Kip McGrath Education Centres
Annual Report 2018

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Table of Contents Appendix 4E Preliminary Final Report Corporate Directory Chairman’s Letter Chief Executive Officer’s Message Director’s Report Auditor’s Independence Declaration Corporate Governance Statement Financial Report General information Statement of profit or loss and other comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements Director’s declaration Independent auditor’s report Shareholder information 1 2 3 5 16 17 24 24 25 26 27 28 29 59 60 66 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Appendix 4E Preliminary final report 1. Company details Name of entity: ABN: Reporting period: Previous period: Kip McGrath Education Centres Limited 73 003 415 889 For the year ended 30 June 2018 For the year ended 30 June 2017 2. Results for announcement to the market Revenues from ordinary activities up 1.8% to Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) up 45.6% to $'000 13,745 3,837 Profit from ordinary activities after tax attributable to the owners of Kip McGrath Education Centres Limited Profit for the year attributable to the owners of Kip McGrath Education Centres Limited up up 40.7% to 2,021 40.7% to 2,021 Dividends On 17 August 2018, a final dividend for the year ended 30 June 2018 of 2.0 cents per ordinary share, 100% fully franked, was declared and will be paid on 21 September 2018 to those shareholders on the register at 7p.m. on 7 September 2018. The total distribution will be $900,686. Comments The profit for the consolidated entity after providing for income tax amounted to $2,021,000 (30 June 2017: $1,436,000). Refer to Chairman's report and Chief Executive Officer's message for further commentary. The following table summarises key reconciling items between statutory profit after tax attributable to the owners of Kip McGrath Education Centres and EBITDA. Revenue EBITDA Less: Depreciation and amortisation Less: Interest expense Add: Interest income Profit before Income tax expense Income tax expense Profit after income tax expense 3. Net tangible assets Net tangible assets per ordinary security Consolidated 2018 $'000 2017 $'000 13,745 13,507 3,837 (1,074) (58) 2 2,707 (686) 2,635 (773) (68) 1 1,795 (359) 2,021 1,436 Reporting Previous period Cents period Cents (2.23) (0.12) Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Appendix 4E Preliminary final report 4. Control gained over entities Not applicable. 5. Loss of control over entities Not applicable. 6. Dividend reinvestment plans Not applicable. 7. Details of associates and joint venture entities Not applicable. 8. Foreign entities Details of origin of accounting standards used in compiling the report: Not applicable. 9. Audit qualification or review Details of audit/review dispute or qualification (if any): The financial statements have been audited and an unqualified opinion has been issued. 10. Attachments Details of attachments (if any): The Annual Report of Kip McGrath Education Centres Limited for the year ended 30 June 2018 is attached. 11. Signed Signed ___________________________ Date: 17 August 2018 Kip McGrath Chairman Newcastle Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited ABN 73 003 415 889 Annual Report - 30 June 2018 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Corporate directory 30 June 2018 Directors Kip McGrath (Chairman) Ian Campbell Trevor Folsom Diane Pass Company secretary Brett Edwards Notice of annual general meeting The details of the annual general meeting of Kip McGrath Education Centres Limited are: 3/6 Newcomen Street Newcastle, NSW 2300 Friday 26 October 2018 at 11:00 a.m. (AEST) Registered office Share register Auditor Bankers Level 3 6 Newcomen Street Newcastle, NSW 2300 Head office telephone: 02 4929 6711 Computershare Investor Services Pty Limited 117 Victoria Street, West End, QLD 4101 Shareholders enquiries: 1300 787 272 PKF Newcastle 755 Hunter Street Newcastle West, NSW 2302 HSBC Bank Australia Ltd Tower 1, International Towers Sydney Level 36 100 Barangaroo Avenue Sydney NSW 2000 Stock exchange listing Kip McGrath Education Centres Limited shares are listed on the Australian Securities Exchange (ASX code: KME) Website www.kipmcgrath.com 1 1 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Chairman's letter 30 June 2018 Dear Shareholders, I am pleased to report the company recorded its 7th straight increase in net profit after tax to $2.021M for the full year, which is an increase of 41% over the previous year. In addition, EBITDA of $3.84M increased by 46%. The strategies I have been communicating to shareholders are continuing to deliver increased shareholder value. The most exciting thing for me is the increase in the number of children we are helping. The lessons delivered last year are up 10% on the previous year. The business only works by producing fabulous educational outcomes initiated by franchisees and their teachers. We are certainly making a difference. This result is above the full year guidance issued in June with revenue and earnings stronger than budgeted. The pound is still historically weak which impacts profit but it remained relatively flat this year. Cash is another highlight with cashflow from operating activities of $5.2m for the year ended 30 June 2018. We have now used all historical tax losses so the company will be paying company tax, with dividends from now on being franked. Our national advertising strategies continue to deliver strong results and brand recognition. Having a significant presence on TV, radio and digital certainly strengthens our 42-year history better than local advertising, and with results 4 times more effective, franchisees are pleased. We are working with franchisees to increase the National Advertising Campaign and reduce the local spend. The CEO will elaborate more in his report. Gold Partner numbers continue to rise globally, with an increase of 30 for the year. We provide back office support to Gold Partners, and they generally do better than other centres. This results in more profitable operations for themselves and the company. New Zealand now has four Gold Partners, and we are looking to sell and convert more in the future. Onscreen tutoring is still growing, and we are currently delivering 1,500 lessons per month. The National Advertising Campaign is starting to see increased traction for onscreen tutoring in rural areas. As I mentioned in my report, I continue to see this as an exciting opportunity for the company. We have spent additional money on development this year, but I believe it was worth it, with the benefit to the tutors and students who are using it. Growth will continue to come from the core business in centres and increasing online revenue, with marketing efforts focussed on building lesson numbers in both these areas. Today, the Board declared a fully franked final dividend of 2 cents per share payable on 21 September 2018 to those shareholders on the register at 7pm on 7 September 2018. This takes the total dividends for the 2018 year to 3 cents (2017– 2 cents), an increase of 50%. Kip McGrath Chairman 17 August 2018 2 2 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Chief Executive Officer's message 30 June 2018 Kip McGrath Education Centres Limited has continued to grow strongly with an EBITDA increase to $3.84M; this is a 46% increase on the previous year. The main reasons are the continued increase in overall student numbers, and improved margins resulting from investment in technology and systems to run the business better. This is the 7th year in a row for continued growth in profit. The Australian dollar is still historically high against the pound, and profit would be higher if the pound was not so weak. 10 Year Franchise Fee Revenue ($m) 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The above graph shows strong franchise fee growth over the past 10 years. The tutoring market continues to expand with a projected compounded annual growth rate of 10.2% according to Global Industry Analyst’s September 2016 report on the private tutoring market. From the increase in the size of the market, combined with our 42-year history and national advertising, we are seeing continued student growth. Overview of our major initiatives: 1. Gold Partner Franchisees We have 267 Gold Partners which is an increase of 37 (16%) from last year. Gold Partner student numbers on average are higher than Silver Partners as the franchisees can focus more on the teaching side of their business. 2. Onscreen Tutoring Onscreen tutoring is continuing to grow steadily with 1,500 lessons per month which up from 1,000 per month in 2016/17 (50% increase). Onscreen tutoring now accounts for 1% of the global student lessons. We expect this number to increase as we begin solid advertising as part of our overall offering. Our software usability remains a focus, and some major developments were completed during the year. 3. National Marketing Campaigns in Australia, UK and New Zealand continue to be very successful. Leads were up 25% globally. We will double the amount spent on national advertising in Australia and UK during the next 12 months. We will continue to use a combination of TV, radio and digital advertising paid for by Franchisees and Head office. 4. Online Booking System The online booking system is now live in Australia and New Zealand, with release in the UK in August. Parents being able to book in for a free assessment directly has delivered an increase in the quality of the lead. 3 3 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889         Kip McGrath Education Centres Limited Chief Executive Officer's message 30 June 2018 5. Technology Development The development team delivered another strong year with the release of iKip, our tutoring software, and the decommissioning of the old software. They also delivered new global websites, the online booking system, and made ongoing improvements to all software. The team is now focussed on the integration of iKip with Salesforce and Xero. Both products will make running our franchised business more efficient and make it easier for our franchisees to run theirs. These systems will improve communication channels with our customers and provide better reporting tools for franchisees to monitor their business. 6. Purchase of Master Franchise territories and Area Developers. The purchase of New Zealand Master Franchise and the Victorian Area Developer businesses took place and the results are going well. It is a big change for the New Zealand franchisees considering they had a Master Franchise for 26 years, but head office is committed to servicing franchisees just as well as before. In July 2018, we executed a contract to purchase the Area Developer business for the Midland in the UK, and this will add to EBITDA growth in the coming year. Outlook We expect revenue, profit and profit margins will continue to grow through a combination of the ongoing development and automation of the software as a service, our national advertising campaigns and the option for students to choose between face to face and online tuition. I would like to thank the Master Franchisees, Area Developers, Franchise Representative Council Members, Franchisees and employees for their hard work and support throughout the year. This year I would also like to thank our dedicated and motivating teachers and the parents who continue to bring their children to Kip McGrath. We are committed to our motto that ‘every child can learn, they just have to be taught well’, and we will continue to do this for our current 40,000 students and the thousands that will join Kip McGrath in the future. Storm McGrath Chief Executive Officer 17 August 2018 4 4 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018           Kip McGrath Education Centres Limited Directors' report 30 June 2018 The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'consolidated entity') consisting of Kip McGrath Education Centres Limited (referred to hereafter as the 'company' or 'parent entity') and the entities it controlled at the end of, or during, the year ended 30 June 2018. Directors The following persons were directors of Kip McGrath Education Centres Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Kip McGrath Ian Campbell Trevor Folsom Diane Pass Principal activities The principal activities of the consolidated entity during the course of the financial year continued to be the sale of franchises and providing services to franchisees in the education field. The consolidated entity operates in Australia and overseas, principally in the United Kingdom and New Zealand. Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2017 of 1.4 cents (2016: 1.0 cents) per ordinary share Interim dividend for the year ended 30 June 2018 of 1 cents (2017: 0.6 cents) per ordinary share Consolidated 2018 $'000 2017 $'000 630 451 1,081 451 270 721 On 17 August 2018, a final dividend for the year ended 30 June 2018 of 2.0 cents per ordinary share, 100% fully franked, was declared and will be paid on 21 September 2018 to those shareholders on the register at 7p.m. on 7 September 2018. The total distribution will be $900,686. Review of operations The profit for the consolidated entity after providing for income tax amounted to $2,021,000 (30 June 2017: $1,436,000). Revenue growth primarily came from the United Kingdom (2018: $6,458,000 versus $5,190,000 in 2017) where the national advertising campaign and government incentives for tutoring helped to drive strong centre and lesson number growth. In the Australasian market, performance was more subdued (2018: $6,346,000 versus 2017: $7,352,000) with a decline in student lesson revenue from older contracts ($1,245,000 reduction) , and the closure of many older Singapore centres ($217,000 reduction) offsetting solid franchise fee growth in the Australian and New Zealand businesses ($655,000 increase). Revenue from other markets decreased (2018: $941,000 versus $965,000) primarily due to weaker franchise sales. The number of Gold Partners grew to 113 in the Australian market (76% of total centres) and to 154 in the UK market (60% of total centres). Overall centre numbers globally grew slightly to 550 (2017: 546). Lesson numbers on the Insight system continued to grow, with total lesson numbers for the financial year reaching 1,233,000 (compared to 1,117,000 in the prior year). Lessons in the United Kingdom are up 14% due to the factors noted above. The Middle East has grown by 15% this year with strongly performing operations in Kuwait and Abu Dhabi. However the Australian, New Zealand and South African operations have been more mixed with each region growing by 3%. The earnings before interest, tax, depreciation and amortisation ('EBITDA') amounted to $3,837,000 (2017: $2,635,000). The following table summarises key reconciling items between statutory profit after tax attributable to the shareholders of Kip McGrath Education Centres and EBITDA. 5 5 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Revenue EBITDA Less: Depreciation and amortisation Less: Interest expense Add: Interest income Profit before Income tax expense Income tax expense Profit after income tax expense Consolidated 2018 $'000 2017 $'000 13,745 13,507 3,837 (1,074) (58) 2 2,707 (686) 2,635 (773) (68) 1 1,795 (359) 2,021 1,436 Significant changes in the state of affairs There were no significant changes in the state of affairs of the consolidated entity during the financial year. Matters subsequent to the end of the financial year On 4 July 2018, the company purchased back the area developer territory for the East Midlands in England to allow better focus on the United Kingdom business. Apart from the event disclosed above and the dividend declared as disclosed in note 17, no other matter or circumstance has arisen since 30 June 2018 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. Likely developments and expected results of operations The company has initiated a number of new marketing campaigns in the key Australian and United Kingdom markets for both traditional tutoring services as well as the new on-line products and expects improved growth in both markets. It is expected online lesson numbers will increase significantly as the number of franchises trained in the upgraded software increases. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on directors Name: Title: Experience and expertise: Kip McGrath Non-Executive Director and Chairman As co-founder, Kip's primary responsibility is strategic planning and developing the "Train-the-Trainer" programs. Other current directorships: None Former directorships (last 3 years): None None Special responsibilities: 16,227,499 ordinary shares (including 11,227,499 directly held) Interests in shares: None Interests in options: 6 6 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Name: Title: Qualifications: Experience and expertise: Other current directorships: Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options: Ian Campbell Non-Executive Director FCA, MAICD Ian joined the Board on 25 August 2009 after a 32 year career with the international accounting firm Ernst & Young principally working with entrepreneurial companies and the capital markets. Ian is a Fellow of Chartered Accountants Australia and New Zealand and a member of the Australian Institute of Company Directors. He is currently a non-executive director of CVC Limited and Redox Pty Ltd and a partner with the Board search practice of the Allegis Group (formerly Talent2). His previous non-executive director roles included Gloria Jean’s Coffees International Pty Limited, Green’s Foods Holdings Pty Ltd and Young Achievement Australia Limited. CVC Ltd Chairman of the Audit Committee and member of the Nomination and Remuneration Committee 500,000 ordinary shares None Name: Title: Experience and expertise: Trevor Folsom Non-Executive Director Trevor has extensive background and experience and is acknowledged for his ability to engage, invest and advise growth companies, particularly in the technology sector. He is a successful entrepreneur in his own right, developing, from start up, Blueprint Management, which he sold in 2008. He is currently a Director of Elevation Capital, an early stage technology investment company. None Other current directorships: Former directorships (last 3 years): None Special responsibilities: Member of the Audit Committee and member of the Nomination and Remuneration Committee None Interests in shares: Name: Title: Experience and expertise: Diane Pass Non-Executive Director Di is currently a Director of the human resources consultancy company 360HR and the Chair of the Advisory Council of Sydney TAFE Institute. Di has more than 20 years local, national and international experience in the recruitment and consulting industry. She is also accomplished in creating and delivering engaging professional development programs and leading complex management consulting assignments. Di is also a member of the Australian Institute of Company Directors. None Other current directorships: Former directorships (last 3 years): None Special responsibilities: Chairman of the Nomination and Remuneration Committee and member of the Audit Committee 30,000 ordinary shares Interests in shares: 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships in all other types of entities, unless otherwise stated. 'Former directorships (in the last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships in all other types of entities, unless otherwise stated. Company secretary Brett Edwards is a Fellow of Chartered Accountants Australia and New Zealand and a member of the Australian Institute of Company Directors. He has 30 years of experience in accounting and reporting in a number of major Australian and international businesses, including 10 years with international accounting firm Ernst & Young. He was previously a director of GMAC Australia LLC, a US company operating in the finance segment in Australia. 7 7 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Meetings of directors The number of meetings of the company's Board of Directors ('the Board') and of each Board committee held during the year ended 30 June 2018, and the number of meetings attended by each director were: Full Board Nomination and Remuneration Committee Audit Committee Attended Held Attended Held Attended Held Kip McGrath Ian Campbell Trevor Folsom Diane Pass 10 10 10 10 10 10 10 10 - 2 2 2 - 2 2 2 - 4 4 4 - 4 4 4 Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. Remuneration report (audited) The remuneration report, which has been audited, outlines the director and other key management personnel ('KMP') arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. KMP are defined as those who have the authority and responsibility for planning, directing and controlling the major activities of the consolidated entity. The remuneration report is set out under the following main headings: ● ● ● ● ● Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration The objective of the consolidated entity's executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to market best practice for delivery of reward. The Board ensures that executive reward satisfies the following key criteria for good reward governance practices: ● ● ● ● competitiveness and reasonableness; acceptability to shareholders; performance linkage / alignment of KMP compensation; and transparency. The Nomination and Remuneration Committee ('NRC') is responsible for determining and reviewing remuneration arrangements for its KMP. The performance of the consolidated entity depends on the quality of its KMP. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The remuneration committee makes recommendations to the Board in relation to remuneration of non-executive directors, and establishes, reviews and approves remuneration terms and the performance of the chief executive officer. The committee also assists the chief executive officer in the remuneration review of senior executives and sets the remuneration package of the chief executive officer for approval by the Board. In accordance with best practice corporate governance, the structure of non-executive director and executive director remuneration is separate. Non-executive directors' remuneration Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the directors. Non-executive directors' fees and payments are reviewed annually by the NRC. The committee may take the advice of independent remuneration consultants to ensure non-executive directors' fees and payments are appropriate and in line with the market. The fees for the chair of the Board are determined independently to the fees of other non-executive directors based on comparative roles in the external market. Non-executive directors do not receive share options or other incentives. 8 8 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Directors' report 30 June 2018 ASX listing rules requires that the aggregate non-executive directors' remuneration be determined periodically by a general meeting. The most recent determination was at the Annual General Meeting held on 20 November 2015, where the shareholders approved a maximum aggregate remuneration of $400,000. Executive remuneration The consolidated entity aims to reward KMP based on their position and responsibility, with a level and mix of remuneration, which has both fixed and variable components. The KMP remuneration and reward framework has four components: ● ● ● ● base pay and non-monetary benefits; short-term performance incentives; share-based payments; and other remuneration, such as superannuation and long service leave. The combination of these comprises the KMP's total remuneration. Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, are reviewed annually by the NRC, based on individual and business unit performance, the overall performance of the consolidated entity and comparable market remuneration. KMPs can receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the consolidated entity and adds additional value to the KMP. The short-term incentives ('STI') program is designed to align the targets of the business units with the performance hurdles of executives. STI payments are granted to executives based on specific annual targets and key performance indicators ('KPI') being achieved. KPI’s for the chief executive officer are set by the NRC and currently focus on the consolidated entity's financial performance measured by reference to annual after-tax profit. The KPI's of other executives are set by the chief executive officer and are reviewed in consultation with the chair of the Board. Long-term incentives ('LTI') include share options and long service leave. An employee share option plan was approved by shareholders in 2012, the objective of which is to assist in the recruitment, reward, retention and motivation of key employees and directors by facilitating the offering of options over ordinary shares, subject to performance and loyalty hurdles. The plan aims to give selected employees and directors the opportunity to share in the future growth and profitability of the company by better aligning their interests with those of shareholders and provides greater incentive for them to work towards achieving the longer term goals of the company. Under the plan, the board has discretion to decide which full or part-time employees or directors of the company (or related body corporate) will be invited to acquire options, the number of options to be offered, any vesting conditions such as performance targets or minimum vesting periods, the applicable exercise price (which must be at least equal to the market value of shares at the time of the offer), and any other terms of issue. Consolidated entity performance and link to remuneration KMP remuneration is linked to the performance of the consolidated entity. Bonus and incentive payments are at the discretion of the Board. Use of remuneration consultants During the financial year ended 30 June 2018, the consolidated entity, through the Nomination and Remuneration Committee, engaged Ascent Data, remuneration consultants, to review its existing remuneration policies and provide recommendations on how to improve both the STI and LTI programs. This has resulted in the production of a remuneration benchmarking report for the use of the Nomination and Remuneration Committee, and the adjustment of salaries for the Directors, Chief Executive Officer and Chief Financial Officer based, in part, on recommendations from this report. Ascent Data was paid $10,000 for these services. An agreed set of protocols were put in place to ensure that the remuneration recommendations would be free from undue influence from key management personnel. These protocols include requiring that the consultant not communicate with affected key management personnel without a member of the Nomination and Remuneration Committee being present, and that the consultant not provide any information relating to the outcome of the engagement with the affected key management personnel. The Board is also required to make inquiries of the consultant's processes at the conclusion of the engagement to ensure that they are satisfied that any recommendations made have been free from undue influence. The Board is satisfied that these protocols were followed and as such there was no undue influence. 9 9 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Voting and comments made at the company's 2017 Annual General Meeting ('AGM') At the 2017 AGM, 99% of the shareholders voted to adopt the remuneration report for the year ended 30 June 2017. The company did not receive any specific feedback at the AGM regarding its remuneration practices. Details of remuneration Amounts of remuneration Details of the remuneration of the directors and other KMP of Kip McGrath Education Centres Limited are set out in the following tables. The KMP of the consolidated entity consisted of the directors of Kip McGrath Education Centres Limited and the following persons: ● ● ● ● ● ● ● ● ● Storm McGrath - Chief Executive Officer and Investor Relations Brett Edwards - Company Secretary and Chief Financial Officer Jackie Burrows - Chief Executive Officer UK Business Catherine Cook - Global Curriculum and Training Manager Julie Russell - Global Marketing Manager Peter Hepp - IT Manager Brad Leach - IT Development Manager (from 1 January 2018) Chris Lee - Australian Operations and Sales Manager (from 1 February 2018) James Street - Chief Executive Officer - Online (to 1 July 2016) Short-term benefits Post- employment benefits Long-term benefits Cash salary and fees $ Bonus $ Non- Leave monetary annuation benefits Super- $ $ $ Share- based payments Share- based payments Equity- settled shares $ Equity- settled options $ Total $ 132,192 63,927 54,794 54,794 - - - - 2,146 2,146 2,146 2,146 7,808 6,073 5,205 5,205 317,941 191,254 142,857 145,768 127,503 127,327 59,059 18,654 1,436,070 25,000 15,000 16,071 15,000 15,000 5,000 5,600 - 96,671 2,146 2,146 2,146 2,146 2,146 2,146 6,547 882 28,889 30,204 19,095 - 14,560 12,730 12,690 6,210 1,772 121,552 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 142,146 72,146 62,145 62,145 26,585 9,129 2,694 2,283 2,283 2,283 - - 401,876 236,624 163,768 179,757 159,662 149,446 77,416 21,308 45,257 1,728,439 2018 Non-Executive Directors: Kip McGrath (Chairman) * Ian Campbell Trevor Folsom Diane Pass Other Key Management Personnel: Storm McGrath Brett Edwards Jackie Burrows Catherine Cook Julie Russell Peter Hepp Brad Leach Chris Lee * Kip McGrath receives a $90,000 fee as Non-executive Chairman plus additional remuneration for agreed services. 10 10 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Short-term benefits Post- employment benefits Long-term benefits Cash salary and fees $ Bonus $ Non- Leave monetary annuation benefits Super- $ $ $ Share- based payments Share- based payments Equity- settled shares $ Equity- settled options $ Total $ 2017 Non-Executive Directors: Kip McGrath (Chairman) * Ian Campbell Trevor Folsom Diane Pass Other Key Management Personnel: Storm McGrath James Street Brett Edwards Jackie Burrows Catherine Cook Julie Russell Peter Hepp 142,608 63,927 54,795 20,653 - - - - 2,158 2,158 2,158 1,079 7,808 6,073 5,205 1,962 273,831 65,951 177,924 143,230 138,104 123,139 115,589 1,319,751 - - 9,750 15,175 7,500 6,500 6,250 45,175 2,158 - 2,158 2,158 2,158 2,158 2,158 20,501 25,445 601 16,903 - 13,120 11,698 10,981 99,796 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 152,574 72,158 62,158 23,694 20,335 - 9,288 2,487 528 528 528 321,769 66,552 216,023 163,050 161,410 144,023 135,506 33,694 1,518,917 * Kip McGrath receives a $90,000 fee as Non-executive Chairman plus additional remuneration for agreed services. The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Non-Executive Directors: Kip McGrath Ian Campbell Trevor Folsom Diane Pass Other Key Management Personnel: Storm McGrath James Street Brett Edwards Jackie Burrows Catherine Cook Julie Russell Peter Hepp Brad Leach Chris Lee Fixed remuneration 2017 2018 At risk - STI At risk - LTI 2018 2017 2018 2017 - - - - 6% - 6% 10% 8% 9% 3% 7% - - - - - - - 5% 9% 5% 5% 5% - - - - - - 7% - 4% 2% 1% 1% 2% - - - - - - 6% - 5% 2% - - - - - 100% 100% 100% 100% 87% - 90% 88% 91% 90% 95% 93% 100% 100% 100% 100% 100% 94% 100% 90% 89% 95% 95% 95% - - 11 11 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Service agreements KMP have standard contracts of employment that have no entitlement to termination payments in the event of removal for misconduct. Termination can be made by either the consolidated entity or the individual subject to one to six months’ notice. Some KMP has entitlements to performance incentives as detailed below:  Storm McGrath has entitlements to performance incentives of up to 37.5% of salary;  Jackie Burrows and Chris Lee have entitlement to performance incentives based on sales in the UK market and Australasian markets respectively, and  Other KMP have specific performance incentives of up to 18.75% of salary. Share-based compensation Issue of options Details of options over ordinary shares granted to directors and other key management personnel as part of compensation during the year, or that otherwise has affected the remuneration of directors and other key management personnel for the year ended 30 June 2018, are set out below: Name Storm McGrath Brett Edwards Jackie Burrows Peter Hepp Julie Russell Catherine Cook Grant Date 21 Nov 2014 27 Oct 2017 28 Feb 2014 20 Aug 2014 19 Aug 2016 9 Oct 2017 28 Feb 2014 19 Aug 2016 9 Oct 2017 19 Aug 2016 9 Oct 2017 19 Aug 2016 9 Oct 2017 19 Aug 2016 9 Oct 2017 No. of options granted No. of options lapsed during year Exercise price 1,000,000 500,000 150,000 150,000 100,000 150,000 50,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 $0.350 $0.370 $0.190 $0.350 $0.300 $0.370 $0.190 $0.300 $0.370 $0.300 $0.370 $0.300 $0.370 $0.300 $0.370 - - - - - - - - - - - - - - - There have been no alterations to the terms or conditions of the options granted since grant date except for the extension of the expiry date in relation to options granted on 28 February 2014 which is now 28 February 2019 (previously 28 February 2018). The terms and conditions of each grant of options over ordinary shares affecting remuneration of directors and other KMP in this financial year or future reporting years are as follows: Grant date No. granted Vesting date Exercise price at grant date 28 Feb 2014 20 Aug 2014 21 Nov 2014 19 Aug 2016 9 Oct 2017 27 Oct 2017 200,000 150,000 1,000,000 500,000 550,000 500,000 28 Feb 2019 31 Dec 2019 31 Dec 2019 31 Dec 2021 31 Dec 2021 31 Dec 2021 $0.190 $0.350 $0.350 $0.300 $0.370 $0.370 $0.223 $0.172 $0.172 $0.113 $0.104 $0.104 Fair value per option 12 12 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Options granted carry no dividend or voting rights. There were no amounts paid or payable by recipients on the granting of options. Options can only be exercised once vested in the recipient and on or prior to expiry date. Options are not transferable except in special or approved circumstances and will not be listed on the ASX. Shares issued on exercise of options will rank equally with other ordinary shares and will be subject to an application for quotation on the ASX. Options will vest after all specified vesting conditions have been met unless determined otherwise by the board where special circumstances exist, such as in the event of a takeover. Unvested options will lapse immediately the holder ceases employment with the company or where performance targets have not been met prior to expiry. On cessation of employment, the holder has 60 business days to exercise any vested options, or 6 months if employment ceases due to death, disablement or retirement, unless otherwise determined by the board. On exercise, each option converts to one ordinary share in the company. Vesting of options is subject to meeting a net profit before tax hurdle, meeting annual performance indicators set by the board which are linked to centre number growth, student number growth and on-line business growth. Issue of shares There were no shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2018. Additional disclosures relating to key management personnel Shareholding The number of shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Balance at Received as part of the start of the year remuneration Additions Disposals/ other Balance at the end of the year Ordinary shares Kip McGrath Storm McGrath Ian Campbell Jackie Burrows Diane Pass 16,227,499 1,333,959 500,000 150,000 - 18,211,458 - - - - - - - - - - 30,000 30,000 (173,471) - - - - 16,227,499 1,160,488 500,000 150,000 30,000 (173,471) 18,067,987 Option holding The number of options over ordinary shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below. Options have not vested in the holder unless indicated otherwise. Options over ordinary shares Storm McGrath Brett Edwards Jackie Burrows Peter Hepp Julie Russell Catherine Cook Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 1,000,000 400,000 150,000 100,000 100,000 100,000 1,850,000 500,000 150,000 100,000 100,000 100,000 100,000 1,050,000 - - - - - - - - - - - - - - 1,500,000 550,000 250,000 200,000 200,000 200,000 2,900,000 Options do not entitle the holder to receive dividends or any distributions or to participate in any share issue of the company. This concludes the remuneration report, which has been audited. 13 13 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Shares under option Unissued ordinary shares of Kip McGrath Education Centres Limited under option at the date of this report are as follows: Grant date 28 February 2014 20 August 2014 21 November 2014 19 August 2016 9 October 2017 27 October 2017 Expiry date 28 February 2019 31 December 2019 31 December 2019 31 December 2021 31 December 2021 31 December 2021 Exercise price Number under option $0.190 $0.350 $0.350 $0.300 $0.370 $0.370 200,000 150,000 1,000,000 500,000 550,000 500,000 2,900,000 No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the company or of any other body corporate. Shares issued on the exercise of options There were no ordinary shares of Kip McGrath Education Centres Limited issued on the exercise of options during the year ended 30 June 2018 and up to the date of this report. Indemnity and insurance of officers The company has indemnified the directors and executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the company paid a premium in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. Indemnity and insurance of auditor The company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. 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. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 21 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 21 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ● all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. ● 14 14 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Directors' report 30 June 2018 Officers of the company who are former partners of PKF Newcastle There are no officers of the company who are former partners of PKF Newcastle. Rounding of amounts The company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors' report. Auditor PKF Newcastle continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Kip McGrath Chairman 17 August 2018 Newcastle 15 15 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited ACN: 003 415 889 Auditor’s Independence Declaration under section 307C of the Corporations Act 2001 In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Kip McGrath Education Centres Limited for the year ended 30 June 2018, I declare that, to the best of my knowledge and belief, there have been: (i) No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) No contraventions of any applicable code of professional conduct in relation to the audit. PKF MARTIN MATTHEWS PARTNER 17 AUGUST 2018 NEWCASTLE, NSW PKF(NS) Audit & Assurance Limited Partnership ABN 91 850 861 839 Liability limited by a scheme approved under Professional Standards Legislation Sydney Newcastle Level 8, 1 O’Connell Street Sydney NSW 2000 Australia GPO Box 5446 Sydney NSW 2001 755 Hunter Street Newcastle West NSW 2302 Australia PO Box 2368 Dangar NSW 2309 p f +61 2 8346 6000 +61 2 8346 6099 p f +61 2 4962 2688 +61 2 4962 3245 PKF(NS) Audit & Assurance Limited Partnership is a member firm of the PKF International Limited family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. For office locations visit www.pkf.com.au 16 16 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Corporate Governance Statement 30 June 2018 This Corporate Governance Statement of Kip McGrath Education Centres Limited (the ‘company’) has been prepared in accordance with the 3rd Edition of the Australian Securities Exchange’s (‘ASX’) Corporate Governance Principles and Recommendations of the ASX Corporate Governance Council (‘ASX Principles and Recommendations’) and is included in the company’s Annual Report pursuant to ASX Listing Rule 4.10.3. This listing rule requires the company to disclose the extent to which it has followed the recommendations during the financial year, including reasons where the company has not followed a recommendation and any related alternative governance practice adopted. Both this Corporate Governance Statement and the ASX Appendix 4G have been lodged with the ASX. This statement has been approved by the company’s Board of Directors (‘Board’) and is current as at 17 August 2018. The ASX Principles and Recommendations and the company’s response as to how and whether it follows those recommendations are set out below. Principle 1: Lay solid foundations for management and oversight Recommendation 1.1 - A listed entity should disclose: (a) the respective roles and responsibilities of its board and management; and (b) those matters expressly reserved to the board and those delegated to management. The Board is ultimately accountable for the performance of the company and provides leadership and sets the strategic objectives of the company. It appoints all senior executives and assesses their performance on at least an annual basis. It is responsible for overseeing all corporate reporting systems, remuneration frameworks, governance issues, and stakeholder communications. Decisions reserved for the Board relate to those that have a fundamental impact on the company, such as material acquisitions and takeovers, dividends and buy-backs, material profits upgrades and downgrades, and significant closures. Management is responsible for implementing Board strategy, day-to-day operational aspects, and ensuring that all risks and performance issues are brought to the Boards attention. They must operate within the risk and authorisation parameters set by the Board. Recommendation 1.2 - A listed entity should: (a) undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and (b) provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director. The company undertakes comprehensive reference checks prior to appointing a director, or putting that person forward as a candidate, to ensure that person is competent, experienced, and would not be impaired in any way from undertaking the duties of director. The company provides relevant information to shareholders for their consideration about the attributes of candidates together with whether the Board supports the appointment or re-election. Recommendation 1.3 - A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. The terms of the appointment of non-executive directors, executive directors and senior executives are agreed upon and set out in writing at the time of appointment. Recommendation 1.4 - The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. The Company Secretary reports directly to the Board through the Chairman on all matters to do with the proper functioning of the board and is accessible to all directors. Recommendation 1.5 - A listed entity should (a) have a diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them; (b) disclose that policy or a summary of it; and (c) disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the board or a relevant committee of the board in accordance with the entity’s diversity policy and its progress towards achieving them, and either: (1) the respective proportions of men and women on the Board, in senior executive positions and across the whole organisation (including how the entity has defined “senior executive” for these purposes); or (2) if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act. 17 17 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Corporate Governance Statement 30 June 2018 The company has a diversity policy approved by the Board, which includes requirements for the Board to set measurable objectives for achieving diversity, including gender, and to assess annually both the objectives and the entity’s progress in achieving them. The company is committed to providing an inclusive workplace and recognises the value individuals with diverse skills, values, backgrounds and experiences bring to the company. As a global provider of education services, the company is committed to equality and respect in all locations it operates. Diversity is recognising and valuing the unique contribution people can make because of their individual background and different skills, experiences and perspectives. People differ not just on the basis of race and gender, but also other dimensions such as lifestyle, education, physical ability, age and family responsibility. The Board’s measurable objective about gender diversity is to progressively increase the portion of women in Board and Senior Executive roles and this objective is being continually reviewed. As at the date of this report the proportion of women to men was as follows: Proportion of women Proportion of men On the board In senior executive positions Across the whole organisation 25% 38% 81% 75% 62% 19% For this purpose, the Board defines a senior executive as a person who makes, or participates in the making of, decisions that affect the whole or a substantial part of the business or has the capacity to affect significantly the company’s financial standing. This therefore includes all senior management and senior executive designated positions as well as senior specialised professionals. No entity within the consolidated entity is a ‘relevant employer’ for the purposes of the Workplace Gender Equality Act 2012 and therefore no Gender Equality Indicators to be disclosed. Recommendation 1.6 - A listed entity should (a) have and disclose a process for periodically evaluating the performance of the Board, its committees and individual directors; and (b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. The company does not currently have a formal process for evaluating the performance of the Board, its committees or individual directors. The Board conducts an introspective annual discussion of its performance on a collective basis to identify general aspects of its performance that could be improved upon, and such analysis includes the roles played by each Board member. Such reviews therefore encapsulate collective discussion around the performance of individual Board members, their roles on specific projects during the financial year, and where relevant, how their role could be modified or suggestions for individual development or performance improvement for the future. Until such time as the company expands to justify an expansion of Board members, the Board is of the current opinion that such performance evaluation is suitable for the company. Recommendation 1.7 - A listed entity should (a) have and disclose a process for periodically evaluating the performance of its senior executives; and (b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. The Board conducts an annual performance assessment of the CEO against agreed performance measures determined at the start of the year. The CEO undertakes the same assessments of senior executives. In assessing the performance of the individual, the review includes consideration of the senior executive’s function, individual targets, group targets, and the overall performance of the company. The most recent review was completed in July 2018. 18 18 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Corporate Governance Statement 30 June 2018 Principle 2: Structure the board to add value Recommendation 2.1 - The board of a listed entity should (a) have a nomination committee which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a nomination committee, disclose that fact and the processes it employs to address Board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. The Board does not maintain a Nomination Committee as it is considered that the current size of the Board does not warrant the formal establishment of a separate committee. The Board therefore performs the function of such a committee which includes the identification of skills and competencies required for the Board and related committees, as well as nomination, selection and performance evaluation of non-executive directors. The Board does not actively manage succession planning and instead relies upon the Board’s extensive networking capabilities and/or executive recruitment firms to identify appropriate candidates when a Board vacancy occurs or when a vacancy is otherwise envisaged. Attributes of candidates put forward will be considered for ‘best-fit’ to the needs of the Board which are assessed at the time of the vacancy. Recommendation 2.2 - A listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership. The Board does not maintain a formal skills matrix that sets out the mix of skills and diversity that the Board aims to achieve in its membership. The current Board members represent individuals that have extensive industry experience as well as professionals that bring to the Board their specific skills in order for the company to achieve its strategic, operational and compliance objectives. Their suitability to the directorship has therefore been determined primarily on the basis of their ability to deliver outcomes in accordance with the company’s short and longer term objectives and therefore deliver value to shareholders. External consultants may be brought in with specialist knowledge to address areas where this is an attribute deficiency in the Board. All Board members are expected to be able to demonstrate the following attributes: Board member attributes Leadership Ethics and integrity Communication Negotiation Corporate governance Represents the company positively amongst stakeholders and external parties; decisively acts ensuring that all pertinent facts are considered; leads others to action; proactive solution seeker. Awareness of social, professional and legal responsibilities at individual, company and community level; ability to identify independence conflicts; applies sound professional judgement; identifies when external counsel should be sought; upholds Board confidentiality; respectful in every situation. Effective in working within defined corporate communications policies; makes constructive and precise contribution to the Board both verbally and in written form; an effective communicator with executives. Negotiation skills which engender stakeholder support for implementing Board decisions. Experienced director that is familiar with the mechanisms, controls and channels to deliver effective governance and manage risks. Recommendation 2.3 - A listed entity should disclose: (a) the names of the directors considered by the board to be independent directors; (b) if a director has an interest, position, association or relationship of the type described in Box 2.3 but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position, association or relationship in question and an explanation of why the board is of that opinion; and (c) the length of service of each director. 19 19 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Corporate Governance Statement 30 June 2018 Details of the Board of directors, their appointment date, length of service and independence status is as follows: Director’s name Kip McGrath Ian Campbell Trevor Folsom Diane Pass Appointment date Length of service at reporting date 30 years 9 March 1988 25 August 2009 9 years 22 September 2014 3 years 1 year 1 February 2017 Independence status Non-Executive Chairman Independent Non-Executive Independent Non-Executive Independent Non-Executive The composition of the Board is structured to ensure that the Board has the appropriate mix of expertise and experience. Details of directors that the Board has declared as independent but which maintain an interest or relationship that could be perceived as impairing independence, and the reason as to the Board’s determination are as follows: Director’s name Details of interest or relationship Board reasoning why director is independent Ian Campbell 500,000 ordinary shares held indirectly in superfund Diane Pass 30,000 ordinary shares This holding aligns the interests of the director with those of the shareholders and is encouraged by the company. This holding aligns the interests of the director with those of the shareholders and is encouraged by the company. Recommendation 2.4 - A majority of the board of a listed entity should be independent directors. Having regard to the response to Recommendation 2.3 above, the majority of the Board at the reporting date were independent. Recommendation 2.5 - The Chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity. Kip McGrath is Chair of the Board and does not hold the position of CEO of the company. Whilst Kip McGrath is not an independent director the Board considers him the most suitable director for the role due to being a co-founder of the company. The CEO is Storm McGrath. Recommendation 2.6 - A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively. New directors undertake an induction program coordinated by the Company Secretary that briefs and informs the director on all relevant aspects of the company’s operations and background. A director development program is also available to ensure that directors can enhance their skills and remain abreast of important developments. Principle 3: Act ethically and responsibly Recommendation 3.1 - A listed entity should: (a) have a code of conduct for its directors, senior executives and employees; and (b) disclose that code or a summary of it. The company maintains a code of conduct for its directors, senior executives and employees. In summary, the code requires that each person act honestly, in good faith and in the best interests of the company; exercise a duty of care; use the powers of office in the best interests of the company and not for personal gain; declare any conflict of interest; safeguard company’s assets and information; and not undertake any action that may jeopardise the reputation of company. Principle 4: Safeguard integrity in corporate reporting Recommendation 4.1 - The board of a listed entity should: (a) have an audit committee which: (1) has at least three members, all of whom are non-executive directors and a majority of whom are independent directors; and (2) is chaired by an independent director, who is not the chair of the board, and disclose: (3) the charter of the committee; (4) the relevant qualifications and experience of the members of the committee; and (5) in relation to each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have an audit committee, disclose that fact and the processes it employs that independently verify and safeguard the integrity of its corporate reporting, including the processes for the appointment and removal of the external auditor and the rotation of the audit engagement partner. 20 20 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Corporate Governance Statement 30 June 2018 The Board has an Audit Committee, under a formal Charter, the members of which are: Director’s name Executive status Independence status Ian Campbell – Chair Trevor Folsom Non-Executive Director Non-Executive Director Independent Independent Diane Pass Non-Executive Director Independent The Committee consists entirely of non-executive directors, Ian Campbell Diane Pass, and Trevor Folsom. The chairperson, Ian Campbell is not Board chair and is an independent director. The number of Committee meetings held and attended by each member is disclosed in the ‘Meetings of directors’ section of the Directors’ Details of the qualifications and experience of the members of the Committee is detailed in the ‘Information of directors’ section of the Directors’ report. Recommendation 4.2 - The board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. For the financial year ended 30 June 2018 and the half-year ended 31 December 2017, the company’s CEO and CFO provided the Board with the required declarations. Recommendation 4.3 - A listed entity that has an AGM should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. The audit engagement partner attends the AGM and is available to answer shareholder questions relevant to the audit. Principle 5: Make timely and balanced disclosure Recommendation 5.1 - A listed entity should (a) have a written policy for complying with its continuous disclosure obligations under the Listing Rules; and (b) disclose that policy or a summary of it. The company maintains a written policy that outlines the responsibilities relating to the directors, officers and employees in complying with the company’s disclosure obligations. Where any such person, is of any doubt, as to whether they possess information that could be classified as market sensitive, they are required to notify the Company Secretary immediately in the first instance. The Company Secretary is required to consult with the Chairman in relation to matters brought to his attention for potential announcement. Generally, the Chairman is ultimately responsible for decisions relating to the making of market announcements. The Board is required to authorise announcements of significance to the company. No member of the company shall disclose market sensitive information to any person unless they have received acknowledgement from the ASX that the information has been released to the market. Principle 6: Respect the rights of security holders Recommendation 6.1 - A listed entity should provide information about itself and its governance to investors via its website. The company maintains information in relation to the board of directors, share registry, ASX announcements and contact details on the company’s website. Recommendations 6.2 and 6.3 A listed entity should design and implement an investor relations program to facilitate effective two-way communication with investors (6.2). A listed entity should disclose the policies and processes it has in place to facilitate and encourage participation at meetings of security holders (6.3). 21 21 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Corporate Governance Statement 30 June 2018 The company does not have a formal investor relations program. The Board, CEO and Company Secretary engage with investors at the AGM and respond to shareholder enquiry on an ad hoc basis. Material communications are dispatched to investors either via email, surface mail, and/or via market announcement. Recommendation 6.4 - A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically. The company engages its share registry to manage the majority of communications with shareholders. Shareholders are encouraged to receive correspondence from the company electronically, thereby facilitating a more effective, efficient and environmentally friendly communication mechanism with shareholders. Shareholders not already receiving information electronically can elect to do so through the share registry, Computershare www-au.computershare.com. Principle 7: Recognise and manage risk Recommendations 7.1 & 7.2 The board of a listed entity should: (a) have a committee or committees to oversee risk, each of which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a risk committee or committees that satisfy (a) above, disclose that fact and the processes it employs for overseeing the entity’s risk management framework (7.1). The board or a committee of the board should: (a) review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound; and (b) disclose, in relation to each reporting period, whether such a review has taken place (7.2). The company does not maintain a Risk Committee as it is considered that the current size of the Board does not warrant the formal establishment of a separate committee. The Board and Audit Committee therefore performs the function of such a committee which includes setting of corporate governance policy and exercising due care and skill in assessing risk, developing strategies to mitigate such risk, monitoring the risk and the company’s effectiveness in managing it. The company maintains internal controls which assist in managing enterprise risk, and these are reviewed as part of the scope of the external audit, with the auditor providing the Board with commentary on their effectiveness and the need for any additional controls. The CEO and CFO are responsible for monitoring operational risk, ensuring all relevant insurances are in place, and ensuring that all regulatory and compliance obligations of the company are satisfied. The last review was completed in May 2018. Recommendation 7.3 - A listed entity should disclose: (a) if it has an internal audit function, how the function is structured and what role it performs; or (b) if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes. The company does not have a dedicated internal audit function. The responsibility for risk management and internal controls lies with both the CEO and CFO who continually monitor the company’s internal and external risk environment. Necessary action is taken to protect the integrity of the company’s books and records through design and implementation of internal controls and operational efficiencies, mitigation of risks, and safeguard of the company assets. Recommendation 7.4 - A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks. As at the date of reporting the company does not consider it has any material exposures to economic, environmental or social sustainability risks. Refer to commentary at Recommendations 7.1 and 7.2 for information on the company’s risk management framework. 22 22 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Corporate Governance Statement 30 June 2018 Principle 8: Remunerate fairly and responsibly Recommendation 8.1 - The board of a listed entity should: (a) have a remuneration committee which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a remuneration committee, disclose that fact and the processes it employs for setting the level and composition of remuneration for directors and senior executives and ensuring that such remuneration is appropriate and not excessive. The Board maintains a Remuneration Committee, whose members during the financial year, were as follows: Director’s Name Executive Status Independence Status Ian Campbell Trevor Folsom Diane Pass - Chair The Committee consists entirely of non-executive directors, Ian Campbell, Diane Pass and Trevor Folsom. The chairperson, Diane Pass is not Board chair and is an independent director. The number of Committee meetings held and attended by each member is disclosed in the ‘Meetings of directors’ section of the Directors’ report. Non-Executive Director Non-Executive Director Non-Executive Director Independent Independent Independent The Board has established the committee under formal Charter. Recommendation 8.2 - A listed entity should separately disclose its policies and practices regarding the remuneration of non-executive directors and the remuneration of executive directors and other senior executives. The Committee reviews remuneration packages and policies applicable to the CEO and senior executives. This may include share schemes, incentive performance packages, superannuation entitlements, retirement and termination entitlements, fringe benefit policies and professional indemnity and liability insurance policies. External advice is sought as appropriate. Further details of directors’ and executives’ remuneration, superannuation and retirement payments are set out in the remuneration report which forms part of the directors’ report. The CEO is invited to committee meetings, as required, to discuss management performance and remuneration packages. Non-executive directors do not receive incentive payments or retirement benefits (other than statutory superannuation). Equity-based remuneration is not a standard component of executive remuneration agreements. Any future equity issued to executives or non-executives as remuneration will be approved at the annual general meeting of shareholders. No senior executive is involved directly in deciding their own remuneration. Recommendation 8.3 - A listed entity which has an equity-based remuneration scheme should: (a) have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and (b) disclose that policy or a summary of it The use of derivatives or other hedging arrangements for unvested securities of the company or vested securities of the company which are subject to escrow arrangements is prohibited. Where a director or other senior executive uses derivatives or other hedging arrangements over vested securities of the company, this will be disclosed. 23 23 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Contents 30 June 2018 Statement of profit or loss and other comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements Directors' declaration Independent auditor's report to the members of Kip McGrath Education Centres Limited Shareholder information General information 25  26  27  28  29  59  60  66  The financial statements cover Kip McGrath Education Centres Limited as a consolidated entity consisting of Kip McGrath Education Centres Limited and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars, which is Kip McGrath Education Centres Limited's functional and presentation currency. Kip McGrath Education Centres Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 3 6 Newcomen Street Newcastle NSW 2300 A description of the nature of the consolidated entity's operations and its principal activities are included in the directors' report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of directors, on 17 August 2018. The directors have the power to amend and reissue the financial statements. 24 24 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Statement of profit or loss and other comprehensive income For the year ended 30 June 2018 Revenue Expenses Royalties, commissions and other direct expenses Employee expenses Marketing expenses Administration expenses Merchandising expenses Depreciation and amortisation expense Net foreign exchange gain/(losses) Finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year attributable to the owners of Kip McGrath Education Centres Limited Other comprehensive income Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Kip McGrath Education Centres Limited Note Consolidated 2018 $'000 2017 $'000 4 5 5 5 5 6 13,745 13,507 (3,716) (3,097) (999) (1,660) (437) (1,074) 3 (58) (5,030) (2,906) (910) (1,571) (326) (773) (128) (68) 2,707 1,795 (686) (359) 2,021 1,436 (12) (12) (101) (101) 2,009 1,335 Cents Cents Basic earnings per share Diluted earnings per share 28 28 4.488 4.244 3.199 3.069 The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 25 25 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Statement of financial position As at 30 June 2018 Assets Current assets Cash and cash equivalents Trade and other receivables Prepayments Total current assets Non-current assets Trade receivables Plant and equipment Intangibles Deferred tax Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Income tax Employee benefits Total current liabilities Non-current liabilities Deferred tax Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity Note Consolidated 2018 $'000 2017 $'000 7 8 9 10 11 12 13 14 15 16 5,916 507 320 6,743 12 71 12,252 306 12,641 4,932 980 141 6,053 19 111 10,304 526 10,960 19,384 17,013 5,188 600 490 448 6,726 1,412 1,412 4,091 750 37 364 5,242 1,522 1,522 8,138 6,764 11,246 10,249 8,838 655 1,753 8,838 598 813 11,246 10,249 The above statement of financial position should be read in conjunction with the accompanying notes 26 26 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Statement of changes in equity For the year ended 30 June 2018 Consolidated Balance at 1 July 2016 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 15) Share-based payments Dividends paid (note 17) Issued capital $'000 Retained Reserves $'000 profits $'000 Total equity $'000 8,774 - - - 64 - - 667 - (101) (101) - 32 - 98 9,539 1,436 - 1,436 (101) 1,436 1,335 - - (721) 64 32 (721) Balance at 30 June 2017 8,838 598 813 10,249 Consolidated Balance at 1 July 2017 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Share-based payments Dividends paid (note 17) Issued capital $'000 Retained Reserves $'000 profits $'000 Total equity $'000 8,838 - - - - - 598 - (12) (12) 69 - 813 10,249 2,021 - 2,021 (12) 2,021 2,009 - (1,081) 69 (1,081) Balance at 30 June 2018 8,838 655 1,753 11,246 The above statement of changes in equity should be read in conjunction with the accompanying notes 27 27 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Statement of cash flows For the year ended 30 June 2018 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Interest and other finance costs paid Income taxes paid Note Consolidated 2018 $'000 2017 $'000 15,568 (10,220) 13,930 (10,730) 5,348 2 (58) (123) 3,200 1 (68) - Net cash from operating activities 27 5,169 3,133 Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from borrowings Dividends paid Repayment of borrowings Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 9 (16) (2,938) (110) (1,064) 15 17 (2,954) (1,174) - 700 (1,081) (850) 64 1,305 (721) (1,205) (1,231) (557) 984 4,932 1,402 3,530 Cash and cash equivalents at the end of the financial year 7 5,916 4,932 The above statement of cash flows should be read in conjunction with the accompanying notes 28 28 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the consolidated entity. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). Historical cost convention The financial statements have been prepared under the historical cost convention. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in note 25. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Kip McGrath Education Centres Limited ('company' or 'parent entity') as at 30 June 2018 and the results of all subsidiaries for the year then ended. Kip McGrath Education Centres Limited and its subsidiaries together are referred to in these financial statements as the 'consolidated entity'. Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. 29 29 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in Australian dollars, which is Kip McGrath Education Centres Limited's functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Franchise fees Revenue from franchise fees derived from franchise operations are recognised on a weekly or monthly basis, depending on the underlying contract with the franchisee. Student lesson fees Revenue from student lessons derived from franchise operations are recognised when the services are provided pursuant to a student's enrolment agreement, which is typically on a weekly basis. Sales of master territories and franchise centres Domestic sales and sales to overseas master franchisees are recognised on satisfactory completion of formal induction and training programs. Overseas franchise sales are recognised when educational materials supplied by the franchisor are shipped to the franchisees. Direct sales Revenue from the sale of educational materials and promotional products is recognised at the time the control of the product passes to the customer. This control will pass when the customer orders the curriculum or other products are shipped. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. 30 30 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: ● when the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or when the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. ● Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Kip McGrath Education Centres Limited (the 'head entity') and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the 'separate taxpayer within group' approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the consolidated entity's normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the consolidated entity's normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. 31 31 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortised cost using the effective interest rate method. Gains and losses are recognised in profit or loss when the asset is derecognised or impaired. Impairment of financial assets The consolidated entity assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor; a breach of contract such as default or delinquency in payments; the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset; or observable data indicating that there is a measurable decrease in estimated future cash flows. The amount of the impairment allowance for loans and receivables carried at amortised cost is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. If there is a reversal of impairment, the reversal cannot exceed the amortised cost that would have been recognised had the impairment not been made and is reversed to profit or loss. Plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of plant and equipment over their expected useful lives of between 3 and 20 years. Plant and equipment is currently not material to the financial statements. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. 32 32 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset's useful life or over the shorter of the asset's useful life and the lease term if there is no reasonable certainty that the consolidated entity will obtain ownership at the end of the lease term. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Intellectual property Intellectual property primarily consists of the acquisition costs for the system of tuition developed by the founders, Kip and Dug McGrath. Costs in relation to intellectual property are capitalised as an asset. These costs are not subsequently amortised as they have an indefinite useful life. Product and overseas development costs Costs in relation to product and overseas development costs are capitalised as an asset. These costs are not subsequently amortised where they have an indefinite useful life. Definite life costs are written off over their finite useful life of up to ten years for curriculum items and up to five years for other items. Franchise and development territories Existing franchise and development territories that have been acquired by the consolidated entity are capitalised as an asset and are not amortised, but are subject to annual impairment reviews based on student numbers remaining at the acquisition level. Other intangibles Other intangibles are capitalised as an asset and amortised, being their finite useful life of five years. Impairment of non-financial assets Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. 33 33 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. Finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred. Employee benefits Short-term employee benefits Liabilities for wages and salaries and other employee benefits expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits Employee benefits not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore, any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. 34 34 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) If the non-vesting condition is within the control of the consolidated entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the consolidated entity or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on 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; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the company. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree's identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity's operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. 35 35 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer's previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Kip McGrath Education Centres Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Comparatives Certain reclassifications have been made to the prior year to enhance comparability in the statement of financial position. Rounding of amounts The company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2018. The consolidated entity's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, are set out below. 36 36 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) AASB 9 Financial Instruments This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of AASB 9 and completes the project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. AASB 9 introduces new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost, if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, which arise on specified dates and solely principal and interest. All other financial instrument assets are to be classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading) in other comprehensive income ('OCI'). For financial liabilities, the standard requires the portion of the change in fair value that relates to the entity's own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements will use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment will be measured under a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. The standard introduces additional new disclosures. The consolidated entity will adopt this standard from 1 July 2018. It is not expected to significantly impact the financial statements on the basis that the main financial assets recognised represent cash and cash equivalent and trade receivables that do not carry a significant financing component and involve a single cash flow representing the repayment of principal, which in the case of trade receivables is the transaction price. Both asset classes will continue to be measured at face value. Other financial asset classes are not material to the consolidated entity. Financial liabilities of the consolidated entity are not impacted as the consolidated entity does not carry them at fair value. AASB 15 Revenue from Contracts with Customers This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard provides a single standard for revenue recognition. The core principle of the standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will require: contracts (either written, verbal or implied) to be identified, together with the separate performance obligations within the contract; determine the transaction price, adjusted for the time value of money excluding credit risk; allocation of the transaction price to the separate performance obligations on a basis of relative stand-alone selling price of each distinct good or service, or estimation approach if no distinct observable prices exist; and recognition of revenue when each performance obligation is satisfied. Credit risk will be presented separately as an expense rather than adjusted to revenue. For goods, the performance obligation would be satisfied when the customer obtains control of the goods. For services, the performance obligation is satisfied when the service has been provided, typically for promises to transfer services to customers. For performance obligations satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. Contracts with customers will be presented in an entity's statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity's performance and the customer's payment. Sufficient quantitative and qualitative disclosure is required to enable users to understand the contracts with customers; the significant judgements made in applying the guidance to those contracts; and any assets recognised from the costs to obtain or fulfil a contract with a customer. The consolidated entity will adopt this standard from 1 July 2018. It is not expected to significantly impact the financial statements on the basis that most of the consolidated entity's revenue is recognised at the time of lessons being provided to a student which represents the satisfaction of the primary performance obligation. 37 37 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. The standard replaces AASB 117 ‘Leases’ and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a ‘right-of-use’ asset will be capitalised in the statement of financial position, measured as the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a ‘right-of-use’ asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) component. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The consolidated entity will adopt this standard from 1 July 2019 but the impact of its adoption is not expected to materially affect the consolidated entity as there are minimal leases. IASB revised Conceptual Framework for Financial Reporting The revised Conceptual Framework has been issued by the International Accounting Standards Board ('IASB'), but the Australian equivalent has yet to be published. The revised framework is applicable for annual reporting periods beginning on or after 1 January 2020 and the application of the new definition and recognition criteria may result in future amendments to several accountings standards. Furthermore, entities who rely on the conceptual framework in determining their accounting policies for transactions, events or conditions that are not otherwise dealt with under Australian Accounting Standards may need to revisit such policies. The consolidated entity will apply the revised conceptual framework from 1 July 2020 and is yet to assess its impact. Note 2. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, 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 judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Intangible assets with indefinite life Intellectual property, franchise territories and certain product and overseas development costs are classified as having an indefinite useful life and not amortised as management considers that there is no foreseeable limit to the cash flows these assets are generating. Such assets are subject to annual impairment reviews in accordance with the accounting policy stated in note 1. The recoverable amounts of cash-generating units to which such assets relate have been determined based on value-in-use calculations which require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Estimates that management has made with respect to such calculations are disclosed in note 9. Finite life intangible assets The consolidated entity determines the estimated useful lives and related amortisation charges for its finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The amortisation charge will increase where the useful lives are less than previously estimated lives. The consolidated entity assesses impairment of such assets at each reporting date by evaluating conditions specific to the consolidated entity, the cash generating unit to which the asset belongs, and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves estimating the asset’s fair value less costs of disposal or value-in-use calculations which incorporate a number of key estimates and assumptions. Estimates that management has made with respect to such calculations are disclosed in note 9. 38 38 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 2. Critical accounting judgements, estimates and assumptions (continued) Share-based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Income tax The consolidated entity is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The consolidated entity recognises liabilities for anticipated tax audit issues based on the consolidated entity's current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the consolidated entity considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The deferred tax assets are expected to be recovered through management’s forecast taxable profits over the next three years. Employee benefits provision As discussed in note 1, the liability for employee benefits expected to be settled more than 12 months from the reporting date are recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at the reporting date. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. Note 3. Operating segments Identification of reportable operating segments The consolidated entity has only one operating segment based on the internal reports that are reviewed and used by the Chief Executive Officer and the Board of Directors (collectively referred to as the Chief Operating Decision Makers ('CODM')) in assessing performance and in determining the allocation of resources. The operating segment information is disclosed throughout these financial statements. The information reported to the CODM is on at least a monthly basis. Geographical information The geographical information of non-current assets below is exclusive of financial instruments, deferred tax assets, post- employment benefits assets and rights under insurance contracts. Geographical information Australasia United Kingdom and Europe Overseas other Sales to external customers Geographical non-current assets 2018 $'000 2017 $'000 2018 $'000 2017 $'000 6,346 6,458 941 7,352 5,190 965 11,589 746 - 9,723 711 - 13,745 13,507 12,335 10,434 39 39 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 4. Revenue Sales revenue Franchise fees Student lesson fees Sales of master territories and franchise centres Direct sales Other revenue Interest Other revenue Revenue Note 5. Expenses Profit before income tax includes the following specific expenses: Depreciation Plant and equipment Amortisation Product and overseas development costs Other intangibles Total amortisation Total depreciation and amortisation Royalties, commissions and other direct expenses Direct costs of student lessons Direct costs of franchise fees Consolidated 2018 $'000 2017 $'000 10,685 1,137 1,236 634 13,692 2 51 53 9,206 2,382 1,423 495 13,506 1 - 1 13,745 13,507 Consolidated 2018 $'000 2017 $'000 49 44 833 192 1,025 1,074 925 2,791 508 221 729 773 1,932 3,098 Total royalties, commissions and other direct expenses 3,716 5,030 Employee benefits Employee benefits expense excluding superannuation Defined contribution superannuation expense Share-based payment expense Total employee benefits Finance costs Interest and finance charges paid/payable Rental minimum lease payments 2,755 297 45 2,640 234 32 3,097 2,906 58 268 68 217 40 40 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 6. Income tax expense Income tax expense Current tax Deferred tax - origination and reversal of temporary differences Aggregate income tax expense Deferred tax included in income tax expense comprises: Decrease in deferred tax assets (note 10) Increase/(decrease) in deferred tax liabilities (note 14) Deferred tax - origination and reversal of temporary differences Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 27.5% (2017: 30%) Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Prior year foreign exchange items Sundry items Income tax expense Tax losses not recognised Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 27.5% (2017: 30%) Consolidated 2018 $'000 2017 $'000 576 110 686 220 (110) 110 (9) 368 359 185 183 368 2,707 1,795 744 539 (104) 46 686 (169) (11) 359 Consolidated 2018 $'000 2017 $'000 1,269 1,269 349 381 The above potential tax benefit for tax losses has not been recognised in the statement of financial position. These tax losses are capital in nature and can only be utilised in the future to offset capital gains if the continuity of ownership test is passed, or failing that, the same business test is passed. Note 7. Current assets - cash and cash equivalents Cash at bank Restricted cash Consolidated 2018 $'000 2017 $'000 2,202 3,714 1,697 3,235 5,916 4,932 Restricted cash represents amounts held on behalf of franchisees and is not available for use by the consolidated entity. The corresponding liability is recognised in other payables and accruals at note 11. 41 41 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 8. Current assets - trade and other receivables Trade receivables Less: Provision for impairment of receivables Other receivables Consolidated 2018 $'000 2017 $'000 447 (68) 379 128 507 949 (84) 865 115 980 Impairment of receivables The consolidated entity has recognised a loss of $3,000 (2017: $107,000) in profit or loss in respect of impairment of receivables for the year ended 30 June 2018. The ageing of the impaired receivables provided for above are as follows: 31-60 days overdue 61-90 days overdue 91-120 days overdue Movements in the provision for impairment of receivables are as follows: Opening balance Additional provisions recognised Amounts recovered during the year Receivables written off during the year as uncollectable Closing balance Consolidated 2018 $'000 2017 $'000 - - 68 68 2 1 81 84 Consolidated 2018 $'000 2017 $'000 84 3 (19) - 68 224 107 - (247) 84 Past due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $62,000 as at 30 June 2018 ($74,000 as at 30 June 2017). The consolidated entity did not consider a credit risk on the aggregate balances after reviewing the credit terms of customers based on recent collection practices. 42 42 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 8. Current assets - trade and other receivables (continued) The ageing of the past due but not impaired receivables are as follows: 31-60 days overdue 61-90 days overdue 91-120 days overdue Note 9. Non-current assets - intangibles Intellectual property - at cost Product and overseas development costs Less: Accumulated amortisation Franchise and development territories Other intangible assets - at cost Less: Accumulated amortisation Consolidated 2018 $'000 2017 $'000 4 3 55 62 8 7 59 74 Consolidated 2018 $'000 2017 $'000 4,012 4,012 8,184 (2,782) 5,402 1,837 1,862 (861) 1,001 7,130 (2,034) 5,096 711 1,154 (669) 485 12,252 10,304 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2016 Additions Amortisation expense Balance at 30 June 2017 Additions Exchange differences Amortisation expense Product and overseas development costs $'000 Franchise and development territories $'000 Intellectual property $'000 Other intangibles $'000 Total $'000 4,012 - - 4,012 - - - 5,065 539 (508) 5,096 1,139 - (833) 711 - - 711 1,091 35 - 181 525 (221) 485 708 - (192) 9,969 1,064 (729) 10,304 2,938 35 (1,025) Balance at 30 June 2018 4,012 5,402 1,837 1,001 12,252 43 43 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 9. Non-current assets - intangibles (continued) The intellectual property and product and overseas development costs are the primary elements of the consolidated entity’s system of tutoring which has been developed and acquired over a period exceeding 30 years by the founders and the consolidated entity. The franchise territories asset consists of the buy-back of the right to operate the business in the United Kingdom and New Zealand. As there is no foreseeable limit to the cash flows these assets are generating, they are considered to have an indefinite useful life and not amortised. Instead they are subject to annual impairment reviews. Other intangibles include the contractual rights for certain territories where KMEC has terminated an area developers contract and the liability for these items are included in payables. Impairment tests for indefinite life intangibles Indefinite life intangibles are allocated to a single cash generating unit ('CGU'). The recoverable amount has been determined by a value-in-use calculation using a discounted cash flow model, based on a three-year projection period approved by management and extrapolated for a further two years using a growth rate of 2.4% (2017: 2.4%). There are no terminal values in the calculation. Key assumptions are those to which the recoverable amount of an asset or cash-generating units is most sensitive. The following key assumptions were used in the discounted cash flow model: a. Pre-tax discount rate 16.5% (2017: 16.5%). The discount rate reflects management’s estimate of the time value of money and the consolidated entity’s weighted average cost of capital, the risk free rate and the volatility of the share price relative to market movements. b. New centre growth rate of 2.6% (2017: 4.0%) over the three-year projection period, which reflects, a renewed sales push, an expected move towards larger on-line based centres and a continued movement towards percentage of revenue contracts, which management believe is reasonable given the current trading performance of the consolidated entity. c. Foreign exchange rates consistent with current market conditions. Based on the above, there was no impairment required for the year ended 30 June 2018 (2017: $nil). Sensitivity As disclosed in note 2, the directors have made judgements and estimates in respect of the impairment testing of indefinite life intangibles. Should these judgements and estimates not occur, the resulting indefinite life intangibles may vary in carrying amount. The key sensitivity is that centre numbers would need to fall by 6% (2017: fall by 5%) before the CGU would be impaired, with all other assumptions remaining constant. Management believes that other reasonable changes in the key assumptions on which the recoverable amount is based would not cause the cash generating unit’s carrying amount to exceed its recoverable amount. 44 44 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 10. Non-current assets - deferred tax Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Tax losses Impairment of receivables Unrealised foreign exchange movements Employee benefits Accrued expenses QAX licence Deferred tax asset Movements: Opening balance Charged to profit or loss (note 6) Closing balance Note 11. Current liabilities - trade and other payables Trade payables Amounts held on behalf of franchisees GST and other similar payables Other payables and accruals Refer to note 18 for further information on financial instruments. Note 12. Current liabilities - borrowings Bank loans Refer to note 18 for further information on financial instruments. Total secured liabilities The total secured current liabilities are as follows: Bank loans 45 45 Consolidated 2018 $'000 2017 $'000 21 16 61 126 (76) 158 306 526 (220) 306 56 25 71 112 68 194 526 711 (185) 526 Consolidated 2018 $'000 2017 $'000 1,034 3,732 40 382 444 3,235 9 403 5,188 4,091 Consolidated 2018 $'000 2017 $'000 600 750 Consolidated 2018 $'000 2017 $'000 600 750 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 12. Current liabilities - borrowings (continued) Assets pledged as security The bank loans are secured by fixed and floating charge over the assets of the consolidated entity. Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank overdraft Bank loans Used at the reporting date Bank overdraft Bank loans Unused at the reporting date Bank overdraft Bank loans Note 13. Current liabilities - employee benefits Annual leave Long service leave Consolidated 2018 $'000 2017 $'000 1,750 600 2,350 - 600 600 1,750 - 1,750 1,750 750 2,500 - 750 750 1,750 - 1,750 Consolidated 2018 $'000 2017 $'000 210 238 448 173 191 364 Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the consolidated entity does not have an unconditional right to defer settlement. However, based on past experience, the consolidated entity does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken within the next 12 months: Employee benefits Consolidated 2018 $'000 2017 $'000 275 215 46 46 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 14. Non-current liabilities - deferred tax Deferred tax liability comprises temporary differences attributable to: Amounts recognised in profit or loss: Research and development costs Overseas development Deferred tax liability Movements: Opening balance Charged/(credited) to profit or loss (note 6) Closing balance Note 15. Equity - issued capital Consolidated 2018 $'000 2017 $'000 1,366 46 1,239 283 1,412 1,522 1,522 (110) 1,339 183 1,412 1,522 Consolidated 2018 Shares 2017 Shares 2018 $'000 2017 $'000 Ordinary shares - fully paid 45,034,331 45,034,331 8,838 8,838 Movements in ordinary share capital Details Balance Conversion of options Balance Balance Date Shares Issue price $'000 1 July 2016 31 August 2016 44,184,331 850,000 $0.075 30 June 2017 45,034,331 30 June 2018 45,034,331 8,774 64 8,838 8,838 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The consolidated entity's objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. 47 47 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 15. Equity - issued capital (continued) In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The capital risk management policy remains unchanged from the 30 June 2017 Annual Report. The capital structure of the consolidated entity consists of net debt (borrowings offset by cash and bank balances) and equity of the consolidated entity (comprising issued capital, reserves and accumulated profits). Note 16. Equity - reserves Foreign currency reserve Share-based payments reserve Other reserves Consolidated 2018 $'000 2017 $'000 (245) 146 754 655 (233) 77 754 598 Foreign currency reserve The reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise profits and losses on hedges of the net investments in foreign operations. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and directors as part of their remuneration, and other parties as part of their compensation for services. Other reserves This reserve is used to recognise the increments and decrements on changes in equity of the parent on acquisition of non- controlling interests. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 July 2016 Foreign currency translation Share-based payments Balance at 30 June 2017 Foreign currency translation Share-based payments Balance at 30 June 2018 Foreign currency $'000 Share-based payments $'000 Other $'000 Total $'000 (132) (101) - (233) (12) - (245) 45 - 32 77 - 69 146 754 - - 754 - - 754 667 (101) 32 598 (12) 69 655 48 48 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 17. Equity - dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2017 of 1.4 cents (2016: 1.0 cents) per ordinary share Interim dividend for the year ended 30 June 2018 of 1 cents (2017: 0.6 cents) per ordinary share Consolidated 2018 $'000 2017 $'000 630 451 1,081 451 270 721 On 17 August 2018, a final dividend for the year ended 30 June 2018 of 2.0 cents per ordinary share, 100% fully franked, was declared and will be paid on 21 September 2018 to those shareholders on the register at 7p.m. on 7 September 2018. The total distribution will be $900,686. Note 18. Financial instruments Financial risk management objectives The consolidated entity's activities expose it to a variety of financial risks: market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. The consolidated entity's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the consolidated entity and to ensure that the consolidated entity is able to finance its business plans. The consolidated entity uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and ageing analysis for credit risk. Risk management is carried out by senior executives ('finance') under policies approved by the Board of Directors ('Board'). These policies include identification and analysis of the risk exposure of the consolidated entity and appropriate procedures, controls and risk limits. The consolidated entity does not enter into or trade in financial instruments, including derivative financial instruments, for speculative purposes. Finance reports to the Board are on a monthly basis. Market risk Foreign currency risk The consolidated entity undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. The consolidated entity operates internationally and is exposed to foreign exchange risk arising primarily from the Pound Sterling, Singapore dollar, South African Rand and New Zealand dollar. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity's functional currency. The consolidated entity presently does not hedge foreign exchange risks. 49 49 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 18. Financial instruments (continued) The carrying amount of the consolidated entity's foreign currency denominated financial assets and financial liabilities at the reporting date were as follows: Consolidated US dollars Euros Pound Sterling New Zealand dollars Singapore dollars South African Rand Kenyan Shilling Hong Kong Dollars Assets Liabilities 2018 $'000 2017 $'000 2018 $'000 2017 $'000 24 28 3,222 777 90 28 5 19 46 7 3,161 470 86 44 4 19 - - 2,214 855 19 - - - 3 - 1,696 306 28 - - - 4,193 3,837 3,088 2,033 The consolidated entity had net assets denominated in foreign currencies of $1,105,000 as at 30 June 2018 (assets $4,193,000 less liabilities $3,088,000) (2017: $1,804,000 (assets $3,837,000 less liabilities $2,033,000)). Based on this net position, a 10% strengthening in the Australian dollar from 30 June 2018 levels may expose the consolidated entity to a $110,000 foreign currency loss. Price risk The consolidated entity is not exposed to any significant price risk. Interest rate risk The consolidated entity's main interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the consolidated entity to interest rate risk. Borrowings issued at fixed rates expose the consolidated entity to fair value interest rate risk. The consolidated entity's objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans, related party loans and financial leases. As at the reporting date, the consolidated entity had the following variable rate borrowings and term deposits. Consolidated Bank overdrafts and bank loans Cash at bank - term deposit Net exposure to cash flow interest rate risk 2018 2017 Weighted average interest rate % Weighted average interest rate % Balance $'000 Balance $'000 4.58% - 4.05% 2.75% 600 - 600 750 (49) 701 The consolidated entity has net bank loans and borrowings outstanding, totalling $600,000 (2017: $701,000), which are principal and interest payment loans. Annually cash outlays of approximately $38,000 (2017: $38,000 per quarter) are required to service the debt. An official increase/decrease in interest rates of 100 (2017: 100) basis points would have an adverse/favourable effect on profit before tax of $6,000 (2017: $7,000) per annum. The percentage change is based on the expected volatility of interest rates using market data and analysis. In June 2017 the consolidated entity entered into a new finance facility with HSBC Bank Australia Ltd. The bank loan covenants are specific annual reporting requirements. 50 50 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 18. Financial instruments (continued) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has adopted a policy of dealing with only recognised, creditworthy third parties. All franchisees are subject to legal and credit checks prior to contracting with the consolidated entity. Policies have been put in place to ensure that receivable balances are monitored on an ongoing basis with the result that the consolidated entity's exposure to credit default is not significant. The consolidated entity does not hold any collateral. However, the consolidated entity's policy for non-payment of debt by contracted partners within the maximum 30-day terms is deactivation of access to student curriculum resources. Before accepting any new customers, the consolidated entity assesses the potential customer's credit quality. In determining the recoverability of a trade receivable, the consolidated entity considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. The maximum exposure to credit risk at the reporting date 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. Liquidity risk Vigilant liquidity risk management requires the consolidated entity to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The consolidated entity manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements Unused borrowing facilities at the reporting date: Bank overdraft Consolidated 2018 $'000 2017 $'000 1,750 1,750 Remaining contractual maturities The following tables detail the consolidated entity's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Consolidated - 2018 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Total non-derivatives Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Over 5 years $'000 Remaining contractual maturities $'000 - - 4.58% 1,034 4,154 175 5,363 - - 468 468 - - - - - - - - 1,034 4,154 643 5,831 51 51 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 18. Financial instruments (continued) Consolidated - 2017 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - fixed rate Bank loans Total non-derivatives Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Over 5 years $'000 Remaining contractual maturities $'000 - - 4.05% 444 3,646 152 4,242 - - 152 152 - - 446 446 - - - - 444 3,646 750 4,840 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Note 19. Fair value measurement Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short- term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial instruments. They are classified as level 3 fair values in the fair value hierarchy due to the inclusion of unobservable inputs. Note 20. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set out below: Short-term employee benefits Post-employment benefits Share-based payments Consolidated 2018 $ 2017 $ 1,561,630 121,552 45,257 1,385,427 99,796 33,694 1,728,439 1,518,917 52 52 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 21. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by PKF Newcastle, the auditor of the company, its network firms and unrelated firms: Audit services - PKF Newcastle Audit or review of the financial statements Other services - PKF Newcastle Preparation of the tax return and other tax services Other services - network firms Preparation of the tax return (NZ) Audit services - unrelated firms Audit or review of the financial statements Other services - unrelated firms Payroll and tax services Consolidated 2018 $ 2017 $ 105,000 96,206 21,139 6,430 126,139 102,636 3,727 - 10,778 17,352 1,769 4,304 12,547 21,656 Fees of $12,547 (2017: $21,656) were paid to Hazlewoods LLP, who are the auditors of the UK subsidiary Kip McGrath Education United Kingdom Limited. Note 22. Contingent liabilities There were no contingent liabilities at 30 June 2018. The consolidated entity has entered into arrangements to provide a guarantee to the lessor of the head office premises amounting to $58,000 (2017: $58,000). Note 23. Commitments PPE Lease commitments - operating Committed at the reporting date but not recognised as liability, payable: Within one year One to five years Consolidated 2018 $'000 2017 $'000 223 416 639 267 639 906 Operating lease commitments includes contracted amounts for offices and plant and equipment under non-cancellable operating leases expiring within one to five years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Note 24. Related party transactions Parent entity Kip McGrath Education Centres Limited is the parent entity. 53 53 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 24. Related party transactions (continued) Subsidiaries Interests in subsidiaries are set out in note 26. Key management personnel Disclosures relating to key management personnel are set out in note 20 and the remuneration report included in the directors' report. Transactions with related parties During the year a child of Catherine Cook (KMP) was paid $4,825 (2017: $1,880) for undertaking marketing services and curriculum testing services, respectively, for the consolidated entity. During the year, $2,937.00 was paid to 360 HR Pty Ltd, a related party to Diane Pass, for the reimbursement of externally acquired training materials. In June 2017, the company Importaurus Pty Ltd became a related party to Kip McGrath and holds 274,050 shares in the parent entity. Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Note 25. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit after income tax Total comprehensive income Parent 2018 $'000 2017 $'000 3,104 1,091 3,104 1,091 54 54 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 25. Parent entity information (continued) Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Foreign currency reserve Share-based payments reserve Accumulated losses Total equity Parent 2018 $'000 2017 $'000 2,350 8,632 9,627 6,257 3,810 2,557 5,296 4,058 8,838 (2) 146 (4,651) 8,838 (42) 77 (6,674) 4,331 2,199 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2018 and 30 June 2017, except as disclosed in note 22. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2018 and 30 June 2017. Financial support The parent entity has issued a financial letter of support to Kip McGrath Education United Kingdom Limited. A letter of support was also issued in the prior year. Significant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in note 1, except for the following: ● ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Dividends received from subsidiaries are recognised as other income by the parent entity. Note 26. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1: Name Principal place of business / Country of incorporation Kip McGrath Education Australia Pty Ltd Kip McGrath Global Pty Limited Kip McGrath Direct Pty Ltd Kip McGrath Education United Kingdom Ltd Kip McGrath Education New Zealand Limited Australia Australia Australia United Kingdom New Zealand Ownership interest 2017 2018 % % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 55 55 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 27. Reconciliation of profit after income tax to net cash from operating activities Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Write off of property, plant and equipment Share-based payments Foreign exchange differences Change in operating assets and liabilities: Decrease in trade and other receivables Decrease in deferred tax assets Decrease/(increase) in prepayments Increase in trade and other payables Increase/(decrease) in provision for income tax Increase/(decrease) in deferred tax liabilities Increase in employee benefits Net cash from operating activities Note 28. Earnings per share Consolidated 2018 $'000 2017 $'000 2,021 1,436 1,074 2 69 (47) 480 220 (179) 1,102 453 (110) 84 773 - 32 (101) 25 185 12 530 (9) 183 67 5,169 3,133 Consolidated 2018 $'000 2017 $'000 Profit after income tax attributable to the owners of Kip McGrath Education Centres Limited 2,021 1,436 Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: 45,034,331 44,892,277 Options over ordinary shares 2,587,671 1,905,754 Weighted average number of ordinary shares used in calculating diluted earnings per share 47,622,002 46,798,031 Number Number Basic earnings per share Diluted earnings per share Note 29. Share-based payments Cents Cents 4.488 4.244 3.199 3.069 On 9 March 2012, shareholders approved the terms and conditions of the Kip McGrath Employee Share Option Plan ('the Plan'). The Plan is designed to provide long-term incentives for employees to deliver long-term shareholder returns. Under the Plan the consolidated entity may, at the discretion of the Nomination and Remuneration Committee, grant options over ordinary shares in the parent entity to certain key management personnel. The options are issued for nil consideration and only vest if certain conditions are met. Options granted under the plan carry no dividend or voting rights. Shares issued under exercised options will rank equally with ordinary shares. On exercise each option converts to one share, except in certain circumstances such as rights issues or bonus issues. 56 56 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 29. Share-based payments (continued) Set out below are summaries of options granted under the plan: 2018 Grant date Expiry date price Exercise Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 28/02/2014 20/08/2014 21/11/2014 02/09/2016 09/10/2017 27/10/2017 28/02/2019 31/12/2019 31/12/2019 31/12/2021 31/12/2021 31/12/2021 2017 $0.190 $0.350 $0.350 $0.300 $0.370 $0.370 250,000 100,000 1,000,000 500,000 - - 1,850,000 - - - - 550,000 500,000 1,050,000 - - - - - - - - - - - - - - 250,000 100,000 1,000,000 500,000 550,000 500,000 2,900,000 Grant date Expiry date price Exercise Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 31/03/2012 28/02/2014 20/08/2014 21/11/2014 02/09/2016 31/03/2022 28/02/2018 31/12/2019 31/12/2019 31/12/2021 $0.075 $0.190 $0.350 $0.350 $0.300 850,000 400,000 300,000 1,000,000 - 2,550,000 - - - - 500,000 500,000 (850,000) - - - - (850,000) - (150,000) (200,000) - - (350,000) - 250,000 100,000 1,000,000 500,000 1,850,000 * Other represents options lapsed The options issued in the current financial year have the following vesting conditions: • Meeting annual performance indicators set by the Board; and • The employee remains in employment until date of vesting. The weighted average share price was $0.320 (2017: $0.319). The weighted average remaining contractual life of options outstanding at the end of the financial year was 2.86 years (2017: 1.83 years). For the options granted during the current financial year, the Black-Scholes option pricing model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Option price Exercise at grant date price Expected volatility Dividend Risk-free Fair value yield interest rate at grant date 09/10/2017 27/10/2017 31/12/2021 31/12/2021 $0.000 $0.000 $0.370 $0.370 - - - - - - $0.104 $0.104 Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were $45,000 (2017: $32,000). 57 57 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Notes to the financial statements 30 June 2018 Note 30. Events after the reporting period On 4 July 2018, the company purchased back the area developer territory for the East Midlands in England to allow better focus on the United Kingdom business. Apart from the event disclosed above and the dividend declared as disclosed in note 17, no other matter or circumstance has arisen since 30 June 2018 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. 58 58 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Directors' declaration 30 June 2018 In the directors' opinion: ● ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; the attached financial statements and notes give a true and fair view of the consolidated entity's financial position as at 30 June 2018 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Kip McGrath Chairman 17 August 2018 Newcastle 59 59 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KIP MCGRATH EDUCATION CENTRES LIMITED Report on the Financial Report Opinion We have audited the accompanying financial report of Kip McGrath Education Centres Limited (the company), which comprises the consolidated statement of financial position as at 30 June 2018, 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 company and 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. In our opinion, the financial report of Kip McGrath Education Centres Limited is in accordance with the Corporations Act 2001, including: a) Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of its performance for the year ended on that date; and b) Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion 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. Our responsibilities under those standards are further described in the Auditor’s Responsibility section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the consolidated entity in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PKF(NS) Audit & Assurance Limited Partnership ABN 91 850 861 839 Liability limited by a scheme approved under Professional Standards Legislation Sydney Newcastle Level 8, 1 O’Connell Street Sydney NSW 2000 Australia GPO Box 5446 Sydney NSW 2001 755 Hunter Street Newcastle West NSW 2302 Australia PO Box 2368 Dangar NSW 2309 p f +61 2 8346 6000 +61 2 8346 6099 p f +61 2 4962 2688 +61 2 4962 3245 PKF(NS) Audit & Assurance Limited Partnership is a member firm of the PKF International Limited family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. For office locations visit www.pkf.com.au 60 60 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. 1. Impairment testing of intangible assets Why significant As disclosed in note 9, the Group has intangible assets of $12.252m as at 30 June 2018. How our audit addressed the key audit matter The Group has determined there is one CGU, being the whole Group. Our audit procedures included but were not limited to: • to assessing and challenging: is An annual impairment test for intangible required under Australian assets Accounting Standard 136 Impairment of Assets. (AASB) the The evaluation of recoverable amount requires the group to exercise significant judgment in determining key assumptions, which include: • • • 5-year cash flow forecast; Terminal growth factor; and Discount rate. of outcome The the impairment if different assessment could vary assumptions were applied. As a result, the evaluation of the recoverable amount of intangible assets including goodwill is a key audit matter. o o o o o the assumption of one cash generating unit being appropriate; the accuracy of the FY19 budget approved by the Board by comparing the budget to FY18 actuals; the assumptions used for the future growth rate by comparing normalised average growth rate from FY17 to FY18 to the growth rate adopted in the impairment model; the key assumptions for long term growth in the forecast cash flows by comparing them to historical results and industry forecasts; and the discount rate applied by comparing the weighted average cost of capital to industry benchmarks. • • • • testing, on a sample basis, the mathematical accuracy of the cash flow models; testing, on a sample basis, the validity and accuracy of intangibles capitalised during the financial year; considering management’s assessment of those with definite and indefinite useful lives; testing, on a sample basis, the validity and accuracy of amortisation expense and accumulated amortisation where appropriate; • agreeing inputs in the cash flow models to relevant data including approved budgets and latest forecasts; • reviewing management’s sensitivity analysis in relation to key assumptions including discount rate, growth rate and terminal value; and • assessing appropriateness of financial statement disclosures including sensitivities to assumptions used, included in Note 9. Based on those procedures performed, we were satisfied with the material accuracy of the intangibles and relevant disclosures. 61 61 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 2. Area Developer Termination payment (one-off transaction) Why significant How our audit addressed the key audit matter During the year, KMEC entered into a confidential termination agreement with an Australian Area Developer ("AD”) which allowed KMEC to regain the rights bestowed under this AD arrangement. For this right, KMEC paid an amount upfront and capitalised the purchase as an intangible asset at 31 January 2018. As at 30 June 2018, the written down value of this intangible asset has been included as a part of Note 9 in the financial statements under “Other Intangible Assets”. We reviewed the AD termination agreement and ensured the asset was capitalised appropriately. Payments made prior to 30 June 2018 have been traced to bank statements. We recalculated the corresponding amortisation to ensure its material accuracy as at 30 June 2018. We deemed management's decision to amortise the AD termination asset over five years as reasonable given the timeframe of expected future economic benefits and customer churn. 3. Master Franchisee payment (one-off transaction) Why significant How our audit addressed the key audit matter During the year, KMEC entered into an arrangement with a Master Franchisee (“MF”) which allowed KMEC to regain the rights bestowed under this MF arrangement. A portion of the consideration payable by KMEC was deferred and is dependent on the achievement of certain performance hurdles. KMEC has estimated the deferred consideration and is included within Trade Payables in Note 11. The acquisition of the MF has been capitalised as an intangible asset with an indefinite useful life and is included in note 9 in the financial statements under Franchise and Development Territories. We reviewed the MF termination agreement and ensured the asset was capitalised appropriately. Payments made prior to 30 June 2018 have been traced to bank statements. Additionally, we have reviewed management’s estimate of deferred consideration to ensure the liability was materially correct as at 30 June 2018. we Furthermore, considered management's assessment of the asset having an indefinite useful life to be reasonable given the nature of the asset. 62 62 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Other Information Other information is financial and non-financial information in the annual report of the company which is provided in addition to the Financial Report and the Auditor’s Report. The directors are responsible for Other Information in the annual report. The Other Information we obtained prior to the date of this Auditor’s Report was the Director’s Report. The remaining Other Information is expected to be made available to us after the date of the Auditor’s Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, the auditor does not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information in the Financial Report and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Directors’ Responsibilities 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 1, the Directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report complies with International Financial Reporting Standards. In preparing the financial report, the Directors are responsible for assessing the consolidated entity’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using a going concern basis of accounting unless the Directors either intend to liquidate the consolidated entity or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our responsibility is to express an opinion on the financial report based on our audit. Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue and auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individual or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. 63 63 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 The procedures selected depend on the auditor’s judgement, including 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 entity’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 entity’s internal control. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of 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 conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the consolidated entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the consolidated entity to cease to continue as a going concern. We evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. We obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the consolidated entity to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. The Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 64 64 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Report on the Remuneration Report Opinion We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Kip McGrath Education Centres Limited for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PKF CHARTERED ACCOUNTANTS MARTIN MATTHEWS PARTNER 17 AUGUST 2018 NEWCASTLE, NSW 65 65 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889 Kip McGrath Education Centres Limited Shareholder information 30 June 2018 The shareholder information set out below was applicable as at 23 July 2018. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Number of holders of options Number of holders of ordinary ordinary over 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: shares shares 77 326 151 164 32 750 58 - - - - 6 6 - Ordinary shares % of total Number held 11,842,862 11,200,499 4,000,000 1,365,933 1,160,488 1,015,000 1,000,000 758,052 688,000 500,000 475,301 400,000 400,000 343,261 274,238 274,050 269,300 250,000 250,000 249,512 shares issued 26.30 24.87 8.88 3.03 2.58 2.25 2.22 1.68 1.53 1.11 1.06 0.89 0.89 0.76 0.61 0.61 0.60 0.56 0.56 0.55 36,716,496 81.54 J P MORGAN NOMINEES AUSTRALIA LIMITED MR KIP MCGRATH KMEC SUPERANNUATION PTY LTD (KMEC SUPERANNUATION FUND A/C) EMERALD SHARES PTY LIMITED (EMERALD UNIT A/C) MR STORM KIP MCGRATH ENSI STREET SUPERANNUATION PTY LTD (ENSI STREET RETIREMENT A/C) KIP MCGRATH INVESTMENTS PTY LTD (MCGRATH FAMILY A/C) BELSOV PTY LTD (TURNER FAMILY S/F A/C) MR BRIAN STEPHAN SLEIGH HETALE PTY LIMITED (EAGLES NEST RETIRE FUND A/C) BNP PARIBAS NOMINEES PTY LTD (IB AU NOMS RETAILCLIENT DRP) MS SNEZANA BOWDEN MRS STACEY-LEE SEGAL INDWECO PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED IMPORTAURUS PTY LTD GOOD HOPE MANAGEMENT PTY LTD (THE GOOD HOPE UNIT A/C) LIBERTY CONSOLIDATED HOLDINGS PTY LTD MR STEVEN JOHN MCCARTHY MRS LYNETTE TIMMINS Unquoted equity securities There are no unquoted equity securities, except the options as disclosed in Note 29. 66 66 Kip McGrath Education Centres Limited ABN 73 003 415 889 | Annual Report 2018 Kip McGrath Education Centres Limited Shareholder information 30 June 2018 Substantial holders Substantial holders in the company are set out below: J P MORGAN NOMINEES AUSTRALIA LIMITED MR KIP MCGRATH KMEC SUPERANNUATION PTY LTD (KMEC SUPERANNUATION FUND A/C) Voting rights The voting rights attached to ordinary shares are set out below: Ordinary shares % of total Number held 11,842,862 11,200,499 4,000,000 shares issued 26.30 24.87 8.88 Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. 67 67 Annual Report 2018 | Kip McGrath Education Centres Limited ABN 73 003 415 889

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