual Report. Minutes of all meetings are provided to the Board and its Chair reports to the Board after each Committee meeting. The Company also complies with the Recommendations for Directors in relation to independent professional advice, information access and contact with the Company Secretary. The Directors may seek external professional advice at the expense of the Company on matters relating to their role as Directors of the Company, however, they must first request approval from the Chairman, which must not be unreasonably withheld. If withheld then it becomes a matter for the whole Board. The Company Secretary attends all Board and committee meetings, is responsible for monitoring adherence to Board policy and procedures, and is accountable on governance matters. 50 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 3. Promote ethical and responsible decision making In Principle 3 the Council states that companies should “actively promote ethical and responsible decision-making”. To this end, the Company has formally adopted a Code of Conduct covering Directors and officers. The Code is based on respect for the law and acting accordingly, dealing with conflicts of interest appropriately, and ethical matters such as acting with integrity, exercising due care and diligence in fulfilling duties, acting in the best interests of the Company and respecting the confidentiality of all sensitive corporate information. If a Director or officer becomes aware of unlawful or unethical behaviour by anyone in the Company then he is obliged under the Code to report such activities to the Chairman. The Board has also approved a whistleblower Policy pursuant to which employees who have genuine suspicions about improper conduct feel safe to report it without fear of reprisal. In addition, Directors recognise the legal obligations relevant to their role and the reasonable expectations of shareholders, other stakeholders and the wider financial community. The Company realises the benefits that can arise to the organisation from diversity in the workplace covering gender, age, ethnicity and cultural background and in various other areas. So, the Board has established a Diversity Policy which details the Company’s approach to promoting a corporate culture that embraces diversity when selecting and appointing its employees and Directors. This Diversity Policy outlines requirements for the Board to develop measurable objectives for achieving diversity, and annually assess both the objectives and the progress in achieving these objectives. Accordingly, the Board developed the following objectives in 2012 regarding gender diversity and aims to achieve these objectives over the five years to 2017 as director and senior positions become vacant and appropriately qualified candidates become available: group Women on the Board Women in senior management roles Women employees in the Company Total employees in the Company Nº - 1 44 116 2014 - 2017 To have at least 1 woman on the Board 20 % Maintain at least the current number (one) of women 38 % Achieve the percentage of women in excess of 40% 100 % The Company also has a documented share Trading Policy for Directors, key management personnel and other staff and consultants which was revised in June 2013 and released on the ASX. The policy prohibits Directors and other persons from dealing in the Company’s securities during stated ‘closed’ and ‘prohibited’ periods and whilst in possession of price sensitive information. Otherwise, those persons may generally deal in securities during stated ‘trading windows’ and at other times provided they obtain the prior consent of the Board Chairman (or, in the case of the Chairman himself, from the Chair of the Audit and Risk Management Committee). The Board will ensure that restrictions on dealings in securities are strictly enforced. 4. Safeguard integrity in financial reporting The Council states that companies should “have a structure to independently verify and safeguard the integrity of their financial reporting”. The Company has an established Audit and Risk Management Committee which operates under an Audit and Risk Management Committee Charter. The role of this Committee is to ensure the truthful and factual presentation of the Company’s financial position and to monitor and review on behalf of the Board the effectiveness of the Company’s control environment, reporting practices and responsibilities in the areas of accounting, risk management and compliance. To assist this process, as required by Section 295A of the Corporations Act, the CEO and the Chief Financial Officer must certify to the Board in writing that the Company’s financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with relevant accounting standards. The Committee’s Charter includes information on procedures for the selection and appointment of the external auditor and rotation of the engagement audit partner. The external auditor is required to attend the Company’s annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the audit report. CORPORATE gOVERNANCE sTATEMENT 51 In accordance with the Council’s Recommendations the Audit and Risk Management Committee’s Charter requires it to have three non-executive Directors, with a majority being independent. However, currently it has only two members, being the non-executive Directors, Bill Lyne (as Chair) and David Barwick, both of whom have strong finance and accounting backgrounds, experience and appropriate technical expertise. The qualifications of the Committee and meeting attendances are set out in the Directors’ Report section of the Company’s Annual Report. Minutes of all Committee meetings are provided to the Board and its Chair also reports to the Board after each Committee meeting. 5. Make timely and balanced disclosure In this Principle the Council states that companies should “promote timely and balanced disclosure of all material matters concerning the Company”. The Company is committed to the promotion of investor confidence by ensuring that trading in the Company’s securities takes place in an informed market. Also to assist compliance with continuous disclosure requirements under the ASX Listing Rules, the Company has a Continuous Disclosure Policy in place to ensure that material price sensitive information is identified, reviewed by management and disclosed to the ASX and published on the Company’s website in a timely manner. This policy was revised in June 2013 and released on the ASX. The CEO is accountable for compliance with this policy. In addition, all changes in Directors’ interests in the Company’s securities are promptly reported to the ASX in compliance with Section 205G of the Corporations Act and the ASX Listing Rules. The Company’s Annual Report is also used to keep investors informed, particularly in its review of operations and activities. 6. Respect the rights of shareholders In Principle 6 the Council states that companies should “respect the rights of shareholders and facilitate the effective exercise of those rights”. Jumbo supports its desire to provide shareholders with adequate information about the Company and its activities through a published Communications Policy. It is also committed to electronic communications through its website, www.jumbointeractive.com , which provides access to all recent ASX announcements, shareholder updates, boardroom broadcasts, notices of meetings, explanatory memoranda, annual reports and key contact details, as well as comprehensive information about the Company and its products and operations. Shareholders and other interested parties may sign up to receive email notification of all ASX releases and other important announcements. Company general meetings also represent a good opportunity for shareholders to meet with, and ask questions of, the Board of the Company and all shareholders are notified of such meetings and encouraged to attend. As part of the Company’s management of investor relations the CEO does, at times, also undertake briefings with investors and analysts to assist their understanding of the Company and its operations, and provide explanatory background and technical information. 7. Recognise and manage risk In this Principle the Council states that companies should “establish a sound system of risk oversight and management and internal control”. The Company maintains documented policies for identifying, assessing and monitoring risk, summarised in a Risk Management Policy. Through the Audit and Risk Managment Committee the Company monitors key business and financial risks, taking into consideration their likelihood and impact, and reviews and appraises risk control measures. The CEO and senior executives have operational responsibility for risk management through Board approved guidelines. Some of these measures include formal authority limits for management to operate within, policies on treasury-related risk management, an information technology plan and a business continuity plan. The CEO reports to the Board on any departures from policy or matters of concern that might be seen as or become material business risks. In addition, the CEO and CFO are required to state in writing annually to the Board that to the best of their knowledge the integrity of the Company’s risk management, internal control and compliance systems are sound and such systems are operating efficiently and effectively in all material respects in relation to financial reporting risks. 52 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 8. Remunerate fairly and responsibly The Council’s final Principle states that companies should “ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear”. To this end the Board has established a Nomination and Remuneration Committee, as noted above under Principle 2. The Board considers that the Committee members are sufficiently qualified to consider and decide on remuneration matters. However, external professional advice may be sought from experienced consultants where appropriate to assist in their deliberations. Non-executive Directors’ remuneration is reviewed periodically with reference to comparable businesses and the trend in Directors’ fees generally, with the object of ensuring maximum stakeholder benefit from the retention of an effective Board. Shareholders, at the Company’s AGM, determine any increase in the aggregate fees payable to non-executive Directors, but it is those Directors who decide amongst themselves the split of such remuneration. The current maximum annual aggregate remuneration which can be paid to all non-executive Directors is $250,000, last approved by shareholders in October 2009. In the past, shareholders have approved share option incentives for the Non-Executive Directors. The current Non-Executive Directors do not hold shares or options as they believe this maintains their independence. The CEO’s remuneration is based on a fixed amount and may include short term incentives (calculated on audited figures) linked to the Company’s financial performance and share options provided as long term incentives. The base amount is designed to attract and retain an appropriately qualified and experienced CEO, and any incentive element is to reward him for his contribution towards the Company’s success. Other senior executives are offered remuneration packages necessary to attract and retain appropriately qualified key personnel as well as being commensurate with the skill and attention required to manage an organisation of the size and scope of the Jumbo Group as it is today and taking into account its plans and forecasts into the future. In addition, the Company has an Employee Option Plan in place and from time to time has granted options to deserving staff as a reward for performance. However, the Board prohibits transactions by executives which might limit the economic risk of participating in unvested entitlements under any equity-based remuneration scheme. Further information about the Company’s Remuneration Policy, along with details of all emoluments of Directors and key management personnel can be found in the Remuneration Report section of the Directors’ Report in the Company’s Annual Report. There are no separate retirement benefits for non- executive Directors, other than statutory superannuation. Current as at 30 June 2014 – approved by the Board CONsOLIDATED sTATEMENT Of PROfIT OR LOss AND OTHER COMPREHENsIVE INCOME 53 Jumbo Interactive Limited and its Controlled Subsidiaries Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2014 Consolidated group Revenue Cost of sales Gross profit Other revenue/income Distribution expenses Marketing costs Occupancy expenses Administrative expenses Finance costs Share of losses of joint ventures accounted for using the equity method Profit before income tax expense Income tax expense Profit after income tax expense for the year attributable to the owners of Jumbo Interactive Limited Other comprehensive income Items that may be reclassified subsequently to profit or loss Foreign currency translation Change in fair value of available-for-sale financial assets Items that will not be reclassified to profit or loss Change in fair value of financial assets at fair value through other comprehensive income. Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Jumbo Interactive Limited Earnings Per share (cents per share) Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 4 5 4 5 6 10 10 Note 2014 $ 24,133,876 (2,665,999) 21,467,877 1,070,897 (26,201) (4,721,395) (765,311) (12,287,967) (1,130) (170,136) 4,566,634 (1,781,676) 2013 $ 25,191,215 (3,290,679) 21,900,536 1,108,744 (26,029) (3,599,335) (762,743) (13,208,145) (9,500) (87,610) 5,315,918 (2,333,761) 2,784,958 2,982,157 43,085 - (2,530,668) (2,487,583) 17,360 233,989 - 251,349 297,375 3,233,506 ¢ 6.4 6.3 ¢ 6.9 6.8 The above Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. 54 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Jumbo Interactive Limited and its Controlled Subsidiaries Consolidated Statement of Financial Position As at 30 June 2014 Consolidated group Note 2014 $ 2013 $ Current assets Cash and cash equivalents Trade and other receivables Inventories Total current assets Non-current assets Receivables Investments accounted for using the equity method Available-for-sale financial assets Property, plant and equipment Intangible assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax liabilities Provisions Total current liabilities Non-current liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Accumulated losses Profits appropriation reserve Other reserves Total equity 11 12 13 14 15 16 18 19 22 20 22 23 23 22 25,366,357 24,460,703 639,734 49,404 418,917 55,098 26,055,495 24,934,718 121,945 1 - 318,062 7,592,694 514,785 8,547,487 193,688 1 2,530,054 366,059 6,314,304 395,562 9,799,668 34,602,982 34,734,386 13,417,446 884,185 200,159 14,501,790 163,950 119,705 283,655 14,785,445 19,817,537 24 29,759,572 (17,398,827) 9,075,627 (1,618,835) 19,817,537 12,496,899 752,946 369,816 13,619,661 133,857 471,643 605,500 14,225,161 20,509,225 29,544,572 (17,398,827) 7,602,499 760,981 20,509,225 The above Statement of Financial Position should be read in conjunction with the accompanying notes. CONsOLIDATED sTATEMENT Of CHANgEs IN EqUITy 55 Jumbo Interactive Limited and its Controlled Subsidiaries Consolidated Statement of Changes in Equity For the year ended 30 June 2014 Contributed equity $ Accumulated losses $ Profits appropriation reserve $ share-based payments reserve $ foreign currency translation reserve $ financial assets revaluation reserve $ Total equity $ 28,876,572 (17,398,827) 6,129,682 499,710 (23,428) - 18,083,709 - - - - - 668,000 - - 668,000 - - - - - - - - - 2,982,157 - - - 2,982,157 - (1,509,340) - - - - - - - - 33,350 (1,509,340) 33,350 - - 17,360 - - - 2,982,157 17,360 - 233,989 233,989 17,360 233,989 3,233,506 - - - - - - - - 668,000 (1,509,340) 33,350 (807,990) 29,544,572 (17,398,827) 7,602,499 533,060 (6,068) 233,989 20,509,225 - - - - 215,000 - - 215,000 - - - - - - - - 2,784,958 - - 2,784,958 - (1,311,830) - - - - - - - 107,767 (1,311,830) 107,767 - 43,085 - - 2,784,958 43,085 - (2,530,668) (2,530,668) 43,085 (2,530,668) 297,375 - - - - - - - - 215,000 (1,311,830) 107,767 (989,063) 29,759,572 (17,398,827) 9,075,627 640,827 37,017 (2,296,679) 19,817,537 CONSOLIDATED GROUP Balance at 1 July 2012 Total comprehensive income for the year Profit/(loss) for the year Other comprehensive income Foreign currency translation differences Available-for-sale financial asset reserve Total comprehensive income for the year Transactions with owners in their capacity as owners Issue of shares Dividends paid Share-based payments Total transactions with owners in their capacity as owners Balance at 30 June 2013 Total comprehensive income for the year Profit/(loss) for the year Other comprehensive income Foreign currency translation differences Change in fair value of financial assets at fair value through other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners Issue of shares Dividends paid Share-based payments Total transactions with owners in their capacity as owners Balance at 30 June 2014 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. 56 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Jumbo Interactive Limited and its Controlled Subsidiaries Consolidated Statement of Cash Flows For the year ended 30 June 2014 Consolidated group Note 2014 $ 2013 $ Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest and other costs of finance paid Income tax received Income tax paid 26,107,856 (19,279,766) 827,507 (1,130) 29,326 (2,150,923) Net cash inflows/(outflows) from operating activities 28 (a) 5,532,870 27,822,996 (18,833,903) 918,060 (9,500) 87,249 (1,216,734) 8,768,168 (2,296,066) (241,080) (209,863) (2,011,160) 17,813 (614) (55,494) (218,376) (3,265,980) 2,884 (3,537,580) (4,740,356) 24 215,000 - (1,311,830) (1,096,830) 898,460 7,194 24,460,703 11 25,366,357 668,000 (444,771) (1,509,340) (1,286,111) 2,741,701 32,205 21,686,797 24,460,703 Cash flows from investing activities Payments for investments Loan to joint venture Payments for property, plant and equipment Payments for intangibles Proceeds from sale of property, plant and equipment Net cash inflows/(outflows) from investing activities Cash flows from financing activities Proceeds from issue of shares Repayment of borrowings Dividends paid Net cash inflows/(outflows) from financing activities Net increase in cash and cash equivalents Net foreign exchange differences Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The above Statement of Cash Flows should be read in conjunction with the accompanying notes. NOTEs TO THE fINANCIAL sTATEMENTs 57 Jumbo Interactive Limited and its Controlled Subsidiaries Notes to the Consolidated Financial Statements For the year ended 30 June 2014 Note 1: Corporate Information The financial statements of Jumbo Interactive Ltd (the ‘Company’) for the year ended 30 June 2014 were authorised in accordance with a resolution of the Directors on 28 August 2014 and cover the consolidated entity consisting of Jumbo Interactive Ltd its subsidiaries (the ‘Group’) as required by the Corporations Act 2001. Jumbo Interactive Limited is a for-profit entity for the purposes of preparing these financial statements. The financial statements are presented in the Australian currency. Jumbo Interactive Limited is a company limited by shares incorporated and domiciled in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX: JIN). The Company’s registered office and principal place of business is at Level 1, 601 Coronation Drive, Toowong QLD 4160 Australia.. Note 2: Summary of Significant Accounting Policies a. Basis of Preparation The financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The financial statements have also been prepared on a historical cost basis, except for available-for-sale financial assets and held-for-trading investments that have been measured at fair value. The carrying values of recognised assets and liabilities that are hedged are adjusted to record changes in the fair value attributable to the risks that are being hedged. Non-current assets and disposal groups held-for-sale are measured at the lower of carrying amounts and fair value less costs to sell. The following significant accounting policies have been adopted in the preparation and presentation of the financial statements: b. Basis of Consolidation Subsidiaries The consolidated financial statements comprise the financial statements of Jumbo Interactive Limited and its subsidiaries at 30 June each year (‘the Group’). Subsidiaries are entities over which the Group has control. The Group has control over 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 use its power to affect those returns. Subsidiaries are consolidated from the date on which control is transferred to the Group and are deconsolidated from the date on which control ceases. All intercompany balances and transactions, including unrealised profits arising from intragroup transactions have been eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of profit or loss and other comprehensive income and statement of financial position respectively. Total comprehensive income is attributable to owners of Jumbo Interactive Limited and non-controlling interests even if this results in the non-controlling interests having a debit balance. 58 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Joint Arrangements Joint arrangements are arrangements in which one or more parties have joint control (the contractual sharing of control of an arrangement where decisions about relevant activities require unanimous consent of the parties sharing control). Joint Venture entities Interests in joint venture partnerships/entities are accounted for in the consolidated financial statements using the equity method. Under the equity method of accounting, the group’s share of profits or losses of joint venture partnerships/entities are recognised in consolidated profit or loss and the group’s share of the movements in reserves of joint venture partnerships/entities are recognised in consolidated other comprehensive income. The cumulative movements are adjusted against the carrying amount of the investment. Details of joint venture entities are set out in Note 15. When the group's share of post-acquisition losses in a joint venture exceeds its interest in the joint venture (including any long term interests that form part of the group's net investment in the joint venture), the group does not recognise further losses unless it has obligations to, or has made payments, on behalf of the associate. Changes in ownership interest Transactions with non-controlling interests that increase or decrease the group's ownership interest in a subsidiary, but which do not result in a change of control, are accounted for as transactions with equity owners of the group. An adjustment is made between the carrying amount of the group's controlling interest and the carrying amount of the non-controlling interests to reflect their relative values in the subsidiary. Any difference between the amount of the adjustment to the non-controlling interest and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of Jumbo Interactive Limited. Where the group loses control of a subsidiary but retains significant influence, joint control, or an available-for-sale investment, the retained interest is remeasured to fair value at the date that control is lost and the difference between fair value and the carrying amount is recognised in profit or loss. This fair value is the initial carrying amount for the retained investment in associate, joint venture or available- for-sale financial asset. If no ownership interest is retained, or if any remaining investment is classified as available-for-sale, any amounts previously recognised in other comprehensive income in respect of the entity are accounted for as if the group had directly disposed of the related assets or liabilities and may be recognised in profit or loss. To the extent that the group retains significant influence or joint control, balances of other comprehensive income relating to the associate or joint venture entity will only be reclassified from other comprehensive income to profit or loss to the extent of the reduced ownership interest so that the balance of other comprehensive represents the group's proportionate share of other comprehensive income of the associate/joint venture. If the group's ownership interest in an associate or a joint venture is reduced, but the group retains significant influence or control, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss, where appropriate. c. Business Combinations The acquisition method of accounting is used to account for all business combinations. Consideration is measured at the fair value of the assets transferred, liabilities incurred and equity interests issued by the group on acquisition date. Consideration also includes the acquisition date fair values of any contingent consideration arrangements, any pre-existing equity interests in the acquiree and share-based payment awards of the acquiree that are required to be replaced in a business combination. The acquisition date is the date on which the group obtains control of the acquiree. Where equity instruments are issued as part of the consideration, the value of the equity instruments is their published market price at the acquisition date unless, in rare circumstances it can be demonstrated that the published price at acquisition date is not fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Identifiable assets acquired and liabilities and contingent liabilities assumed in business combinations are, with limited exceptions, initially measured at their fair values at acquisition date. Goodwill represents the excess of the consideration transferred and the amount of the non-controlling interest in the acquiree over fair value of the identifiable net assets acquired. If the consideration and non-controlling interest of the acquiree is less than the fair value of the net identifiable assets acquired, the difference is recognised NOTEs TO THE fINANCIAL sTATEMENTs 59 in profit or loss as a bargain purchase price, but only after a reassessment of the identification and measurement of the net assets acquired. For each business combination, the group measures non-controlling interests at either fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed when incurred. Transaction costs arising on the issue of equity instruments are recognised directly in equity and transaction costs arising on the issue of debt as part of the consideration are accounted for in accordance with note 2(r). Where the group obtains control of a subsidiary that was previously accounted for as an equity accounted investment in associate or joint venture, the group remeasures its previously held equity interest in the acquiree at its acquisition date fair value and the resulting gain or loss is recognised in profit or loss. Where the group obtains control of a subsidiary that was previously accounted for as an available-for-sale investment, any balance on the available-for-sale reserve related to that investment is recognised in profit or loss as if the group had disposed directly of the previously held interest. Where settlement of any part of the cash consideration is deferred, the amounts payable in future are discounted to present value at the date of exchange using the entity's incremental borrowing rate as the discount rate. Contingent consideration is classified as equity or financial liabilities. Amounts classified as financial liabilities are subsequently remeasured to fair value at the end of each reporting period, with changes in fair value recognised in profit or loss. Assets and liabilities from business combinations involving entities or businesses under common control are accounted for at the carrying amounts recognised in the group's controlling shareholder's consolidated financial statements. d. Foreign Currency Translation The functional and presentation currency of Jumbo Interactive Limited and its Australian subsidiaries is Australian dollars (AU$). Foreign currency transactions are translated into the functional currency using the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the end of the reporting period. Foreign exchange gains and losses resulting from settling foreign currency transactions, as well as from restating foreign currency denominated monetary assets and liabilities, are recognised in profit or loss, except when they are deferred in other comprehensive income where they relate to differences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. Foreign exchange gains and losses are presented in profit and loss on a net basis within other income or other expenses, unless they relate to borrowings, in which case they are presented as a part of finance costs. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when fair value was measured. The functional currency of the overseas subsidiaries is measured using the currency of the primary economic environment in which that entity operates. At the end of the reporting period, the assets and liabilities of these overseas subsidiaries are translated into the presentation currency of the Company at the closing rate at the end of the reporting period and income and expenses are translated at the average exchange rates for the year. All resulting exchange differences are recognised in other comprehensive income as a separate component of equity (foreign currency translation reserve). On disposal of a foreign entity, the cumulative exchange differences recognised in foreign currency translation reserves relating to that particular foreign operation is recognised in profit or loss. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 60 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 e. Revenue Recognition Revenue is recognised at the fair value of consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and duties and taxes paid. Revenue from the sale of lottery tickets and related services are recognised on a net inflow basis. The following specific recognition criteria must also be met before revenue is recognised: Sale of Goods Revenue from sale of goods is recognised when the significant risks and rewards of ownership have passed to the buyer and can be reliably measured. Risks and rewards are considered passed to buyer when goods have been delivered to the customer. Rendering of Services Revenue is recognised when the service is provided. Interest Revenue is recognised as interest accrues using the effective interest method. The effective interest method uses the effective interest rate which is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial asset. Dividends Dividends are recognised as revenue when the Group’s right to receive payment is established. Dividends received in the entity’s separate financial statements that are paid out of pre-acquisition profits of a subsidiary, associate or joint venture are recognised as revenue when the entity’s right to receive payment is established. f. Income Tax The income tax expense for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax base of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for all temporary differences, between carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, at the tax rates expected to apply when the assets are recovered or liabilities settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. Exceptions are made for certain temporary differences arising on initial recognition of an asset or a liability if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit. Deferred tax assets are only recognised for deductible temporary differences and unused tax losses if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax bases of investments in subsidiaries, associates and joint ventures where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax balances relating to amounts recognised directly in other comprehensive income are also recognised directly in other comprehensive income. Jumbo Interactive Limited and its wholly owned subsidiaries have implemented the tax consolidation legislation for the whole of the financial year. The Group notified the Australian Tax Office that it had formed an income tax consolidated group to apply from 1 July 2006. Jumbo Interactive Limited is the head entity in the tax consolidated group. The separate taxpayer within a group approach has been used to allocate current income tax expense and deferred tax expense to wholly-owned subsidiaries that form part of the tax consolidated group. Jumbo Interactive Limited has assumed all the current tax liabilities and the deferred tax assets arising from unused tax losses for the tax consolidated group via intercompany receivables and payables because a tax funding arrangement has been in place for the whole financial year. The amounts receivable/payable under tax funding arrangements are due upon notification by the head entity, which is issued soon after the end of each financial year. Interim funding notices may also be issued by the head entity to its wholly owned subsidiaries in order for the head entity to be able to pay tax installments. NOTEs TO THE fINANCIAL sTATEMENTs 61 g. Impairment of Assets At the end of each reporting period the Group assesses whether there is any indication that individual assets are impaired. Where impairment indicators exist, recoverable amount is determined and impairment losses are recognised in profit or loss where the asset’s carrying value exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of 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. Where it is not possible to estimate recoverable amount for an individual asset, recoverable amount is determined for the cash-generating unit to which the asset belongs. h. Cash and Cash Equivalents For the purposes of the Statement of Cash Flows, cash and cash equivalents includes cash on hand and at bank, deposits held at call with financial institutions, other short term, highly liquid investments with maturities of three months or less, that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value and bank overdrafts. i. Trade Receivables Trade receivables are recognised at original invoice amounts less an allowance for uncollectible amounts, and have repayment terms between seven and 30 days. Collectability of trade receivables is assessed on an ongoing basis. Debts which are known to be uncollectible are written off. An allowance is made for doubtful debts where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. Objective evidence of impairment includes financial difficulties of the debtor, default payments or debts more than 90 days overdue. On confirmation that the trade receivable will not be collectible the gross carrying value of the asset is written off against the associated provision. From time to time, the Group elects to renegotiate the terms of trade receivables due from customers with which it has previously had a good trading history. Such renegotiations will lead to changes in the timing of payments rather than changes to the amounts owed and are not, in the view of the Directors, sufficient to require the derecognition of the original instrument. j. Inventories Raw Materials, Work in Progress and Finished Goods Inventories are stated at the lower of cost and net realisable value. Cost comprises all direct materials, direct labour and an appropriate portion of variable and fixed overheads. Fixed overheads are allocated on the basis of normal operating capacity. Costs are assigned to inventories using the first-in-first-out basis. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. k. Investments and Other Financial Assets All investments and other financial assets (except for those at fair value through the profit and loss) are initially stated at the fair value of consideration given plus transaction costs. Purchases and sales of investments are recognised on trade date which is the date on which the Group commits to purchase or sell the asset. Accounting policies for each category of investments and other financial assets subsequent to initial recognition are set out below. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Loans and receivables are included in current assets, where they are expected to mature within 12 months after the end of the reporting period. 62 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Available-for-sale financial assets Available-for-sale financial assets comprise investments in listed and unlisted entities and any non- derivatives that are not classified as any other category of financial assets, and are classified as non- current assets (unless management intends to dispose of the investment within 12 months of the end of the reporting period). After initial recognition, these investments are measured at fair value with gains or losses recognised in other comprehensive income (available-for-sale investments reserve). Purchases and sales of available-for-sale financial assets are recognised on settlement date with any change in fair value between trade date and settlement date being recognised in other comprehensive income. Interest on corporate bonds classified as available-for-sale is calculated using the effective interest rate method and is recognised in finance income in profit or loss. Investments in subsidiaries, associates and joint venture entities are accounted for in the consolidated financial statements as described in note 2(a). Financial Assets At Fair Value Through Other Comprehensive Income Equity investments are classified as fair value through Other Comprehensive Income. After initial recognition at fair value (being cost), the Company has elected to present in Other Comprehensive Income changes in the fair value of equity instrument investments. Unrealised gains and losses on investments are recognised in the financial assets revaluation reserve until the investment is sold or otherwise disposed of, at which time the cumulative gain or loss is transferred to profits appropriation reserve. The Company derecognises an investment when it is sold or it transfers the investment and the transfer qualifies for derecogniition in accordance with AASB 9. Upon derecognition, unrealised gains/losses net of tax relating to the investment are transferred from the financial assets revaluation reserve to profits appropriation reserve. Impairments Impairment losses are measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows, excluding future credit losses that have not been incurred. The cash flows are discounted at the asset’s original effective interest rate. Impairment losses are recognised in profit or loss. l. Fair Values Fair values may be used for financial asset and liability measurement as well as for sundry disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is based on the presumption that the transaction takes place either in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market. The principal or most advantageous market must be accessible to, or by, the group. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest. The fair value measurement of a non-financial asset takes into account the market participant's ability to generate economic benefits by using the asset at its highest and best use or by selling it to another market participant that would use the asset at its highest and best use. In measuring fair value, the group uses valuation techniques that maximise the use of observable inputs and minimise the use of unobservable inputs. Fair values for financial instruments traded in active markets are based on quoted market prices at the end of the reporting period. The quoted market price for financial assets is the current bid price. The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. NOTEs TO THE fINANCIAL sTATEMENTs 63 m. Property, Plant and Equipment Property, plant and equipment is stated at historical cost, including costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, less depreciation and any impairments. Depreciation is calculated on a straight-line basis over the estimated useful life, or in the case of leasehold improvements and certain leased plant and equipment, the shorter lease term, as follows: • Plant and equipment - two to five years • Leasehold improvements - up to six years The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at the end of each reporting period.Gains and losses on disposals are calculated as the difference between the net disposal proceeds and the asset’s carrying amount and are included in profit or loss in the year that the item is derecognised. n. Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases and capitalised at inception of the lease at the fair value of the leased property, or if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to profit or loss over the lease period. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Payments made under operating leases (net of incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. When assets are leased out under finance leases, the present value of the lease payments is recognised as a lease receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the lease term using the net investment method which reflects a constant periodic rate of return. Lease income from operating leases is recognised in profit or loss on a straight-line basis over the lease term. Initial direct costs incurred in negotiating operating leases are added to the carrying value of the leased asset and recognised as an expense over the lease term on the same bases as the lease income. o. Intangible Assets Goodwill Goodwill represents the excess of the cost of the business combination over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is not amortised but is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash- generating unit to which the goodwill relates. Impairment losses on goodwill cannot be reversed. Intellectual Property Acquired intellectual property is stated at cost, and is measured at cost less any accumulated impairment losses. Intellectual property is considered to have an indefinite useful life and is not amortised [refer Note 19(b) for reasons for the indefinite useful life]. The carrying value of intellectual property is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment losses are recognised in profit or loss. Any reversal of impairment losses of intellectual property is recognised in profit or loss. 64 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Website Developments Costs Expenditure during the research phase of a project is recognised as an expense when incurred. Development costs are capitalised only when technical feasibility studies identify that the project will deliver future economic benefits and these benefits can be measured reliably. Development costs have a finite life and are amortised on a straight-line basis matched to the future economic benefits over the useful life of the project of three years. Domain Names Acquired domain names are stated at cost and are considered to have indefinite useful lives and are not amortised [refer Note 19(b) for reasons for the indefinite useful life]. The useful life is assessed annually to determine whether events or circumstances continue to support an indefinite useful life assessment. The carrying value of domain names is tested semi-annually at each reporting date for impairment. Customer Acquisition Costs During the 2013 financial year, management revised the treatment of customer acquisition costs within the existing policy to expensing the costs as they are incurred. Previously, expenditure on customer acquisition was recognised at cost of acquisition with a finite life and amortised on a straight-line basis matched to the future economic benefits over their useful life of one and a half years. Customer acquisition costs were tested semi-annually at each reporting date for impairment and carried at cost less accumulated amortisation and any impairment losses. Previous customer acquisition costs were fully amortised in November 2013. Software Items of computer software which are not integral to the computer hardware owned by the Group are classified as intangible assets with a finite life. Computer software is amortised on a straight line basis over the expected useful life of the software. These lives range from one and a half to two and a half years. p. Trade and Other Payables Trade and other payables represent liabilities for goods and services provided to the Group prior to the year end and which are unpaid. These amounts are unsecured and have seven to 30 day payment terms. q. Interest-bearing Liabilities All loans and borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the loans and borrowings using the effective interest method. r. Borrowing Costs Borrowing costs incurred for the construction of a qualifying asset are capitalised during the period of time that it is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed when incurred. The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate on credit outstanding for large business (source: Reserve Bank of Australia) being 5.44% (2013: 5.44%), as the Group repaid all borrowings outstanding during the 2013 financial year. s. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses. Where the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. NOTEs TO THE fINANCIAL sTATEMENTs 65 t. Employee Benefits Short-term employee benefit obligations Liabilities for wages and salaries, including non-monetary benefits, and accumulating sick leave expected to be settled wholly within 12 months after the end of the reporting period are recognised in respect of employees’ services rendered up to the end of the reporting period and are measured at amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when leave is taken and measured at the actual rates paid or payable. Other long-term employee benefit obligations Liabilities for long service leave and annual leave are not expected to be settled wholly within 12 months after the end of the reporting period. They are recognised as part of the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees to the end of the reporting period. Consideration is given to expected future salaries and wages levels, experience of employee departures and periods of service. Expected future payments are discounted using national government bond rates at the end of the reporting period with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Regardless of when settlement is expected to occur, liabilities for long service leave and annual leave are presented as current liabilities in the statement of financial position if the entity does not have an unconditional right to defer settlement for at least 12 months after the end of the reporting period. Profit-sharing and Bonus Plans The Group recognises an expense and a liability for bonuses and profit-sharing based on when the entity is contractually obliged to make such payments or where there is past practice that has created a constructive obligation. Retirement Benefit Obligations Employees have defined contribution superannuation funds. Contributions are recognised as expenses as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Termination Benefits The Group recognises termination benefits as an expense and a liability on the earlier of when the Group: • Can no longer withdraw the offer and the benefits; and • Recognises costs for restructuring under AASB 137 Provisions, Contingent Liabilities and Contingent Assets and which involves the payment of termination benefits. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. u. Contributed Equity Ordinary shares are classified as equity. Costs directly attributable to the issue of new shares or options are shown as a deduction from the equity proceeds, net of any income tax benefit. v. Dividends Provision is made for dividends declared, and no longer at the discretion of the Group, on or before the end of the reporting period but not distributed at the end of the reporting period. w. Share-Based Payments The Group may provide benefits to employees (including Directors) or consultants of the Group in the form of share-based payment transactions, whereby services may be undertaken in exchange for shares or options over shares (“equity-settled transactions”). The Jumbo Interactive Limited Employee Share Option Plan (ESOP) provides these benefits to Directors and senior executives. The fair value of options granted to Directors, employees and consultants is recognised as an expense with a corresponding increase in equity (share option reserve). The fair value is measured at grant date and recognised over the period during which the employees or consultants become unconditionally entitled to the options. Fair value is determined by an independent valuer using the Black-Scholes, Bi- nomial, and Monte Carlo Simulation option pricing models as appropriate. In determining fair value, no 66 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 account is taken of any performance conditions other than those related to the share price of Jumbo Interactive Limited (“market conditions”). The cumulative expense recognised between grant date and vesting date is adjusted to reflect the Directors’ best estimate of the number of options that will ultimately vest because of internal conditions of the options, such as the employees having to remain with the Group until vesting date, or such that employees are required to meet internal sales targets. No expense is recognised for options that do not ultimately vest because internal conditions were not met. An expense is still recognised for options that do not ultimately vest because a market condition was not met. Where the terms of options are modified, the expense continues to be recognised from grant date to vesting date as if the terms had never been changed. In addition, at the date of the modification, a further expense is recognised for any increase in fair value of the transaction as a result of the change. Where options are cancelled, they are treated as if vesting occurred on cancellation and any unrecognised expenses are taken immediately to profit or loss. However, if new options are substituted for the cancelled options and designated as a replacement on grant date, the combined impact of the cancellation and replacement options are treated as if they were a modification. x. Earnings Per Share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to members of the Company, adjusted for the after-tax effect of preference dividends on preference shares classified as equity, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. Diluted earnings per share Earnings used to calculate diluted earnings per share are calculated by adjusting the basic earnings by the after-tax effect of dividends and interest associated with dilutive potential ordinary shares. The weighted average number of shares used is adjusted for the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. y. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of GST except where GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority, are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. z. Financial Guarantees Financial guarantee contracts are recognised as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value and at the end of each subsequent reporting period at the higher of the amount determined under AASB 137 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less cumulative amortisation, where appropriate. aa. Critical Accounting Estimates and Judgments The preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates judgments and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgments, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgments and estimates will seldom equal actual results. The judgments, estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. NOTEs TO THE fINANCIAL sTATEMENTs 67 Joint Ventures As discussed in Note 2(a), joint ventures are accounted for using the equity method. The fair value of the group’s interest is determined based on a value-in-use calculation which is determined by discounting projected future cash flows using a risk adjusted pre-tax discount rate and impairment is assessed for the individual asset. With specific reference to Lotto Points Plus LLC, a key judgment by management is that merchandising agreements are signed up as anticipated by the joint venture. Fair Value of Available-for-Sale financial Assets on 1 July 2013 when AASB 9 adopted A key management judgement of this fair value is that it equated to the original cost of balance of the equity securities at 30 June 2013 Available-for-sale financial assets Available-for-sale financial assets are accounted for as detailed in Note 2(k). With specific reference to the group’s interest in Sorteo Games Inc, a key management judgement is the uncertainty of future economic benefits of Sorteo. Goodwill and other intangible assets The Group tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other intangible assets have suffered any impairment in accordance with the accounting policy stated in Note 2(o). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. In determining value in use, projected future cash flows are discounted using a risk adjusted pre-tax discount rate and impairment is assessed for the individual asset or at the ‘cash generating unit’ level. A ‘cash generating unit’ is determined as the smallest group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. With specific reference to the internet lottery segment CGU, a key judgment by management is that the reseller agreements with the Tatts Group will continue. Refer to Note 19(c) for details. No impairment has been recognised in respect of goodwill, domain names and intellectual property at the end of the reporting period. ab. Change in Accounting Standards i. AASB 9 Financial Instruments AASB9 introduces new classification and measurement models for financial assets, using a single approach to determine whether a financial asset is measured at amortised cost or fair value. The accounting for financial liabilities continues to be classified and measured in accordance with AASB 139, with one exception, being that the portion of a change of fair value relating to the entity’s own credit risk is to be presented in other comprehensive income unless it would create an accounting mismatch. Chapter 6 ‘Hedge Accounting’ supersedes the general hedge accounting requirements in AASB 139 and provides a new simpler approach to hedge accounting that is intended to more closely align risk management activities undertaken by entities when hedging financial and non-financial risks. 68 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 While AASB9 does not need to be applied until 1 January 2017, the Group has decided to adopt it from 1 July 2013. The main effects resulting from the adoption were: • The group elected to present in other comprehensive income changes in the fair value of all its equity investments previously classified as available-for-sale, because the business model is to hold these equity investments for long-term strategic investment and not for trading. As a result, assets with a fair value of $2,530,054 were reclassified from available-for-sale to financial assets at fair value through other comprehensive income. • There was no difference between the previous carrying amount and the revised carrying amount of the financial assets at 1 July 2013 to be recognised in opening retained earnings. The impact of these changes in the entity’s accounting policy on individual line items in the financial statements can be summarised as follows: statement of Profit or Loss and other comprehensive income Previous policy $ Adjustment $ Revised policy $ 2014 Impairment of available-for-sale financial assets Profit before income tax expense (2,296,679) 2,269,955 2,296,679 2,296,679 - 4,566,634 Profit after income tax expense for the year attributable to the owners of Jumbo Interactive Limited 488,279 2,296,679 2,784,958 Other Comprehensive Income Items that may be reclassified to profit or loss Change in fair value of available-for-sale financial assets Items that will not be reclassified to profit or loss Change in fair value of financial assets at fair value through other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Jumbo Interactive Limited Basic earnings per share (cents) Diluted earnings per share (cents) statement of Changes in Equity 2014 Profits appropriation reserve Financial assets revaluation reserve Total equity (233,989) 233,989 - - (2,530,668) (2,530,668) (190,904) (2,296,679) (2,487,583) 297,375 ¢ 1.1 1.1 - ¢ 5.3 5.2 297,375 ¢ 6.4 6.3 Previous policy $ Adjustment $ Revised policy $ 6,778,948 2,296,679 9,075,627 - (2,296,679) (2,296,679) 19,817,537 - 19,817,537 There is no effect of the change in accounting policy in the annual financial statements for the year ended 30 June 2013. This changed accounting policy has no effect on the Consolidated Statement of Financial Position, other than the changes in equity per above, or on net change in cash. ac. New, revised or amending Accounting Standards and Interpretations adopted There are six new standards and amendments to standards that are mandatory for the first time for the financial year beginning 1 July 2013 that have affected accounts recognised in the current period or any prior period financial statements. The impact on the accounting policies of the Group are discussed below. i. Consolidation standards A package of consolidation standards are effective for annual periods beginning or after 1 January 2013. Information on these new standards is presented below. There is no material impact on the Group’s consolidated financial statements of these new and revised standards. NOTEs TO THE fINANCIAL sTATEMENTs 69 AASB 10 Consolidated Financial Statements (AASB 10) AASB 10 supersedes the consolidation requirements in AASB 127 Consolidated and Separate Financial Statements (AASB 127) and Interpretation 112 Consolidation – Special Purpose Entities. It revised the definition of control together with accompanying guidance to identify an interest in a subsidiary. However, the requirements and mechanics of consolidation and the accounting for any non-controlling interest and changes in control remain the same. AASB 11 Joint Arrangements (AASB 11) AASB 11 supersedes AASB 131 Interest in Joint Ventures (AASB 131). It aligns more closely the accounting by the investors with their rights and obligations relating to the joint arrangements. It introduces two accounting categories (joint operations and joint ventures) whose applicability is determined based on the substance of the joint arrangements. In addition, AASB 131’s option of using proportionate consolidation for joint ventures has been eliminated. AASB 11 now requires the use of the equity accounting method for joint ventures, which is currently used for investments in associates. AASB 12 Disclosure of Interest in Other Entities (AASB 12) AASB 12 integrates and makes consistent the disclosure requirements for various types of investments, including unconsolidated structured entities. It introduces new disclosure requirements about the risks to which an entity is exposed from its involvement with structured entities. Consequential amendments to AASB 127 Separate Financial Statements (AASB 127) and AASB 128 Investments in Associates and Joint Ventures (AASB 128) AASB 127 Consolidated and Separate Financial Statements was amended to AASB 127 Separate Financial Statements which now deals only with separate financial statements. AASB 128 brings investments in joint ventures into its scope, however AASB 128’s equity accounting methodology remains unchanged. ii. AASB 13 Fair Value Measure (AASB 13) AASB 13 does not affect which items are required to be fair-valued but clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. It is applicable for annual periods on or after 1 January 2013. iii. AASB 119 Employee Benefits (2011) Historically the Group calculated its liability for annual leave employee benefits on the basis that it is due to be settled within 12 months of the end of the reporting period because employees are entitled to use this leave at any time. The amendments to AASB 119 require that such liabilities be calculated on the basis of when the leave is expected to be taken, i.e. expected settlement. This change has had no material impact on the Group’s consolidated financial statements. iv. AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 AASB2012-5 makes amendments to AASB101 Presentation of Financial Statements, AASB116 Property, Plant and Equipment and AASB132 Financial Instruments: Presentation that are applicable for annual periods on or after 1 July 2013. None of these amendments have a material impact on the Group’s consolidated financial statements. ad. Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group At the date of authorization of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Group. Management anticipates that all of the relevant pronouncements will be adopted in the Group’s accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group’s financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group’s financial statements. i. AASB2013-3 Amendments to AASB 136 – recoverable Amount Disclosures for Non-Financial Assets These amendments are applicable to annual reporting periods on or after 1 January 2014. The disclosure requirements of AASB 136 Impairment of Assets have been enhanced to require additional information about the fair value measurement when the recoverable amount of impaired assets is based on fair value less costs of disposals. Additionally, if measured using a present value technique, the discount rate is to be disclosed. The adoption of these amendments from 1 July 2014 may increase disclosures by the Group. 70 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Note 3: Parent Entity Information The Corporations Act 2001 requirement to prepare parent entity financial statements where consolidated financial statements are prepared has been removed and replaced by regulation 2M.3.01 which requires the following limited disclosure in regards to the parent entity (Jumbo Interactive Limited). The consolidated financial statements incorporate the assets, liabilities and results of the parent entity in accordance with the accounting policy described in Note 2 (a). Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Issued capital Share based payment reserve Available-for-sale financial assets reserve Retained earnings/(accumulated losses) Profits Appropriation Reserve Total shareholders’ equity Profit/(loss) for the year Total comprehensive income for the year 2014 $ 3,893,194 4,772,696 8,665,890 1,662,843 4,079,025 5,741,868 2,924,022 29,759,572 640,827 (2,296,679) (26,037,236) 857,538 2,924,022 (1,070,212) (3,366,892) 2013 $ 3,654,205 7,320,855 10,975,060 1,621,477 1,839,616 3,461,093 7,513,967 29,544,572 533,060 233,989 (26,037,236) 3,239,582 7,513,967 4,748,922 4,982,912 Guarantees The parent entity has provided guarantees to third parties in relation to the obligations of controlled entities in respect to banking facilities. The guarantees are for the terms of the facilities per Note 21: Borrowings, and are ongoing. The parent entity has also provided a guarantee in favour of the Lotteries Commission of South Australia in respect of payment obligations of a subsidiary company in terms of the Agent agreement between its subsidiary and the favouree. Contractual commitments There were no contractual commitments for the acquisition of property, plant and equipment entered into by the parent entity at 30 June 2014 (2013: $0). Contingent liabilities The parent entity has no contingent liabilities other than the guarantees referred to above. Note 4: Revenue and other Income Sales revenue Revenue from sale of goods Revenue from rendering services Other revenue/income Interest Cash Other income Foreign exchange gains Other Note 5: Profit/(Loss) for the Year Profit before income tax from operations includes the following specific expenses: Cost of sales Sale of goods Rendering of services Finance costs Interest on financial liabilities not at fair value through profit and loss Fees arising from financial liabilities not at fair value through profit and loss Depreciation of non-current assets1 Plant and equipment Amortisation of non-current assets1 Leasehold improvements Intangibles Other expenses Operating lease rentals – minimum lease payments Employee benefits expense1 Defined contribution superannuation expense1 Bad debts written off1 1 Included in administration expense NOTEs TO THE fINANCIAL sTATEMENTs 71 2014 $ 2013 $ 2,008,256 2,356,860 22,125,620 22,834,355 24,133,876 25,191,215 848,917 918,060 24,869 197,111 112,084 78,600 1,070,897 1,108,744 25,204,773 26,299,959 Consolidated Group 2014 $ 2013 $ 1,051,733 1,614,266 1,258,899 2,031,780 1,130 - 1,477 8,023 198,708 118,291 64,781 68,067 1,987,589 2,095,563 765,311 4,911,352 589,559 - 762,743 5,255,959 511,377 346,446 Note 22 72 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Note 6: Income Tax Expense a. The components of tax expense comprise: Current tax Deferred tax arising from origination and reversal of temporary differences Under/over provision deferred tax prior years Under/over provision tax prior years Under/over provision overseas tax prior years Total income tax expense/(benefit) in profit and loss b. Reconciliation: Tax at the Australian tax rate of 30% (2013: 30%) Income tax effect of overseas tax rates R&D expense Share options expensed during year Other Under/over provision for income tax in prior year R&D concession/credit Total income tax expense/(benefit) in profit and loss Note 7: Key Management Personnel (KMP) a. Key management personnel compensation Short term employee benefits Post employment benefits Other long term benefits Share based payments Consolidated Group 2014 $ 2013 $ 2,280,434 (471,161) (3,285) (31,383) 7,071 1,781,676 1,369,990 414,670 (27,725) 32,330 3,000 (31,383) 20,794 1,781,676 1,985,168 68,084 4,326 276,183 - 2,333,761 1,594,776 50,578 146,235 10,005 688,251 276,178 (432,262) 2,333,761 Consolidated Group 2014 $ 2013 $ 1,329,310 1,506,136 107,381 20,918 71,691 112,962 25,891 10,828 1,529,300 1,655,817 Further information regarding the identity of key management personnel and their compensation can be found in the Audited Remuneration Report contained in the Directors’ Report b. Other transactions and balances NOTEs TO THE fINANCIAL sTATEMENTs 73 Consolidated group 2014 $ 2013 $ Transactions between related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. Elegant Properties Pty Ltd and Rosch Realty Pty Ltd are solely owned by Mr Mike Rosch, the father of Mr Mike Veverka, the CEO and executive director of the Company. Elegant Properties Pty Ltd rented an office from the Group and provided services during this financial year and Rosch Realty Pty Ltd provided an agent service during the previous financial year. Office rent received Sales commission paid Services paid 10,236 - 2,613 4,550 6,000 17,018 Mrs Julie Rosch, the mother of Mr Mike Veverka, the CEO and Executive Director of the Company, is engaged as a full time employee within the Group. Salary and superannuation 81,938 79,864 Note 8: Auditor’s Remuneration Audit services Amounts paid/payable to BDO for audit or review of the financial statements for the entity or any entity in the Group Taxation services Amounts paid/payable to a related practice of BDO for taxation services for the entity or any entity in the Group: review of income tax return transfer pricing consulting other taxation advice Other services Amounts paid/payable to a related practice of BDO for other services for the entity or any entity in the Group: accounting advice Total Consolidated Group 2014 $ 2013 $ 104,061 104,061 99,084 99,084 27,212 58,594 12,000 97,806 37,345 - 29,693 67,038 - - 201,867 3,180 3,180 169,302 74 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Note 9: Dividends a. Ordinary dividends Final fully franked ordinary dividend of 1.5 (2012: 2.0) cent per share franked at the tax rate of 30% (2012: 30%) Interim fully franked ordinary dividend of 1.5 (2013: 1.5) cent per share franked at the tax rate of 30% (2013: 30%) Total dividends paid or provided for Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the years ended 30 June 2013 and 30 June 2012 were as follows: Paid in cash b. Dividends not recognised at the end of the reporting period In addition to the above dividends, since year end the Directors have recommended the payment of a final 2014 fully franked ordinary dividend of 1.5 (2013: 1.5) cents per share franked at the rate of 30% (2013: 30%). The aggregate amount of the proposed dividend expected to be paid on 26 September 2014, but not recognised as a liability at year end, is: c. Franked dividends The franked portions of dividends recommended after 30 June 2014 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 30 June 2014. Franking credits available for subsequent financial years based on a tax rate of 30% (2013: 30%): Consolidated Group 2014 $ 2013 $ 658,540 856,050 653,290 653,290 1,311,830 1,509,340 1,311,830 1,311,830 1,509,340 1,509,340 Consolidated Group 2014 $ 2013 $ 658,540 653,288 Consolidated Group 2014 $ 2013 $ 4,367,814 2,774,210 The above amounts represent the balance of the franking account as at the reporting date adjusted for: a. Franking credits that will arise from the payment of the amount of the provision for income tax, and b. Franking debits that will arise from the payment of dividends recognised as a liability at the reporting date. The impact on the franking account of the dividend recommended by the directors since the end of the reporting period, but not recognised as a liability at the reporting date, will be a reduction in the franking account of $282,232 (2013: $279,981). Note 10: Earnings per Share Reconciliation of earnings used in calculating earnings per share Basic earnings/(loss) per share Profit after tax attributable to owners of Jumbo Interactive Limited used to calculate basic earnings per share Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Diluted earnings/(loss) per share Profit after tax from continuing operations attributable to owners of Jumbo Interactive Limited used to calculate diluted earnings per share Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: — options Weighted average number of ordinary shares used as the denominator in calculating diluted earnings per share Note 11: Cash and Cash Equivalents Total cash and cash equivalents General account balances Cash at bank and in hand Short term bank deposits Customer Funds Cash at bank and in hand Short term bank deposits Online lottery customer account balances NOTEs TO THE fINANCIAL sTATEMENTs 75 Consolidated Group 2014 $ 2013 $ 2,784,958 2,982,157 43,758,055 43,050,857 2,784,958 2,982,157 43,758,055 43,050,857 326,434 44,084,489 1,027,309 44,078,166 Note Consolidated Group 2014 $ 25,366,357 2013 $ 24,460,703 1,368,035 15,049,626 16,417,661 3,241,041 13,622,929 16,863,970 4,348,696 4,600,000 20 8,948,696 2,996,733 4,600,000 7,596,733 Customer account balances being deposits and prize winnings earmarked for payment to customers on demand. 76 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Note 12: Trade and Other Receivables Current Trade receivables Allowance for doubtful debts Other receivables Joint venture receivable Prepayments Consolidated Group 2014 $ 125,792 - 125,792 162,585 155,796 195,561 639,734 2013 $ 194,755 - 194,755 103,136 - 121,026 418,917 All receivables that are neither past due nor impaired are with long standing clients who have a good credit history with the Group. a. Analysis of the allowance account Current trade receivables are non-interest bearing and generally on terms ranging from seven days to 30 days. Trade receivables are assessed for recoverability based on the underlying terms of the contract. A provision for impairment is recognised when there is objective evidence that an individual trade receivable is impaired. These amounts have been included in the administrative expense items. Movement in the trade receivables allowance for doubtful debts is as follows: Opening balance Provision for doubtful receivables Reversal of amounts provided Closing balance Consolidated Group 2014 $ - - - - 2013 $ - - - - There are no balances within trade and other receivables that are past due other than noted in (b) below. It is expected these balances, other than those impaired, will be received when due. Impaired assets are provided for in full. Receivables are pledged as per Note 21(a). b. Age analysis of trade receivables that are past due at the end of the reporting period The following provides an aging analysis of trade receivables which are past due and impairments which have been raised. Consolidated group Not past due Past due 30 days Past due 60 days Past due 90 days Past due 90 days+ Total 2014 Amount Impaired - - - - - - Amount not impaired $ 103,968 - - 21,824 - 125,792 Total $ 103,968 - - 21,824 - 125,792 2013 Amount Impaired - - - - - - Amount not impaired $ 177,328 - 1,147 16,280 - 194,755 Total $ 177,328 - 1,147 16,280 - 194,755 Payment terms on receivables past due but not considered impaired have not been renegotiated. The Group has been in direct contact with the relevant customers and are reasonably satisfied that payment will be received in full. As at 30 June 2014 the Group had current trade receivables of $0 (2013: $0) that were impaired. Note 13: Inventories Current Finished goods at cost Note 14: Receivables – Non-Current Opening balance at cost Loan advance Capitalised expenses Foreign currency translation increment Share of joint entity’s profit/(loss) brought forward Share of joint entity’s results for the financial year period: Revenues Expenses Loss before income tax Income tax benefit Loss after income tax Net interest in joint venture NOTEs TO THE fINANCIAL sTATEMENTs 77 Consolidated Group 2014 $ 2013 $ 49,404 55,098 Consolidated Group 2014 $ 241,080 55,494 63,209 19,908 379,691 (87,610) 327,166 (497,302) (170,136) - (170,136) 121,945 2013 $ 241,080 - - 40,218 281,298 25,022 (112,632) (87,610) - (87,610) 193,688 The receivable is due to be repaid by 4 December 2017 and the effect of discounting is considered not to be material. This receivable is not past due nor impaired. Note 15: Investments Accounted for Using the Equity Method Interest in Joint Venture The Company has a 50% interest in the joint venture entity Lotto Points Plus Inc, incorporated in the USA, which is involved in the provision of retailer-based lottery merchandising and affinity programs combined with internet lottery solutions in the USA. The voting power held by the Company is 50%. The interest in joint venture entities is accounted for in the consolidated financial statements using the equity method of accounting. Unlisted shares at cost Consolidated Group 2014 $ 2013 $ 1 1 78 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Note 16: Equity instruments at fair value through Other Comprehensive Income and Available- For-Sale Financial Assets (Non-Current) Unlisted securities Equity investments Available-for-sale financial assets - at cost Financial assets at fair value through other comprehensive income - at fair value Unlisted securities Unlisted securities comprise an investment in Sorteo Games Inc., USA. The Company owns 7% of the issued share capital of Sorteo Games Inc. The Company does not control Sorteo Games Inc because it is not able to govern the activities of this entity so as to obtain benefits from it. Shares in Sorteo Games Inc are carried at fair value of $nil (2013: at cost of $2,530,054). Available-for-sale financial assets reconciliation: Opening value at cost at 1 July 2012 Foreign currency translation increment Closing value at cost 30 June 2013 Reclassification to financial assets at fair value through other comprehensive income on 1 July 2013 Closing value at 30 June 2014 Financial assets at fair value through other comprehensive income reconciliation: Opening balance at 1 July 2013 Fair value of financial assets reclassified from available-for-sale assets on 1 July 2013 Additional cost Change in fair value of financial assets at fair value through other comprehensive income Fair value at 30 June 2014 fair value Refer to Note 32 for more information about fair value of equity securities 2014 $ 2013 $ - - 2,530,054 - 2,296,065 233,989 2,530,054 (2,530,054) - - 2,530,054 614 (2,530,668) - NOTEs TO THE fINANCIAL sTATEMENTs 79 Note 17: Controlled Entities The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 2(b). Direct subsidiaries of the ultimate parent entity Jumbo Interactive Limited: Benon Technologies Pty Ltd TMS Global Services Pty Ltd Jumbo Ventures Pty Ltd Intellitron Pty Ltd Manaccom Pty Ltd Jumbo Lotteries Pty Ltd Jumbo Interactive Asia Pty Ltd Cook Islands Tattslotto Pty Ltd Jumbo Interactivo de Mexico SA de CV Jumbo Interactive GmbH2 subsidiaries of TMs global services Pty Ltd: TMS Global Services (NSW) Pty Ltd TMS Global Services (VIC) Pty Ltd TMS Fiji Limited TMS Fiji On-Line Limited TMS Global Services (PNG) Limited Cook Islands Tattslotto Pty Ltd Jumbo Lotteries USA Limited Jumbo Lotteries NC, Inc. Note 18: Property, Plant and Equipment Plant and equipment At cost Accumulated depreciation Leasehold improvements - at cost Accumulated amortisation Total property, plant and equipment Country of Incorporation Australia Australia Australia Australia Australia Australia Australia Cook Islands Mexico Germany Country of Incorporation Australia Australia Fiji Fiji Papua New Guinea Cook Islands United States of America United States of America Percentage Ownership 2014 % 100 100 100 100 100 100 100 1 100 100 2013 % 100 100 100 100 100 100 100 1 100 100 Percentage Indirect Ownership 2014 % 100 100 100 100 100 99 100 100 Consolidated Group 2014 $ 1,128,393 (824,352) 304,041 309,837 (295,816) 14,021 318,062 2013 % 100 100 100 100 100 99 100 100 2013 $ 1,063,856 (762,508) 301,348 295,746 (231,035) 64,711 366,059 Movements in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year. 80 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 a. Movements in Carrying Amounts Consolidated group Year ended 30 June 2013 Balance at the beginning of year Additions Disposals Depreciation/amortisation expense Carrying amount at the end of year Year ended 30 June 2014 Balance at the beginning of year Additions Disposals Depreciation/amortisation expense Carrying amount at the end of year Note 19: Intangible Assets Goodwill Accumulated impaired losses Net carrying value Intellectual property Accumulated impairment losses Net carrying value Website development costs Accumulated amortisation Net carrying value Customer acquisition costs Accumulated amortisation (and impairment) Net carrying value Software costs Accumulated amortisation Net carrying value Domain names - cost Net carrying value Other Accumulated amortisation Net carrying value Total intangibles Plant and Equipment $ Leasehold Improvements $ 231,789 205,663 (17,813) (118,291) 301,348 301,348 204,285 (2,884) (198,708) 304,041 128,583 4,195 - (68,067) 64,711 64,711 14,091 - (64,781) 14,021 Consolidated Group 2014 $ 3,686,355 (854,805) 2,831,550 53,499 (23,404) 30,095 9,331,585 (5,498,246) 3,833,339 4,446,799 (4,446,799) - 141,897 (133,951) 7,946 889,764 889,764 39,204 (39,204) - 7,592,694 Total $ 360,372 209,858 (17,813) (186,358) 366,059 366,059 218,376 (2,884) (263,489) 318,062 2013 $ 3,686,355 (854,805) 2,831,550 53,499 (23,340) 30,159 6,081,799 (3,738,117) 2,343,682 4,446,799 (4,264,569) 182,230 132,471 (131,040) 1,431 888,342 888,342 192,641 (155,731) 36,910 6,314,304 a. Movements in Carrying Amounts NOTEs TO THE fINANCIAL sTATEMENTs 81 goodwill $ Intellectual property $ website development costs $ Customer acquisition costs $ software $ Domain names $ Other $ Total $ 2,831,550 30,265 1,327,085 1,277,521 778 854,337 77,171 6,398,707 - - - 1,927,157 - - 4,998 34,005 (106) (955,560) (1,095,291) (4,345) - - 39,003 1,972,157 (40,261) (2,095,563) 2,831,550 30,159 2,343,682 182,230 1,431 888,342 36,910 6,314,304 2,831,550 30,159 2,343,682 182,230 1,431 888,342 36,910 6,314,304 - - - 3,255,104 - - 9,453 1,422 (64) (1,765,447) (182,230) (2,938) - - 10,875 3,255,104 (36,910) (1,987,589) - - - - - - - - - - - - 2,831,550 30,095 3,833,339 - 7,946 889,764 - 7,592,694 Consolidated group: Year ended 30 June 2013 Balance at the beginning of year Additions acquired Additions internally developed Amortisation charge Closing value at 30 June 2013 Year ended 30 June 2014 Balance at the beginning of year Additions acquired Additions internally developed Amortisation charge Closing value at 30 June 2014 b. Other Disclosures Domain names have an indefinite useful life because: • There is no time limit on the expected usage of the domain names; • Licence renewal is automatic on payment of the renewal fee without satisfaction of further renewal conditions; • The cost is not significant when compared with future economic benefits expected to flow from renewal. As such, the useful life can include the renewal period; and • Since there is no limit on the number of times the licence can be renewed this leads to the assessment of “indefinite” useful life. This assessment has been based on: • Technical, technological, commercial and other types of obsolescence; • The stability of the industry in which the asset operates and changes in the market demand for the products and/or services output from the asset; • The level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity’s ability and intention to reach such a level; and • The period of control over the asset and legal or similar limits on the use of the asset. Intellectual property has an indefinite useful life because: • There is no time limit on the expected usage of the intellectual property; and • The intellectual property is proprietary in nature and only the company has the source code. The assessment has been based on: • Technical, technological, commercial and other types of obsolescence; • The stability of the industry in which the asset operates and changes in the market demand for the products and/or services output from the asset; and • The period of control over the asset and legal or similar limits on the use of the asset. Intangible assets include capitalised website development costs, capitalised customer acquisition costs and domain names with a carrying value of $4,723,103 (2013: $3,414,254). The amortisation period relating 82 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 to the website developments costs is three years and to the customer acquisition costs is 18 months. Domain names have an indefinite useful life and therefore have no amortisation period. c. Impairment Testing of Cash-Generating Units Containing Goodwill or Intangible Assets with Indefinite Useful Lives Goodwill and domain names have been allocated to the internet Lottery cash-generating unit which is an operating segment: Carrying amount of goodwill internet Lottery unit Total Carrying amount of domain names internet Lottery unit Total Consolidated Group 2014 $ 2,831,550 2,831,550 889,764 889,764 2013 $ 2,831,550 2,831,550 888,342 888,342 The recoverable amount of the cash-generating unit is based on a value-in-use calculation using a discounted cash flow model based on a one year projection approved by management and extrapolated over a five year period using a steady rate, together with a terminal value. The growth rate used in these projections does not exceed the historical growth rate of the relative cash-generating unit. Key assumptions used for value-in-use calculation of the CGU is as follows: • Annual growth rate of 3% (2013: 3%) • Terminal growth rate of 3% (2013: 3%) • Discount rate of 17% being the calculated weighted average cost of capital based on the capital asset pricing model (2013: 17%) • Reseller agreements with expiry periods will be renewed as and when they expire and those with notice periods will remain in place. Management determined projections based on past performance and its expectations for the future. The growth rate used is consistent with those used in industry reports. The discount rate used is pre-tax and is specific to relevant segment in which the unit operates. The recoverable amount of the goodwill of the internet lottery CGU is estimated to be $29,346,552 which exceeds the carrying amount at 30 June 2014 by $26,515,002. If a discount rate of 100% and growth rate of 0% was used instead of 17% and 3% respectively, the recoverable amount of goodwill would equal the carrying amount. Should the lottery reseller agreements be cancelled or not extended for further periods when they expire, an impairment loss would be recognised up to the maximum carrying value of $2,831,550. The recoverable amount of the internet lottery CGU of $29,346,552 also exceeds the carrying value of all intangible assets (including goodwill, domain names and website development costs) of that segment by $22,126,611. Note 20: Trade and Other Payables Total trade and other payables Current Trade creditors GST payable Sundry creditors and accrued expenses Employee benefits Customer funds payable Current Customer funds payable NOTEs TO THE fINANCIAL sTATEMENTs 83 Note 2014 $ 13,417,446 2,060,739 415,393 1,440,156 552,462 4,468,750 2013 $ 12,496,899 2,390,179 604,598 1,532,981 372,408 4,900,166 12 8,948,696 7,596,733 Note 21: Borrowings There were no outstanding interest bearing liabilities for the financial year ended 2014 (2013: $nil) Bank overdraft A bank overdraft facility of $500,000 (2013: $500,000) is repayable on demand and currently bears interest at a current floating rate of 9.34% (2013: 10.24% p.a.). This facility was undrawn for the financial year ended 2014 (2013: $nil). a. Assets pledged as security The bank liabilities are secured by a fixed and floating charge over all the assets of the Group. The covenants within the bank liabilities require interest not to exceed 25% of profit before finance costs and income tax (net profit before interest and tax/total interest expense > 4x), and debt not to exceed 67% of earnings before interest, tax, depreciation and amortisation (consolidated debt/net profit before deduction of interest, tax, depreciation and amortisation, and before significant items < 1.5x). b. Bank overdraft facility The bank overdraft facilities may be drawn down at any time but may be terminated by the bank without notice. c. Defaults and breaches There have been no defaults or breaches during the financial year ended 30 June 2014. 84 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Note 22: Tax Current Income tax payable Consolidated Group 2014 $ 884,185 2013 $ 752,946 NON-CURRENT Deferred tax liabilities comprise temporary differences recognised in the profit or loss as follows: Property plant and equipment Opening Balance $ Charged to Profit or Loss $ depreciation Amortisation Other Balance at 30 June 2013 Property plant and equipment depreciation Amortisation Other Balance at 30 June 2014 5,013 383,256 14,062 402,331 105,077 346,721 19,845 471,643 100,064 (36,535) 5,783 69,312 (43,542) (307,606) (790) (351,938) NON-CURRENT Deferred tax assets comprise temporary differences recognised in the profit or loss as follows: Property plant and equipment Opening Balance $ Charged to Profit or Loss $ depreciation Amortisation Accruals Provisions Other Balance at 30 June 2013 Property plant and equipment depreciation Amortisation Accruals Provisions Other Balance at 30 June 2014 75,029 33,787 80,963 158,313 46,242 394,334 101,483 10,909 39,640 215,915 27,615 395,562 26,454 (22,878) (41,323) 57,602 (18,627) 1,228 32,260 - 37,350 58,549 (8,936) 119,223 Deferred tax assets not brought to account, the benefits of which will only be realised if the conditions for deductibility set out in Note 2(f) occur: • Gross capital losses $4,156,464 (2013: $3,884,942) Closing Balance $ 105,077 346,721 19,845 471,643 61,535 39,115 19,055 119,705 Closing Balance $ 101,483 10,909 39,640 215,915 27,615 395,562 133,743 10,909 76,990 274,464 18,679 514,785 Note 23: Provisions Current Long service leave Make good provision Non-current Long service leave NOTEs TO THE fINANCIAL sTATEMENTs 85 Consolidated Group 2014 $ 200,159 - 200,159 163,950 163,950 2013 $ 216,379 153,437 369,816 133,857 133,857 Make good The Group is required under the terms of certain leases to restore the leased premises at the end of the lease to its original condition. A provision has been recognised for the present value of the estimated expenditure required to demolish any leasehold improvements at the end of the lease. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets. Balance at beginning of the year Provisions reversed during the year Balance at end of the year Note 24: Contributed Equity Share capital Fully paid ordinary shares Movements in ordinary share capital Date 1 July 2012 Shares issued during the year 29 August 2012 17 September 2012 20 December 2012 15 January 2013 1 February 2013 25 February 2013 4 March 2013 29 August 2012 30 June 2013 Shares issued during the year 17 October 2013 18 October 2013 23 January 2014 30 June 2014 Make good provision $ 153,437 (153,437) - Consolidated Group Consolidated Group 2014 shares 2014 $ 2013 shares 2013 $ 43,902,560 29,759,572 43,552,560 29,544,572 Details Opening balance Exercise of options Exercise of options Exercise of options Exercise of options Exercise of options Exercise of options Exercise of options Exercise of options Closing balance Exercise of options Exercise of options Exercise of options Closing balance Number of shares 42,412,560 390,000 50,000 150,000 100,000 10,000 40,000 400,000 390,000 43,552,560 100,000 100,000 150,000 43,902,560 Issue price $ 0.700 0.500 0.500 0.700 0.500 0.500 0.500 0.700 0.700 0.700 0.500 $ 28,876,572 273,000 25,000 75,000 70,000 5,000 20,000 200,000 273,000 29,544,572 70,000 70,000 75,000 29,759,572 86 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 a. Ordinary shares Ordinary shares have no par value and the company does not have a limited amount of authorised share capital. Ordinary shareholders are entitled to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. Every ordinary shareholder present at a meeting in person or by proxy is entitled to one vote on a show of hands and upon a poll each share is entitled to one vote. b. Options i. Details of the employee option plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year are set out in Note 29: Share- Based Payments. ii. For information relating to share options issued to third parties during the financial year, refer to Note 29: Share-Based Payments. c. Capital management Management controls the capital of the Group in order to maintain a good debt to equity ratio, provide the shareholders with adequate returns and ensure that the Group can fund its operations and continue as a going concern. The Board regularly reviews its capital management strategies in order to optimise shareholder value. There are no externally imposed capital requirements. Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues. There was a change in the strategy adopted by management to control the capital of the Group for the current financial year which strategy is to ensure that the Group’s gearing ratio remains less than 40% (2013: less than 40%). The gearing ratios for the year ended 30 June 2014 and 30 June 2013 are as follows: Total borrowings Total equity Total capital Gearing ratio Note 25: Capital and Leasing Commitments a. Operating lease commitments Note 21 Consolidated Group 2014 $ - 19,817,537 19,817,537 0% 2013 $ - 20,509,225 20,509,225 0% Consolidated Group 2014 $ Non-cancellable operating leases contracted for but not capitalised in the financial statements Payable Not later than one year Later than one year but not later than six years 781,102 3,589,072 4,370,174 The property leases are non-cancellable leases for occupied premises at various locations ranging from month-to-month to six year terms, with rent payable monthly in advance. Options to renew leases at the end of the term range from terms of one to six years. Rent and outgoings are paid on a monthly basis with periodic pricing reviews. 2013 $ 765,890 93,596 859,486 NOTEs TO THE fINANCIAL sTATEMENTs 87 Note 26: Contingent Liabilities Estimates of the potential financial effect of contingent liabilities that may become payable: Contingent Liabilities Guarantees provided by the Group’s bankers The Group’s bankers have provided guarantees to third parties in relation to premises leased by Group companies. These guarantees have no expiry term and are payable on demand, and are secured by a fixed and floating charge over the Group’s assets. Consolidated Group 2014 $ 2013 $ 385,710 160,763 385,710 160,763 Note 27: Segment Reporting Segment information is presented using a ‘management approach’, i.e. segment information is provided on the same basis as information used for internal reporting purposes by the chief operating decision maker (the Board). Comparatives for 2013 were stated on this basis. Accounting policies Segment revenues and expenses are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Segment information a. Description of segments Management has determined the operating segments based on the reports reviewed by the Board that are used to make strategic decisions. The Board considered the business from both a product and a geographic perspective and has identified the reportable segments. Internet Lotteries segment consists of retail of lottery tickets sold both in Australia and eligible international jurisdictions, and internet database management/marketing. The Board monitors the performance of the regions on a separate basis. Accordingly, there are three operating segments: internet lotteries Australia, internet lotteries Germany and internet lotteries Mexico. All other segments include operating segments of non-lottery business activities that are not reportable in terms of AASB 8 and revenues from external customers are derived from the sale of software products. Comparative figures for 2013 are stated on this basis. 88 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 b. Segment information provided to the Board 2014 The segment information provided to the Board for the reportable segments for the year ended 30 June 2014 is as follows: Germany and Mexico became reportable segments in the 2014 financial year Total segment revenue/income Intra-segment revenue Revenue from external customers NPBT Interest revenue Finance costs expense Depreciation and amortisation Internet Lotteries Australia $ 23,836,781 - 23,836,781 6,765,422 714,491 41 2,017,408 Internet Lotteries germany $ 8,621 - 8,621 (1,114,642) - 1,087 28,779 Internet Lotteries Mexico $ 308,450 (308,450) - (349,077) 3 - 855 Total Internet Lotteries $ 24,153,852 (308,450) 23,845,402 5,301,703 714,494 1,128 2,047,042 There was no impairment charge or other significant non-cash item recognised in 2014 relating to the segments. 2013 The segment information provided to the Board for the reportable segments for the year ended 30 June 2013 is as follows: Total segment revenue/income Intra-segment revenue Revenue from external customers NPBT Interest revenue Finance costs expense Depreciation and amortisation Bad debt written off There was no impairment charge or other significant non-cash item recognised in 2013 relating to the segments. Internet Lotteries $ 24,403,335 - 24,403,335 6,354,472 810,150 978 2,168,753 346,446 NOTEs TO THE fINANCIAL sTATEMENTs 89 c. Other segment information i. Segment revenue The revenue from external parties reported to the Board is measured in a manner consistent with that in the profit or loss. Revenues from external customers are derived principally from the sale of lottery tickets and provision of related services. Segment revenue reconciles to total revenue/other income from continuing operations as follows: Total Internet Lotteries segment revenue All other segments Interest revenue Other Total revenue/other income from operations (note 4) Consolidated Group 2014 $ 23,845,402 508,749 848,917 1,705 25,204,773 2013 $ 24,403,335 866,480 918,060 112,084 26,299,959 The entity is domiciled in Australia. The amount of its revenue from external customers in Australia is $22,669,631 (2013: $23,336,409), and the total revenue from external customers in other countries is $2,535,142 (2013: $2,963,550). Revenues of $1,056,162 (2013: $1,705,713) are from external customers in Fiji. Segment revenues are allocated based on the country in which the customer is located. No single external customer derives more than 10% of total revenues. ii. NPBT The Board assesses the performance of the operating segments based on a measure of NPBT. This measure excludes the effects of non-recurring expenditure from the operating segments such as restructuring costs and impairments when the impairment is the result of an isolated, non-recurring event. Furthermore the measure excludes the effects of foreign currency gains/(losses). A reconciliation of the NPBT to profit before income tax is provided as follows: NPBT All other segments Other Interest revenue Corporate expenses Finance costs expense Share based payments expense Directors’ remuneration Salaries and wages Other Profit before income tax from operations (per P&L) Consolidated Group 2014 $ 5,301,703 12,883 1,705 848,917 (2) (107,767) (131,100) (687,848) (671,857) 4,566,634 2013 $ 6,354,472 (84,962) - 918,060 (8,522) (33,350) (130,800) (807,977) (891,003) 5,315,918 90 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Note 28: Cash Flow Information a. Reconciliation of Cash Flow from Operations with Profit after Income Tax Profit/(loss) for the year after income tax Non-cash flows Amortisation Depreciation Unrealised foreign currency (gain)/loss Share of losses of joint ventures accounted for using the equity method Capitalised expenses of joint venture Share option expense Other Changes in operating assets and liabilities, net of the effects of purchase and disposal of subsidiaries Decrease/(increase) in trade receivables Decrease/(increase) in other receivables Decrease/(increase) in inventories Decrease/(increase) in DTA Increase/(decrease) in trade payables Increase/(decrease) in other payables Increase/(decrease) in other provisions Increase/(decrease) in DTL Increase/(decrease) in provision for income tax Cash flow from operations b. Facilities with Banks Credit facility Facilities utilised Overdraft Multi Option/Chattel mortgages Loans Bank guarantees Amount available Consolidated Group 2014 $ 2,784,958 2,052,370 198,708 20,311 170,136 (63,209) 107,767 35,891 68,963 (289,780) 5,694 (119,223) (329,440) 1,249,987 (139,564) (351,938) 131,239 5,532,870 Consolidated Group 2014 $ 1,550,000 - - - (385,710) 1,164,290 2013 $ 2,982,157 2,163,630 118,291 (62,326) 87,610 - 33,350 17,360 (31,077) 13,878 43,526 (1,228) 856,040 1,276,173 65,281 69,312 1,136,191 8,768,168 2013 $ 1,211,000 - - (160,763) 1,050,237 The facilities are provided by ANZ Group Limited subject to general and specific terms and conditions being set and met periodically. Interest rates are both fixed and variable and subject to adjustment. Refer to Note 21 for terms of these facilities. c. Non-Cash Financing and Investing Activities i. Joint Venture Interest of 7.00% pa payable on the US$365,567 loan to Lotto Points Plus LLC is being capitalised Note 29: Share Based Payments share-based payment expense recognised during the financial year Options issued under employee option plan Options issued to third parties for services received NOTEs TO THE fINANCIAL sTATEMENTs 91 Consolidated Group 2014 $ 107,767 - 107,767 2013 $ 27,088 6,262 33,350 Employee option plan The Jumbo Interactive Limited Employee Option Plan was ratified at the annual general meeting held on 28 October 2008. Employees are invited to participate in the scheme from time to time. Options vest when the volume weighted average share price over five consecutive trading days equals the exercise price and provided the staff member is still employed by the Group. When issued on exercise of options, the shares carry full dividend and voting rights. Options granted carry no dividend or voting rights. Fair value of options granted Employees The weighted average fair value of options granted during the 2014 year was 18.9 cents (2013: no options were issued to employees). The fair value at grant date was determined by an independent valuer using the Monte Carlo Simulation option pricing model that takes into account the share price at grant date, exercise price, expected volatility, option life, expected dividends, and the risk free rate. The inputs used for the Monte Carlo Simulation option pricing model for options granted during the year ended 30 June 2014 were as follows: Options are granted for no consideration, have a five year life, and are exercisable when the five day volume weighted average price equals the exercise price Grant date: Share price at grant date: Exercise price: Expected volatility: Expected dividend yield Risk free rate 2014 2013 3 Sep 2013 $2.17 $4.00 69.144% 1.38% 3.31% 6 Nov 2013 $2.31 $4.00 86.156% 1.30% 3.49% - - - - - - Expected volatility was determined based on the historic volatility (based on the remaining life of the option), adjusted for any expected changes to future volatility based on publicly available information. 92 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 2014 Exercise price $ grant date KMP and staff options 15 February 2011 14 December 20111 3 September 2013 6 November 2013 $0.50 $0.70 $4.00 $4.00 Expiry date 15 February 2014 14 December 2014 3 September 2018 6 November 2018 Third party options 14 December 20111 14 December 2014 $0.70 Total Balance at beginning of year granted during the year Lapsed/ forfeited during the year Exercised during the year Expired during the year Balance at end of year Exercisable at end of year 150,000 500,000 - - - 2,400,000 - 400,000 650,000 2,800,000 - - - - - (150,000) (200,000) - - (350,000) - (400,000) 400,000 - (400,000) 400,000 1,050,000 2,800,000 (400,000) - - (350,000) - - - - - - - - - - 300,000 300,000 2,400,000 400,000 - - 3,100,000 300,000 - - 3,100,000 - - 300,000 1 during the financial year a third party with 500,000 existing options became an employee of the Group Balance at beginning of year granted during the year Lapsed/ forfeited during the year Exercised during the year Expired during the year Balance at end of year Exercisable at end of year 2013 Exercise price $ grant date KMP and staff options 21 October 2009 15 February 2011 $0.70 $0.50 Third party options 14 December 2011 $0.70 Total Expiry date 30 October 2012 15 February 2014 390,000 800,000 1,190,000 14 December 2014 1,000,000 1,000,000 2,190,000 - - - - - - - - (390,000) (650,000) - (1,040,000) (100,000) - - (100,000) - (1,140,000) - - - - - - - - 150,000 150,000 150,000 150,000 900,000 900,000 1,050,000 500,000 500,000 650,000 The weighted average exercise price for the year ended 30 June 2014 was $3.38 (2013: $0.64). The weighted average remaining contractual life of share options outstanding at 30 June 2014 was 3 years 10 months (2013: 1 years 4 months). Note 30: Events After the Reporting Date There are no material events after the reporting date. NOTEs TO THE fINANCIAL sTATEMENTs 93 Note 31: Financial Risk Management a. General objectives, policies and processes In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks and measurement from previous periods unless otherwise stated in this note. The Group’s financial instruments consist mainly of deposits with banks, and accounts receivable and payable. The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group’s finance function. The Group’s risk management policies and objectives are therefore designed to minimise the potential impacts of these risks on the results of the Group where such impacts may be material. The Board receives periodic reports from the Chief Financial Officer through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. The main purpose of non-derivative financial instruments is to raise finance for Group operations. There are no derivative instruments recognised or unrecognised at the reporting date. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below: i. Treasury Risk Management An Audit and Risk Management Committee consisting of a majority of Non-Executive Directors meet on a regular basis to consider currency and interest rate exposure and to evaluate treasury management strategies in the context of the most recent economic conditions and forecasts. The Committee’s overall risk management strategy seeks to assist the Group in meeting its financial targets whilst minimising potential adverse effects on financial performance. The Audit and Risk Management Committee operates under policies approved by the Board of Directors. Risk management policies are approved and reviewed by the Board on a regular basis. These include the use of hedging derivative instruments, credit risk policies, and future cash flow requirements. ii. Financial Risk Exposures and Management The main risks the Group is exposed to through its financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk. Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the entity’s income or the value of its holdings of financial instruments. The Group is exposed to market risks from interest rates and foreign currency. Interest rate risk Interest rate risk arises principally from cash and cash equivalents, and borrowings. The object of market risk management is to manage and control interest rate risk exposure within acceptable parameters while optimising the return. Interest rate risk is managed with a mixture of fixed and floating rate debt. The Group policy is to manage between 50% and 100% of interest bearing debt using capped and fixed interest rates. At 30 June 2014 the Group interest bearing debt was $0 (2013: $0). 94 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Foreign currency risk The Group is exposed to fluctuations in foreign currencies arising from the sale and purchase of goods and services in currencies other than the Group’s functional currency. Senior management monitor the Group’s exposure regularly and utilise the spot market to buy and sell specified amounts of foreign currency to manage this risk. Liquidity risk The Group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate cash balances and unutilised borrowing facilities are maintained. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations to the entity. Credit risk arises principally from cash and cash equivalents and trade and other receivables. The objective of the Group is to minimize risk of loss from credit risk exposure. The maximum exposure to credit risk, excluding the value of any collateral or other security, at the end of the reporting period to recognised financial assets, is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. No collateral or other security is held over these assets at balance sheet date. Credit risk is managed on a Group basis and reviewed regularly by the Audit and Risk Management Committee. The Audit and Risk Management Committee monitors credit risk by actively assessing the rating quality and liquidity of counter parties: • Surplus funds are only invested with banks and financial institutions with a Standard and Poor’s rating of no less than A: • All potential customers are rated for credit worthiness taking into account their size, market position and financial standing; and • Customers that do not meet the Group’s strict credit policies may only purchase in cash or using recognised credit cards. The trade receivables balance, before allowance for doubtful debts, at balance date by geographic region: Australia Fiji Cook Islands Samoa 2014 $ 41,014 48,256 - 36,522 125,792 % 32.6 38.4 - 29.0 100 2013 $ 35,467 103,249 15,533 40,506 194,755 % 18.2 53.0 8.0 20.8 100 The Group’s most significant customer, located in Samoa, accounts for 29% of trade receivables as at 30 June 2014 (2013: 21%). Credit risk is measured using debtor aging. Refer Note 12(b): Trade and Other Receivables for aging analysis. b. Financial Instruments Categories of Financial Instruments Financial Assets Cash and cash equivalents - AA rated Loans and receivables Financial assets at fair value through Other Comprehensive Income Available for sale financial assets Financial Liabilities Trade and other payables NOTEs TO THE fINANCIAL sTATEMENTs 95 Consolidated Group 2014 $ 2013 $ 25,366,357 761,679 - - 24,460,703 612,605 - 2,530,054 13,417,446 12,496,899 i. Maturity Analysis Financial liabilities have differing maturity profiles depending on the contractual term and in the case of borrowings, different repayment amounts and frequency. The table below shows the period in which the principal and interest (if applicable) of financial liability balances will be paid based on the remaining period to repayment date assuming contractual repayments are maintained. Trade and other payables are expected to be paid as follows: Less than six months ii. Sensitivity Analysis Consolidated Group 2014 $ 13,417,446 14,417,446 2013 $ 12,496,899 12,496,899 Interest Rate Risk and Foreign Currency Risk The Group has performed a sensitivity analysis relating to its exposure to interest rate risk and foreign currency risk at reporting date. This sensitivity analysis demonstrates the effect on the current year results and equity which could result from a change in these risks. Interest Rate Sensitivity Analysis At 30 June 2014, the effect on profit/(loss) and equity as a result of changes in interest rates, with all other variables remaining constant, would be as follows: Change in profit/(loss): increase in interest rates by 2% (2013: 2%) decrease in interest rates by 2% (2013: 2%) Change in equity: increase in interest rates by 2% (2013: 2%) decrease in interest rates by 2% (2013: 2%) Consolidated Group 2014 $ 507,327 (507,327) 507,327 (507,327) 2013 $ 489,214 (489,214) 489,214 (489,214) 2013 $ (53,847) 57,178 (53,847) 57,178 2013 $ (180) 180 (180) 180 96 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Foreign Currency Risk Sensitivity Analysis At 30 June 2014, the effect on profit/(loss) and equity as a result of changes in the value of the Australian Dollar to the Fijian Dollar, with all other variables remaining constant is as follows: Change in profit/(loss): improvement in AUD to FJD by 3% (2013: 3%) decline in AUD to FJD by 3% (2013: 3%) Change in equity: improvement in AUD to FJD by 3% (2013: 3%) decline in AUD to FJD by 3% (2013: 3%) Consolidated Group 2014 $ (47,213) 50,133 (47,213) 50,133 At 30 June 2014, the effect on profit/(loss) and equity as a result of changes in the value of the Australian Dollar to the Euro, with all other variables remaining constant is as follows: Change in profit/(loss): improvement in AUD to EUR by 3% (2013: 3%) decline in AUD to EUR by 3% (2013: 3%) Change in equity: improvement in AUD to EUR by 3% (2013: 3%) decline in AUD to EUR by 3% (2013: 3%) Consolidated Group 2014 $ (33,439) 33,439 (33,439) 33,439 The above interest rate and foreign exchange rate sensitivity analysis has been performed on the assumption that all other variables remain unchanged. Note 32: Fair Value Measurement Financial assets at fair value through Other Comprehensive Income are recognised and measured at fair value on a recurring basis. Fair value hierarchy AASB 13 Fair Value Measurement requires disclosure of fair value measurements by level in the fair value measurement hierarchy as follows: • Level 1 - the instrument has quoted prices (unadjusted) in active markets for identical assets or liabilities • Level 2 - a valuation technique is used using inputs other than quoted prices within level 1 that are observable for the financial instrument, either directly (i.e. as prices), or indirectly (i.e. derived from prices) • Level 3 - a valuation technique is used using inputs that are not observable based on observable market data (unobservable inputs). As Jumbo Interactive Limited only holds unlisted equity securities, which are initially measured at cost, all available-for-sale financial assets fall within Level 3 of the fair value hierarchy. NOTEs TO THE fINANCIAL sTATEMENTs 97 Recognised fair value measurements The following table sets out the group’s assets and liabilities that are measured and recognised at fair value in the financial statements. 30 June 2014 Financial assets at fair value through Other Comprehensive Income 30 June 2013 Available-for-sale financial assets Disclosed fair values Note 16 Note 16 Level 3 $ - Level 3 $ 2,530,054 Total $ - Total $ 2,530,054 The group also has assets and liabilities which are not measured at fair value, but for which fair values are disclosed in the notes to the financial statements. Due to their short-term nature, the carrying amount of trade receivables and payables are assumed to approximate their fair values. The fair value of non-current receivables disclosed in note 14 are based on cash flows discounted using the current lending rate of 7.00% (2013: 7.00%) for loans to joint venture parties (Level 3). The carrying amount of current trade and other payables disclosed in note 20 are assumed to approximate their fair values because the impact of discounting is not significant. Valuation techniques used to derive level 3 fair values Description Unlisted equity securities in Sorteo Games Inc Valuation approach Discounted cash flow Unobservable inputs Weighted average cost of capital (WACC) Future free cash flow Long term profit growth rate Range of inputs 20% Uncertain Uncertain Relationship between unobservable inputs and fair value Increased long-term profit growth rate and a lower WACC would increase the fair value Decreased long-term profit growth rate and a higher WACC would decrease the fair value Reconciliation of level 3 movements The following table sets out the movement in level 3 fair values for unlisted equity securities. Opening balance 1 July 2013 Other increases Change in fair value of available-for-sale financial assets Closing balance 30 June 2014 Valuation process for level 3 fair values Valuations of unlisted equity securities are performed by the CFO every six months to ensure that they are current for the half-year and annual financial statements. Valuations are reviewed and approved by the Audit and Risk Management Committee. $ 2,530,054 614 (2,530,668) - 98 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Note 33: Reserves a. Foreign Currency Translation Reserve The foreign currency translation reserve records exchange differences arising on translation of foreign controlled subsidiaries. Amounts are reclassified to profit or loss when an entity is disposed of. b. Share Based Payments Reserve The share based payments reserve records items recognised as expenses on valuation of employee and third party share options. This reserve can be reclassified as retained earnings if options lapse. c. Financial Assets Revaluation Reserve The financial assets revaluation reserve comprises changes in the fair value of available-for-sale investments which are recognised in other comprehensive income including when the investments are sold or re-classified. Note 34: Company Details The registered office of the Company is: Jumbo Interactive Limited, Level One, 601 Coronation Drive, Toowong, QLD, 4066. The principal places of business are: • Level One, 601 Coronation Drive, Toowong, QLD, 4066 • Suite 604, 370 St Kilda Road, Melbourne, VIC, 3001 DIRECTORs’ DECLARATION 99 Directors’ Declaration The Directors of the Company declare that: 1. The financial statements, comprising the Consolidated Statement of Profit and Loss and Other Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows, and accompanying notes, are in accordance with the Corporations Act 2001 and: a. comply with Accounting Standards and the Corporations Regulations 2001; and b. give a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date. 2. The Company has included in the notes to the financial statements an explicit and unreserved statement of compliance with International Financial Reporting Standards. 3. In the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 4. The remuneration disclosures included in pages 37 to 45 of the Directors’ report (as part of the audited Remuneration Report), for the year ended 30 June 2014, comply with section 300A of the Corporations Act 2001. 5. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A. This declaration is made in accordance with a resolution of the Directors. David K Barwick Chairman Brisbane 28 August 2014 100 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Independent Auditor’s Report Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au Level 10, 12 Creek St Brisbane QLD 4000 GPO Box 457 Brisbane QLD 4001 Australia To the members of Jumbo Interactive Limited DECLARATION OF INDEPENDENCE BY TIMOTHY KENDALL TO THE DIRECTORS OF JUMBO INTERACTIVE LIMITED Report on the Financial Report We have audited the accompanying financial report of Jumbo Interactive Limited, which comprises the consolidated statement of financial position as at 30 June 2014, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. As lead auditor of Jumbo Interactive Limited for the year ended 30 June 2013, I declare that, to the best of my knowledge and belief, there have been no contraventions of: • • the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. This declaration is in respect Jumbo Interactive Limited and the entities it controlled during the period. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. T J Kendall Director BDO Audit Pty Ltd Brisbane, 28 August 2013 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. INDEPENDENT AUDITOR’s REPORT 101 Independence In conducting our audit, we have complied with the independence requirements of the Corporations Independence Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which In conducting our audit, we have complied with the independence requirements of the Corporations has been given to the directors of Jumbo Interactive Limited, would be in the same terms if given to Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Jumbo Interactive Limited, would be in the same terms if given to the the directors as at the time of this auditor’s report. directors as at the time of this auditor’s report. Opinion Opinion In our opinion: In our opinion: a) the financial report of Jumbo Interactive Limited is in accordance with the Corporations Act 2001, a) the financial report of Jumbo Interactive Limited is in accordance with the Corporations Act 2001, including: including: i. giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its i. performance for the year ended on that date; and giving a true and fair view of the consolidated entity’s financial position as at 30 June 2013 and of its performance for the year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001; and b) the financial report also complies with International Financial Reporting Standards as disclosed in b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 2. Note 1. Report on the Remuneration Report Report on the Remuneration Report We have audited the Remuneration Report included in pages 37 to 45 of the directors’ report for We have audited the Remuneration Report included in pages 38 to 45 of the directors’ report for the the year ended 30 June 2014. The directors of the company are responsible for the preparation and year ended 30 June 2013. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in presentation of the Remuneration Report in accordance with section 300A of the Corporations Act accordance with Australian Auditing Standards. 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Jumbo Interactive Limited for the year ended 30 June 2014 Opinion complies with section 300A of the Corporations Act 2001. In our opinion, the Remuneration Report of Jumbo Interactive Limited for the year ended 30 June 2013 complies with section 300A of the Corporations Act 2001. BDO Audit Pty Ltd BDO Audit Pty Ltd T J Kendall T J Kendall Director Director Brisbane, 28 August 2014 Brisbane, 28 August 2013 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. 102 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Additional Information for Listed Public Companies The following additional information is required by the Australian Securities Exchange in respect of listed public companies only. 1. Shareholding The Company has 43,902,560 ordinary shares on issue, each fully paid. There are 2,276 holders of these ordinary shares as at 31 July 2014. Shares are quoted on the Australian Securities Exchange under the code JIN and on the German Stock Exchange. In addition, there are an aggregate total 3,100,000 options over ordinary shares on issue but not quoted on the Australian Securities Exchange. a. Distribution of Shareholders Number as at 31 July 2014 Category (size of Holding) 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over Number Holders of Ordinary shares 495 997 375 366 43 2,276 Ordinary shares Held 270,121 2,858,478 3,008,663 8,976,596 28,788,702 43,902,560 b. The number of shareholdings held in less than marketable parcels is: Number Holders of Ordinary shares 177 Ordinary shares Held 30,953 c. The names of the substantial shareholders listed in the holding Company’s register as at 31 July 2014 are: Name Vesteon Pty Ltd and associates Forager Funds Management Pty Ltd Watermark Funds Management Pty Ltd Ordinary shares 9,060,471 2,647,998 2,189,531 Percentage Held 20.6 6.0 5.0 d. Voting Rights The voting rights attached to each class of equity security are as follows: Ordinary shares Each ordinary share is entitled to one vote when a poll is called, otherwise each member present at a meeting or by proxy has one vote on a show of hands. Options Optionholders have no voting rights until their options are exercised. ADDITIONAL INfORMATION fOR LIsTED PUBLIC COMPANIEs 103 e. 20 Largest Shareholders — Ordinary Shares as at 31 July 2014 Number of Ordinary fully Paid shares Held 8,481,359 4,225,861 2,328,430 2,122,637 888,980 % Held of Issued Ordinary Capital 19.32 9.63 5.30 4.83 2.02 880,110 814,737 737,000 600,000 579,112 530,000 500,000 447,996 400,000 400,000 395,000 358,201 275,000 270,000 204,000 25,438,423 2.00 1.86 1.68 1.37 1.32 1.21 1.14 1.02 0.91 0.91 0.90 0.82 0.63 0.61 0.46 57.94 VESTEON PTY LTD Name 1. 2. NATIONAL NOMINEES LIMITED 3. UBS NOMINEES PTY LTD 4. 5. BNP PARIBAS NOMS PTY LTDJP MORGAN NOMINEES AUSTRALIA LIMITED 6. BOND STREET CUSTODIANS LIMITED 7. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 8. MR BARNABY COLMAN CADDICK 9. MR VICTOR JOHN PLUMMER 10. MR MIKE VEVERKA 11. WARAWONG PTY LTD 12. MR JAMES GARDINER 13. MR JOHN WILDE + MRS ELIZABETH WILDE 14. MR CRAIG KUHN 15. UNAVAL NOMINEES PTY LTD IMPALA SUPERANNUATION NOMINEES PTY LTD 16. 17. CITYCORP NOMINEES PTY LIMITED 18. MR GRANT BUXTON PORTER + MRS JANELLE KAY PORTER 19. MR DAVID PLATT + MRS SUE PLATT 20. MR JOHN ROSAIA 2. The name of the Company Secretary is Mr Bill Lyne. 3. The address of the principal registered office in Australia is Level One, 601 Coronation Drive, Toowong, QLD, 4066 Telephone (07) 3831 3705 4. Registers of securities are held at the following addresses: Computershare Investor Services Pty Ltd 117 Victoria Street, West End, QLD, 4101 5. Stock Exchange Listing Quotation has been granted for all the ordinary shares of the Company on the Australian Securities Exchange. 6. Unquoted Securities as at 31 July 2014 Options over Unissued Shares. A total of 3,100,000 options are on issue to employees for services rendered Exercise Price $0.70 $4.00 $4.00 Expiry Date 14 December 2014 3 September 2018 6 November 2018 Number on Issue 300,000 2,400,000 400,000 Number of Holders 1 9 1 7. Other Disclosures There are no other disclosures. 104 JUMBO INTERACTIVE LTD ANNUAL REPORT 2014 Corporate Directory Directors David K Barwick (Non-Executive Chairman) Mike Veverka (Chief Executive Officer) Bill Lyne (Non-Executive Director) Chief Financial Officer David Todd Company Secretary Bill Lyne Registered Office Level One 601 Coronation Drive Toowong Qld 4066 Telephone: 07 3831 3705 Facsimile: 07 3369 7844 Bankers ANZ Banking Group Commonwealth Bank of Australia Westpac Banking Corporation Share Registrar Computershare Investor Services Pty Ltd 117 Victoria Street West End Qld 4101 Telephone: 07 3237 2100 Facsimile: 07 3229 9860 Auditors BDO Audit Pty Ltd Level 10 12 Creek Street Brisbane Qld 4000 Telephone: 07 3237 5999 Facsimile: 07 3221 9227 Website www.jumbointeractive.com Australian Business Number 66 009 189 128 Jumbo Interactive Limited Level 1, 601 Coronation Drive PO Box 824 Toowong, Queensland, 4066 Australia +61 7 3831 3705 www.jumbointeractive.com