BUILDING ON OUR STRENGTH Annual Report 2013 Setting the foundations for future GROWTH Contents 2 Overview of Steadfast 4 2013 Financial Highlights 5 Letter from the Chairman 6 Letter from Managing Director & Chief Executive Officer 8 Board of Directors 9 Executive Management Team 10 Organic Growth Opportunities 11 Growth by Acquisition 12 Advantages of Being a Steadfast Network Broker 14 Steadfast Convention 15 Steadfast Foundation 16 Corporate Governance Statement 20 2013 Financial Report 92 Shareholders’ Information IBC Corporate Directory FY13 has been an exciting year for Steadfast During the year, Steadfast set the foundations to become a consolidator of insurance brokers and underwriting agencies in addition to being the leading provider of services to its network of brokers. This involved restructuring the operations of Steadfast in order to facilitate the listing of its Shares on the ASX through an Initial Public Offering, and making investments in insurance brokers, underwriting agencies and ancillary service organisations. We remain Australia’s largest general insurance broking network measured by annual premiums placed and number of licensed brokers and have now become a significant player in New Zealand with an equity interest in Rothbury Group, New Zealand’s fourth largest general insurance broker. We also have strengthened our position as a leading premium funder in Australia with the purchase of Pacific Premium Funding by Macquarie Premium Funding, our joint venture with Macquarie Bank. The size of the Steadfast Network, its well-established relationships with a number of leading underwriters in Australia and overseas as well as its ability to leverage its diversified business model, position Steadfast strongly to take advantage of future growth opportunities. Steadfast Group Annual Report 2013 3 Overview of Steadfast Steadfast is the leading distribution channel of general insurance products and services to the small and medium sized enterprise (SME) market in Australia and New Zealand Our history and achievements 1996 $4.0bn 430 $334m Founded in 1996 as a collective buying and service group for independent brokers Grown from 43 to ~280 broker businesses representing $4.0 billion in Gross Written Premiums (GWP) for the year ended 30 June 2013 430 offices across all Australian states and territories and New Zealand Raised approximately $334 million before costs through an Initial Public Offering (IPO) which launched on 28 June 2013 enabling Steadfast to purchase interests in 58 insurance brokers, 4 underwriting agencies and 2 ancillary businesses (the IPO Acquisitions) O88 67 METR 21 REGIONAL 121 O 99 METR 22 REGIONA L 4 14 12 METRO 2 REGIONAL 7NORTH ISLAND 5SOUTH ISLAND 47 41 METRO 6 REGIONA L 4 2 METRO 2 REGIONA L 33 27 METRO 6 REGIONAL 107 96 METRO 11 REGIONAL 4 Steadfast Group Annual Report 2013 SDF LARGEST general insurance broker network in Australia 1 The IPO Acquisitions completed on 7 August 2013, and Steadfast’s ordinary shares were listed on the ASX under the code “SDF” FOLLOWING LISTING, STEADFAST HAS OPERATIONS IN FOUR KEY LINES OF BUSINESS: 1. INSURANCE BROKING Equity interests in 62 insurance broking businesses (Steadfast Equity Brokers) and provider of support services to ~280 Steadfast Network Brokers 2. INSURANCE UNDERWRITING AGENCIES Ownership interests in 4 insurance underwriting agencies which develop and market insurance products in niche segments 3. PREMIUM FUNDING 50% interest in Macquarie Premium Funding, one of the largest originators of premium funding products in Australia 4. ANCILLARY SERVICES Equity interests in complementary businesses providing back office services, legal services and life insurance broking Note: 1 Measured by annual premiums placed and number of licensed brokers. 5 Steadfast Group Annual Report 2013 2013 Financial Highlights $4.0 bn $24.5 m in Gross Written Premiums (GWP) placed by the Steadfast Network on which fees and commissions and M&A Fees are based Marketing & Administration (M&A) Fees paid to Steadfast by its Strategic Partners and other product partners Steadfast Network Gross Written Premiums $ billions Marketing & Administration Fees $ millions 5.0 4.0 3.0 2.0 1.0 0.0 2 % C A G R 3.2 3.0 1 4.0 3.7 2.5 2.3 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 25.0 20.0 15.0 10.0 5.0 0.0 24.5 R G A 19.8 21.7 5 1 % C 16.9 14.5 12.4 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Acquisitions > 3 broker businesses in Australia (100%) > Rothbury Group, the fourth largest broker in New Zealand (17.9%) > Sports Underwriting Agency (80%) IPO acquisitions made in August 2013 > 58 broker businesses in Australia (equity interests between 25% and 100%) > Rothbury Group (a further 12.2%) > 2 underwriting agencies (39.5% and 100%) > White Outsourcing (87.5%) > Meridian Lawyers (25%) $711 m market capitalisation as at 26 August 2013 Final Price of SDF shares was $1.15 on 2 August 2013. Shares closed at $1.42 on 26 August 2013. 40.0 5.0 4.0 s n o i l l i m – e m u o V l 3.0 2.0 1.0 0.0 1.48 1.46 1.44 1.42 1.40 1.38 1.36 1.34 1.32 S h a r e P r i c e – $ 3 1 g u A 2 3 1 g u A 5 3 1 g u A 6 3 1 g u A 7 3 1 g u A 8 3 1 g u A 9 3 1 g u A 2 1 3 1 g u A 3 1 3 1 g u A 4 1 3 1 g u A 5 1 3 1 g u A 6 1 3 1 g u A 9 1 3 1 g u A 0 2 3 1 g u A 1 2 3 1 g u A 2 2 3 1 g u A 3 2 3 1 g u A 6 2 Volume SDF (at close) Source: tradingroom .com .au 6 Steadfast Group Annual Report 2013 Letter from the Chairman Dear Shareholders, On behalf of your Directors I would like to welcome you as a shareholder in Steadfast Group Limited. We are very pleased with our strong shareholder base made up of Steadfast Network Brokers, institutional and retail shareholders, and employees. Our Initial Public Offering (IPO) was a significant achievement for Steadfast and its broker network. The IPO provides the Group with an excellent platform for strong growth and succession. Steadfast ordinary shares have traded on an unconditional and normal settlement basis since 14 August 2013. As at 26 August 2013, Steadfast’s market capitalisation was $711 million. I would like to thank everyone involved in the IPO process as well as those who built Steadfast to where it is today. Steadfast is the largest insurance broker network in Australia (based on annual premiums placed and number of licensed brokers) and a leading network in New Zealand. It has equity interests in 62 broker businesses, 4 underwriting agencies and 2 ancillary service organisations and a 50% interest in Macquarie Premium Funding. The IPO was conducted to fund 60 acquisitions, to facilitate succession planning within the network through a co-ownership model to ensure the network continues to grow and prosper, and to enhance Steadfast’s financial flexibility to pursue the growth opportunities through funds raised and improved access to capital markets. Employees of the businesses within the Steadfast Network along with your Directors, management and other employees of Steadfast Network Brokers hold approximately 37% of the ordinary shares in Steadfast, re-affirming their commitment to the business and its future success. The 2013 audited results in this report include a number of one-off items related to the IPO and the IPO acquisitions which were completed after 30 June 2013. We are pleased to report that for the financial year ended 2013 Steadfast Group Limited, assuming all IPO acquisitions and other acquisitions are included for a full year, is slightly ahead of expectations for revenue and for earnings before interest expense, income tax and amortisation (EBITA) forecast in the IPO prospectus. The Balance Sheet post the IPO has net assets over $500 million, substantially reduced debt and excess cash. Your Directors have set the maximum debt at 15% of shareholders’ funds plus debt. This together with excess cash and expected retained profits gives us around $110 million for potential acquisitions and other growth initiatives in the 2014 financial year without raising further equity. In the financial year ending 2014, we intend to only look at acquisitions that are earnings per share accretive within the first year of ownership. Steadfast Directors, management and employees are committed to deliver to our shareholders the benefits from our key strengths and opportunities summarised below: > Organic growth from our extensive distribution network in a resilient industry segment, the Australian and New Zealand general insurance markets, which has exhibited stable premium increases over recent years. > Growth from acquisitions and cross-selling of existing and new products. We are a natural acquirer of Steadfast Network Brokers and non-aligned brokers. > Delivering synergies from the acquisitions made to date and for the Steadfast Network. We are working to develop common back office solutions to increase efficiency and reduce costs. > Building on our existing underwriting agencies with particular focus on specialist products and driving down costs of servicing and administration. > Implementing succession and incentive plans for our experienced senior management and acquired businesses. Our incentive plans are aligned with shareholders interests and are focused on achieving personal objectives and strong earnings per share growth. The Board monitors the operational and financial position of Steadfast and oversees its business strategy. We are focused on ensuring that Steadfast is soundly managed and operates in an appropriate environment of corporate governance. Accordingly, the Board and management have created a framework for managing Steadfast. This included adopting relevant internal controls, risk management processes and corporate governance policies and practices for continuous disclosure and effective shareholder communications. Our Initial Public Offering (IPO) was a significant achievement for Steadfast and its Broker Network. The IPO provides the Group with an excellent platform for strong growth and succession. Frank O’Halloran, AM On behalf of the Board, I would like to thank your Chief Executive Officer, Robert Kelly, and his team for their significant contribution to the success of your IPO. I would also like to thank my fellow Directors for the extensive time required to implement the necessary corporate governance framework and meet the substantial requirements for the IPO. Yours faithfully, Frank O’Halloran, AM Chairman 7 Steadfast Group Annual Report 2013 Letter from Managing Director & Chief Executive Officer In the past year, we have transformed Steadfast from an unlisted company into an ASX traded entity under the code SDF. The listing follows 17 years of building Steadfast Group into Australia’s largest broker cluster group. The listing enables us to be an acquirer of insurance brokers, underwriting agencies and a series of ancillary businesses. Most acquisitions are made on a co-ownership basis. We are focused on choosing successful and profitable businesses and their dynamic management. Acquisitions will enable us to generate new revenue streams and significant improvement in profitability. The IPO and the completion of the IPO acquisitions occurred after the close of the 2013 financial year which means the profit from those acquisitions will be reflected in the next financial year (FY14), as detailed in the IPO prospectus. New revenue and profit drivers Past revenue is expected to grow in line with the market and be enhanced by our pre and post IPO acquisitions, new acquisitions and the development of our underwriting agencies. The pre and post IPO acquisitions made in the past year of 62 insurance broker businesses, 4 underwriting agencies and 2 ancillary service organisations will benefit revenue and profit in FY14. In addition to acquisitions and the development of our underwriting agencies we will benefit from economies of scale and some unique back office cost synergies. There are two main strategies in place to achieve this expense reduction: > > Firstly, through merging smaller acquired brokers with larger ones which we refer to as “hubbing”. This helps with succession planning, retaining and incentivising key employees, and creating cost savings by eliminating back office duplication. We are on target to complete the first two hubs by December 2013; and Secondly, through implementing our common back office platform developed with the help of external parties and the skills of the White Outsourcing team (one of our ancillary service acquisitions). The IPO prospectus included a budgeted $600,000 in the FY14 cash flows for the development and implementation of this platform with the pilot operation expected to occur during FY14. Commitment to the broker network We remain committed to all the Steadfast Network Brokers who are the core of our business and growth. They give us scale that is difficult to replicate. This together with our successful listing makes us very attractive to new brokers wanting to join the Steadfast Network. Our network throughout Australia and New Zealand also provides strong distribution for product providers such as insurance companies. We will continue to provide the required support to all our brokers to ensure they have the tools they need to provide the right professional service and advice to their clients. Steadfast’s ethos ‘Strength when you need it’ will remain anchored by its determination to deliver a suite of products and services that are innovative, dynamic and best in class, and available only to the Steadfast Broker Network. Products and services such as the Steadfast Virtual Underwriter (“SVU”), the Erato Program, and Steadfast Triage are a few of the advantages of being part of Steadfast. Another key advantage is the fact that brokers in Steadfast will continue to have the ability to remain independently owned and operated. The ASX listing provides insurance brokers with an ability to capitalise on years of hard work by selling part or all of their business to the Steadfast Group. For a complete list of the advantages of being a Steadfast Network Broker, see pages 12 and 13. Growth opportunities In FY13, the Gross Written Premiums (“GWP”) placed by the Steadfast Network amounted to $4.0 billion. GWP is a key driver of revenue for the Group. Over the past 5 years, our network GWP has grown on average 12% per annum. This compares favourably to the APRA growth of Commercial Insurance premiums which has been on average 5% over the same period. Our higher growth rate is primarily due to the advantages of being part of the Steadfast Network and the attraction of new brokers who wish to gain access to our network. With our products, services and knowledge of the business of insurance manufacture, service and distribution, we are in a strong position to help brokers maximise their growth potential. We remain committed to all the Steadfast Network Brokers who are the core of our business and growth. They give us scale that is difficult to replicate. This together with our successful listing makes us very attractive to new brokers wanting to join the Steadfast Network. Our network throughout Australia and New Zealand also provides strong distribution for product providers such as insurance companies. Robert Kelly, MD & CEO 8 Steadfast Group Annual Report 2013 Leadership team We have a superb team assembled to lead the Company into a new growth phase. We are honoured that Frank O’Halloran AM chairs Steadfast. In addition to his 35 years’ experience at QBE Insurance Group including 14 years as CEO, it is hard to find anyone more enthusiastic about Steadfast and its business model. The biographies of our other Directors as well as our executive management team are also impressive and provide us with the depth and breadth of experience required to execute our growth strategy and operate as a listed company. Thank you In preparing for the IPO, I did not realise the amount of work required and was amazed by the tireless efforts from everyone involved – the Board, management, the due diligence team, our employees, the joint lead managers and our finance and legal teams. Thank you all for your amazing hard work in getting us through the IPO. I was humbled by the enormous support shown by the brokers and the market in believing in our potential to grow and add shareholder value. I look forward to updating you over the next 12 months about building on our strength. Yours faithfully, Robert Kelly Managing Director & CEO A lot of our growth historically leverages from rises in GWP due to higher volumes, inflation and rises in premium rates. Going forward we expect to see more growth through the cross-sell of products and services and through acquisitions. Cross-sell products and services include premium funding, underwriting agency services, legal services and life insurance. In terms of growth through acquisitions, there are over 200 brokers in the Steadfast Network in which we have no equity interests. We are the natural acquirer of these businesses and usually the first stop in any sale process. Pages 10 and 11 outline in more detail our organic growth and growth through acquisitions strategies. FY13 statutory financial results In FY13, Steadfast acquired an 80% interest in Sports Underwriting Agency and interests in 4 insurance broker businesses – 3 in Australia of which we purchased 100% and our first broker in New Zealand, Rothbury Group, of which we purchased 17.9%. In August 2013 our equity interest in Rothbury was increased to 30%. Revenue for the year ended 30 June 2013 was $37.8 million consisting of $24.5 million from M&A Fees, $5.8 million from equity interests in Sports Underwriting and 4 insurance broker businesses, $2.9 million from investments in Macquarie Premium Funding and Miramar, and $4.6 million in other income including fees from Steadfast brokers, the Steadfast Convention and interest income. M&A Fees increased 13% compared to FY12, which exceeded the network’s gross written premium year-over- year growth and demonstrates the value we provide to our insurance underwriters. The IPO resulted in a number of one-off costs totalling $23.8 million. The significant expenses were $13.3 million for due diligence and restructure costs and a $10.5 million non cash expense from the re-weighting of shares (with a corresponding offset to retained profits). Excluding these IPO costs, earnings before interest expense, tax and amortisation expenses (EBITA) was $12.3 million compared with $9.7 million last year. As outlined in our IPO prospectus we had forecast a loss before tax of $15.7 million for FY13. Due to additional revenue from acquisitions, cost savings and the Group’s M&A Fees being higher than expected, the actual loss before tax of $13.4 million was slightly better than we expected. Pro-forma FY13 results We are pleased that all of the planned IPO acquisitions completed contemporaneously with the IPO. Assuming we had owned them as at 1 July 2012, our IFRS revenue and EBITA would have been $144.9 million and $57.4 million, respectively. These figures are slightly better than our IPO of revenue and EBITA of $143.6 million and $56.4 million or by 0.8% and 1.8%, respectively. Balance sheet As at 30 June 2013, we had net assets of $12 million including debt of $37 million. In August 2013, we raised $334 million to fund the cash consideration payable on completion for the IPO acquisitions, pay down debt and create balance sheet capacity to fund future acquisitions. Post IPO and the completion of the IPO acquisitions, our balance sheet has net assets of over $500 million including $25 million of cash and debt capacity of $85 million (based on a 15% gearing ratio) to fund future acquisitions. We expect strong cash flow generation going forward as brokers are required to pay a dividend of at least 75% of after-tax profits bi-annually. However, these cash flows are not expected to manifest until the second half of FY14. Outlook for 2014 In light of the pro-forma FY13 figures being slightly ahead of our forecasts and our market outlook, we reaffirm our FY14 pro-forma forecasts outlined in the IPO prospectus including IFRS revenue of $152.0 million and EBITA of $60.6 million. It is important to note that these forecasts are based on the following assumptions: > organic revenue growth of 5.0% for all brokers (aggregated view); > margin expansion through revenue growth exceeding net expense growth; > 35% of M&A Fees rebated to Steadfast Network Brokers; > budgeted $600,000 spend on the development and implementation of a back office platform with no synergies forecast (i.e. all synergies realised will be additional to forecast earnings); and > no acquisitions in 2014. 9 Steadfast Group Annual Report 2013 Board of Directors Steadfast has a strong Board with the relevant expertise to execute its business strategy as a listed entity. Each of the Directors has at least 30 years’ experience in the financial services industry with a combined depth of experience in the insurance industry. Frank O’Halloran, AM Non-Executive and independent Chairman Frank has over 35 years’ experience at QBE Insurance Group Limited where he was Chief Executive Officer from 1998 until August 2012. He also worked with Coopers & Lybrand (now PwC) for 13 years where he commenced his career as a Chartered Accountant. Frank has been active in the insurance industry, holding many representative positions in the Insurance Council of Australia (ICA), including President and Director of the ICA in 1999-2000. He was inducted into the International Insurance Hall of Fame in 2010. Robert Kelly Managing Director & CEO See biography on page 9. David Liddy Non-Executive Director (independent) David has over 43 years’ experience in banking, including international postings in London and Hong Kong. He was Managing Director of Bank of Queensland from April 2001 to August 2011 and has a Masters in Business Administration. David is currently Chairman of Collection House Limited, Financial Basics Foundation and Financial Basics Community Foundation. He is a Senior Fellow of the Financial Services Institute of Australasia and a Fellow of the Australian Institute of Company Directors. 10 1 2 5 3 6 4 7 1. Frank O’Halloran, 2. Robert Kelly, 3. David Liddy, 4. Anne O’Driscoll, 5. Philip Purcell, 6. Greg Rynenberg, 7. Jonathan Upton Anne O’Driscoll Non-Executive Director (independent) Greg Rynenberg Non-Executive Director (independent) Anne has 30 years of business experience, mainly in financial services. She was CFO of Genworth Australia from 2009 to 2012 and spent over 13 years with Insurance Australia Group. She held prior positions with Coopers & Lybrand (now PwC) in Sydney and London and with Deloitte in Dublin, where she commenced her career as a Chartered Accountant. Anne is on the Advisory Board of the NSW Self-Insurance Corporation. She is a Fellow of ANZIIF, a Graduate Member of the Australian Institute of Company Directors and has attended Harvard Business School’s Advanced Management Program. Philip Purcell Non-Executive Director (independent) Philip has over 39 years’ experience in the insurance and legal industries, working as a solicitor in claims, corporate and regulatory areas. He has been a partner at Dunhill Madden Butler, PricewaterhouseCoopers Legal and Ebsworth and Ebsworth, where he assisted with the growth and management of these firms. Philip currently holds two Board positions with GE in Australia, is a Consultant to the international law firm, Holman Fenwick Willan and provides advice to clients who are engaged in mediation of commercial disputes. Greg has 37 years of experience in the general insurance broking industry with 29 years spent running his own business, East West Group, which now employs more than 25 industry specialists. East West Group is a Steadfast Network Broker but not a Steadfast Equity Broker. Greg is a Qualified Practicing Insurance Broker, Fellow of NIBA and an Associate of ANZIIF. He holds an Advanced Diploma in Financial Services (General Insurance Broking). Jonathan Upton Non-Executive Director (non-independent) Jonathan has 40 years’ experience in the general and life insurance broking industry. For the past 34 years, he has been running his own corporate insurance broking business, IRS Steadfast Pty Ltd (formerly Indemnity Corporation). Following its partial sale to Steadfast in August 2013, IRS Steadfast is a Steadfast Equity Broker. Jonathan is a Qualified Practicing Insurance Broker, an Associate of NIBA, an Associate Fellow of The Australian Institute of Management, a Member of the Australian Institute of Company Directors and holds a Diploma of Financial Services (General Insurance Broking). He is also a Justice of the Peace. Steadfast Group Annual Report 2013 Executive Management Team The Executive Management Team consists of experienced professionals with the track records necessary to develop and grow the Steadfast Network and operate as a listed company. From left to right: Allan Reynolds, Linda Ellis, Robert Kelly, Cameron McCullagh, Samantha Hollman and Stephen Humphrys Robert Kelly Managing Director & CEO Stephen Humphrys Chief Financial Officer Stephen joined Steadfast in January 2013. He has over 20 years’ experience as a Chartered Accountant, being Managing Director of Moore Stephens Sydney for ten years and Chairman of Moore Stephens Australiasia for three years. Stephen has a wide range of experience in all areas of professional accounting and taxation across a broad spectrum of industry sectors and is a Fellow of the Institute of Chartered Accountants and a registered tax agent. Allan Reynolds Executive General Manager Operations Allan joined Steadfast in 2002. With a background in product development and distribution, corporate strategy and portfolio management, Allan has more than 38 years of industry experience in the general insurance broking industry. He holds a Diploma of Business Studies (Insurance) and is a Certified Insurance Professional and a Fellow of ANZIIF. Robert co-founded Steadfast in April 1996. With more than 44 years’ experience in the insurance industry, Robert has held senior roles as a risk manager, general insurance broker and underwriting agent. Robert was named Insurance Industry Leader of the Year at the 2011 Annual Australian Insurance Industry Awards and the Third Most Influential Person in the Insurance Industry in 2012, by Insurance News Magazine. Robert is a Qualified Practicing Insurance Broker and a Fellow of the National Insurance Brokers Association. He is a Senior Associate, Certified Insurance Professional and holds a Diploma in Financial Services (General Insurance Broker) from ANZIIF. He also has a Diploma in Occupational Health and Safety and a Graduate Diploma in Australian Risk Management. Cameron McCullagh Chief Operating Officer Cameron joined Steadfast in 2011. He trained as a Chartered Accountant with KPMG and is an experienced finance professional, with 32 years’ experience in accounting, financial management and corporate strategy. Prior to joining Steadfast, Cameron was CEO of Employers Mutual. Cameron is a director of a number of Steadfast Group companies, Hospitality Employers Mutual Limited, Leading Edge Group Limited and Lease Company of Australia Limited. Cameron was Chairman of White Outsourcing until June 2013 and served as a director of the company from November 2012 to March 2013. Samantha Hollman Executive General Manager – Strategic Projects Sam joined Steadfast in 2000, holding key roles in broker services, project management and marketing and communications, and is currently Executive General Manager – Strategic Projects. She has more than 18 years’ experience in the insurance industry. During the last five years, Sam has worked closely with the Chairman, the CEO and the Board, implementing strategic initiatives for the Group, including marketing trips to the UK and North America to review projects on an international level. Linda Ellis Group Company Secretary & General Counsel Linda joined Steadfast in June 2013. She is a lawyer with over 15 years’ experience gained at top tier international law firms. She has held prior positions with Mallesons Stephen Jaques (now King & Wood Mallesons) and Atanaskovic Hartnell in Sydney and with Clifford Chance in London. Linda has a wide range of experience in corporate and commercial law, including in connection with mergers and acquisitions, capital markets and corporate governance. She is admitted to practice as a solicitor of the Supreme Court of New South Wales. 11 Steadfast Group Annual Report 2013 Organic Growth Opportunities Steadfast has a history of strong organic growth which has mainly been driven by price and volume rises in insurance premiums or growth in GWP. Going forward, we expect to benefit from cross-selling synergies of Steadfast Network products and services. Growth in GWP Steadfast Network’s GWP growth has historically outperformed GWP growth in the commercial lines of the general insurance market due to the scale and network benefits of Steadfast. Its size, infrastructure, services and buying power provide brokers with the knowledge and support to maximise their revenue generation potential. Over the past 5 years, Steadfast Network’s gross written premiums have increased on average by 12% a year. In comparison, the gross earned premiums of Australian commercial lines have risen by 5% annually. Total Australian commercial lines gross earned premiums 1,2 $ billions Steadfast Network Gross Written Premiums $ billions 14.0 12.0 10.0 9.3 5 % C A G R 10.2 10.3 10.7 12.03 11.3 8.0 6.0 4.0 2.0 0.0 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 5.0 4.0 3.0 2.0 1.0 0.0 2 % C A G R 3.2 3.0 1 4.0 3.7 2.5 2.3 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Notes: 1. Source: APRA. Commercial lines assumed to be commercial motor vehicles, fire and industrial special risks, marine and aviation, employers’ liability, professional indemnity and public and product liability. 2. Premiums calculated for the 12 months to June each year. Premium figures for 2006-2010 based on gross written premiums (gross earned premiums for that period not published by APRA) and based on direct insurers only. Premium figures from 2010 based on gross earned premiums and comprise total industry (direct and reinsurance). 3. Represents forecast for 12 months to June 2013 based on annualised 6 months to December 2012 data. Cross Sell of Products and Services Steadfast leverages the distribution capability of Steadfast Network Brokers in order to cross-sell products and services from complementary businesses in the Steadfast Network. Premium Funding Steadfast holds a 50% equity interest in Macquarie Premium Funding (MPF), with the remaining 50% held by Macquarie Bank. MPF is one of the largest premium funders in Australia. In FY13, MPF arranged approximately $950 million in premium funding for policyholders of which Steadfast Network Brokers sold 68% or close to $650 million. In March 2013, MPF acquired Pacific Premium Funding, adding $600 million in premium funding for policyholders. Steadfast Network Brokers Underwriting Agencies Steadfast holds equity interests in four underwriting agencies, collectively referred to as Steadfast Underwriting Agencies. These underwriting agencies act as agents on behalf of general insurers, providing product expertise, claims management and distribution for specialised insurance policies. Legal Services Steadfast has a 25% interest in Meridian Lawyers which provides legal services to local and overseas insurers, professional member associations and a number of SME customers. Established in 2004, Meridian Lawyers has grown to be a mid-tier insurance law practice with complementary commercial, employment and commercial litigation practices. Steadfast Life Due to the demand for life insurance by Steadfast Network Broker customers, Steadfast has established Steadfast Life. Steadfast Life offers a suite of life and risk products from a variety of life insurance companies which Steadfast Network Brokers can sell to their clients. 12 Steadfast Group Annual Report 2013 Growth by Acquisition We have tremendous opportunity to grow through acquiring insurance brokers from within and outside the Steadfast Network. Overview of Australian General Insurance Intermediaries Insurance Intermediaries consist of multi-national brokers, consolidator groups, broker clusters, underwriting agencies and sole brokers. Steadfast is a consolidator and broker cluster group. As at 31 December 2012, there were 851 active general insurance brokers (source: APRA) of which 279 were Steadfast Network Brokers. Of the 62 brokers acquired or partially acquired by Steadfast, referred to as Steadfast Equity Brokers, 58 belong to the Steadfast Network. Active general insurance brokers are defined as general insurance intermediaries that are AFSL holders authorised to deal in general insurance policies and that placed business directly with insurers in the six month period ended 31 December 2012. Steadfast is the natural acquirer of further interests in Steadfast Network Brokers We are in most cases the acquirer of choice for Steadfast Network Brokers and also appeal to non-aligned brokers due to our scale and benefits. This is encouraging going forward as we continue to assess future acquisitions. Steadfast will actively consider further investments in insurance brokers, including Steadfast Network Brokers and Steadfast Equity Brokers. However, all acquisitions will be considered on the basis of their potential to add value to the Steadfast business and its Shareholders. Steadfast will also consider the use of consolidating brokers (“hubbing”) as part of its acquisition process. ACQUISITION CRITERIA for acquiring equity interests in insurance brokers > Disciplined due diligence process that takes into account both quantitative and qualitative criteria > EPS accretive to shareholders within the first 12 months assuming 85% equity funding > Intend to principally fund via debt and cash in the near term > May also issue equity to further align vendors > Established balance sheet capacity to support acquisitions Total Australian General Insurance Intermediaries: 8511 Steadfast Equity Brokers: 3 Steadfast Network Brokers: ~280 Steadfast Equity Brokers that belong to the Steadfast Network: 58 NZ based Steadfast Equity Broker: 12 £ Steadfast Equity Brokers Steadfast Network Brokers £ Australian General Insurance Intermediaries 622 ~280 851 Notes: 1. APRA Intermediated General Insurance Statistics December 2012 (Issued March 2013). 2. Rothbury Group, a Steadfast Equity Broker, is based in New Zealand. When evaluating insurance brokers to acquire, we take into account both quantitative and qualitative criteria such as culture and fit, key person risk and revenue concentration. In terms of quantitative criteria, the acquisitions are expected to be earnings per share (EPS) accretive within 12 months of acquisition when assuming at least 85% of the acquisition price is equity funded (irrespective of the actual level of equity funding for the transaction). Steadfast expects that any acquisitions made in the first year post-listing will be primarily funded by debt or available cash resources due to its current balance sheet capacity. Steadfast may also issue shares at the prevailing market price to fund certain transactions and to align vendors’ interests. 13 Steadfast Group Annual Report 2013 Advantages of Being a Steadfast Network Broker The key advantage of being a Steadfast Network Broker is the ability to access the support and collective scale benefits of the largest general insurance broking network in Australia 1, while at the same time remain independently owned and operated. ADVANTAGES OF BEING A STEADFAST NETWORK BROKER > Ability to remain independently owned and operated > Access to Strategic Partners > Collective negotiating > Steadfast Virtual Underwriter > Erato Program > Steadfast Triage > Training and support > Networking and industry events > Discounted goods and services > Marketing These benefits include: Access to Strategic Partners Steadfast has cultivated solid relationships with a significant number of carefully selected insurers, underwriters and specialist insurance providers – referred to as our Strategic Partners. Also included in this select group are Steadfast Underwriting Agencies and Macquarie Premium Funding. All Steadfast Network Brokers have access to our Strategic Partners and hence a market of product and service providers. Collective negotiating Steadfast negotiates with insurers, underwriting agencies and premium funders on behalf of the Steadfast Network. As a result, Steadfast Network Brokers are able to offer products with pricing and terms more favourable than could be achieved by the brokers negotiating individually. Steadfast Network Brokers also have the benefit of exclusive Steadfast-negotiated policy wordings, which provide access to policies that offer broader coverage than the standard product offerings of the major insurers and underwriting agencies. Steadfast Virtual Underwriter Steadfast Virtual Underwriter (SVU) is a web-based tool, developed and funded by Steadfast, that enables Steadfast Network Brokers to obtain multiple, detailed quotes from a variety of Strategic Partners using only one data input. The SVU empowers brokers and their clients by delivering the information they need to make an informed choice, quickly and cost-effectively. Erato Program The Erato Program is a professional indemnity program and error rectification service offered to Steadfast Network Brokers, which provides coverage for errors and omissions by Steadfast Network Brokers. The program provides cover of $100 million for any one event and $214 million in aggregate, with one automatic reinstatement per annum. One of the key benefits of the Erato Program is that it provides Steadfast Network Brokers with access to a higher level of professional indemnity cover than would be the case had the broker purchased cover individually. Note: 1 Measured by annual premiums placed and number of licensed brokers. 14 Steadfast Group Annual Report 2013 Networking and industry events Regular networking and industry events include Steadfast Network Broker town hall meetings, held three times annually Australia wide, and the annual Steadfast Convention. The town hall meetings are held to keep brokers up to date with new developments and are used to gather feedback. The Steadfast Convention is the largest insurance conference in Australia attended by Steadfast Network Brokers, Strategic Partners and service providers. Discounted goods and services We give our brokers access to a range of discounted goods and services through our extensive network of selected referral partners including insurance service providers and business service providers. Steadfast Triage Steadfast Triage is a managed escalation process designed to support brokers in areas impacting client interaction and business relationships including claims, ethics and placement issues. Working closely with the brokers, we help to clarify the facts of the situation, apply established standards of best practice and assist with the resolution of disputes involving customers, insurers and other brokers. Training and support Training programs include online access to specially developed training modules, face-to-face training on Steadfast products, processes and industry-related themes, and training from third parties including selected referral partners. We support our brokers with web-based tools and help lines managed by experts in the areas of compliance, contractual liability, human resources, and legal and technical advice. Marketing Steadfast provides marketing support to Steadfast Network Brokers, including promotional material, marketing collateral and brand awareness. During FY13, Steadfast conducted an awareness campaign designed to promote the Steadfast brand and the Steadfast Network. Key features of the campaign included: > > > > > a refreshed logo and brand identity; an improved public website, creating a centralised online channel to drive business to brokers in the Steadfast Network; interactive multimedia materials, including online videos and information; support for brokers seeking to refresh their own business websites; and a media strategy including television, print, outdoor and digital. 15 Steadfast Group Annual Report 2013 2,400+ delegates 86 sponsors and exhibitors 144 booths Steadfast Convention The Steadfast Convention is Australia’s largest insurance conference attended by Steadfast Network Brokers, Strategic Partners and Service Providers. Since its inception in 1999 with just 200 delegates, the Steadfast Convention has grown to become Australia’s largest insurance conference. In 2013 our convention was attended by more than 2,400 delegates with 86 sponsors and exhibitors and 144 booths. The growth the Steadfast Convention has experienced since its inception showcases the strength of our Group in the insurance industry. Only Steadfast Network Brokers and our Strategic Partners and Service Providers are allowed access to the convention. Steadfast’s Annual Convention combines business sessions and networking into one event. The exhibition space is termed ‘The Marketplace’. Steadfast Network Brokers, Strategic Partners and service providers utilise this space to discuss business, develop initiatives and enhance relationships. This platform is a business opportunity for all parties involved and has become a true ‘marketplace’ to conduct business. The Steadfast Convention provides a range of benefits to our brokers, including: > > insights and analysis from leading industry figures and economic commentators, business specialists and inspirational speakers from the corporate world and beyond; an opportunity to build and sustain relationships with key Strategic Partners and brokers from the Steadfast Network; > briefings from Strategic Partners, keeping our brokers up to date with new product offerings and industry developments; > > exclusive broker-only sessions; and an opportunity to share and provide feedback on the Group’s corporate direction. The Convention has been accredited by both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the National Insurance Brokers Association (NIBA). Our brokers earn Continuing Professional Development (CPD) points for attendance at the Convention. 16 Steadfast Group Annual Report 2013 $1.2 m contributed to charities over the last 8 years $760,000 donated by Steadfast Convention attendees since 1999 Steadfast Foundation Steadfast donates around 1% of M&A Fees to charitable causes each financial year. Since Steadfast was founded, our brokers and Strategic Partners have consistently demonstrated their generosity and commitment to supporting the communities where we live and work. As a result, Steadfast has always been a substantial contributor to charity, typically donating around 1% of our M&A Fees to charitable causes each financial year. The Steadfast Foundation was created to provide a more robust and sustainable structure for these donations. As well as managing and distributing funds from the Steadfast Group, it provides a mechanism for Steadfast Network Brokers and the public to donate to causes that are important to them, particularly in times of national emergency. Charities we have supported through the Foundation include: > beyondblue Over the last 8 years, Steadfast Group Limited and the Steadfast Foundation have contributed almost $1.2 million to these and other charities. As well as the ongoing activities of the Steadfast Foundation, our brokers help to raise funds for a local charity based near the location of our annual Steadfast Convention. In 2013, Steadfast Convention attendees donated more than $160,000 to KidsXpress, which helps children impacted by emotional trauma. Using empowering expressive therapies, KidsXpress helps children process their experiences, express themselves safely, and learn positive coping strategies for life. Since the Steadfast Convention began in 1999, our brokers have raised around $760,000 for charities including: > Angel Flight > Apex Foundation – Destiny > Cancer Council Australia Youth Trust > The Create Foundation > The Australian Institution of Suicide Research and Prevention > Inspire Foundation > KidsXpress > The Mirabel Foundation > Student Care Australia > United Way WA > Youngcare We would like to thank our brokers and Strategic Partners for their continued generosity. > Diabetes Australia > The Exodus Foundation > Make a Wish Australia > McGrath Foundation > Mission Australia > The Movember Foundation > The National Breast Cancer Foundation > The Prostate Cancer Foundation of Australia > The Royal Flying Doctor Service > The Salvation Army > The Starlight Foundation > Surf Lifesaving Australia > Youth off the Streets 17 Steadfast Group Annual Report 2013 Corporate Governance Statement The Directors and management of Steadfast Group Limited are committed to achieving high corporate governance standards and to following the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. In preparation for listing on the ASX, the Board adopted corporate governance policies and practices which are outlined in the Charters and Policies found in the Corporate Governance Section in the Investor Relations Centre on our website at www .steadfast .com .au. The Group’s main corporate governance policies are summarised below under the eight principles that the ASX Corporate Governance Council believes underlie good corporate governance. If Steadfast proposes to depart from the ASX Corporate Governance recommendations in future, it plans to disclose any departures in the relevant annual report. Principle 1 – Lay solid foundations for management and oversight Role of the Board Steadfast has established a Board charter which sets out the responsibilities of the Board and the responsibilities of senior management. The schedule of matters reserved for the Board for approval includes: > the Group’s overall strategic direction and monitoring performance against the strategic and business plans; > overseeing all aspects of the Group’s financial position and approving the business planning process and timetables, including operating budgets; > overseeing the Group’s reporting systems and overall framework for internal controls; and > approving and monitoring major projects. The Board delegates authority to the Managing Director & CEO for the day to day operations of the Group, its subsidiaries and their respective operations. Performance evaluation of senior management The Board charter provides that the Board is responsible for ensuring there is an appropriate process in place to review the performance of senior management. Executive management are reviewed by the Managing Director & CEO. The Managing Director & CEO is reviewed by the Chairman. The review process involves a performance management process (“PMP”) with a performance assessment rating out of a maximum of 5. No employee is entitled to awards under the Short Term Incentive Plan or Long Term Incentive Plan if their PMP rating is less than 3 out of a maximum of 5. The PMP involves a set of specified objectives and criteria against which performance is measured. Steadfast intends to conduct annual performance evaluations for senior executives in accordance with the process disclosed. Principle 2 – Structure the Board to add value Composition of the Steadfast Board The role of Chairman and the role of Managing Director & CEO are exercised by different individuals, being Frank O’Halloran and Robert Kelly respectively. The Board is comprised of a majority of independent Directors including the Chairman. The Board is comprised of 7 Directors, with 5 characterised as independent by Steadfast, being Frank O’Halloran, David Liddy, Anne O’Driscoll, Philip Purcell and Greg Rynenberg. The Board takes a qualitative approach to materiality and assesses independence on a case by case basis, by reference to each Director’s particular circumstances rather than applying strict quantitative thresholds. When reviewing independence of Directors, the Board decided to rebase tenure from 2013 in view of the significant changes in the Group’s operations post its restructure and listing. The Board charter sets out the mix of skills that Steadfast is looking to achieve in its Board and provides the procedure for Directors to seek external professional advice at the expense of Steadfast. All of the Directors have extensive industry experience in a range of insurance broking, general insurance, professional services and financial management. The following table provides specific information regarding the Directors: Name Position Joined Board Experience (years)/industry Independence Frank O’Halloran Non-Executive Chairman of the Board 2012 43/insurance Independent Robert Kelly Managing Director & CEO David Liddy Non-Executive Director Anne O’Driscoll Non-Executive Director Philip Purcell Non-Executive Director Greg Rynenberg Non-Executive Director Jonathan Upton Non-Executive Director 1996 2013 2013 2013 1998 2005 44/insurance 43/banking Non-independent Independent 30/accounting & insurance Independent 39/legal & insurance Independent 37/insurance 40/insurance Independent 1 Non-independent 1 Further details of the Directors are disclosed on page 8 and page 21. Note: 1 Greg Rynenberg and Jonathan Upton each own and manage a broker business in the Steadfast Network. Mr Rynenberg is deemed independent as he did not sell any of his broker business to Steadfast. Mr Upton is deemed non-independent as he sold part of his broker business to Steadfast. 18 Steadfast Group Annual Report 2013 Nomination Committee The Board has established a Nomination Committee which is currently comprised of the full Board and accordingly, comprises a majority of independent Directors. The Chairman of the Nomination Committee is the Chairman of the Board, being Frank O’Halloran (who is an independent Director). As the Nomination Committee is comprised of the full Board, the Board’s nomination functions are included in the Board Charter that sets out its roles, responsibilities, composition and structure. The Board charter also sets out the Board’s policy for the nomination and appointment of Directors and the procedure for the selection and appointment of new Directors. The Nomination Committee will meet at least four times each year. Performance evaluation of the Board The Board charter provides that the Board is responsible for developing and implementing a formal process to assess its own performance. The Board, and each committee established by the Board, will perform an annual self-evaluation. Each year, the Directors will be requested to provide to the Board their assessments of the effectiveness of the Board and the committees on which they serve. Steadfast also currently intends to disclose in future annual reports whether a performance evaluation for the Board, its committees and Directors has taken place in the relevant reporting period and whether it was in accordance with the process disclosed. Subject to not being in possession of insider information and the requirements of Steadfast’s Securities Trading Policy, Designated Persons may only deal in Steadfast’s securities during the following trading windows: a) b) c) the 30 day period beginning on the business day after Steadfast’s half yearly results are announced to the ASX; the 30 day period beginning on the business day after Steadfast’s annual results are announced to the ASX; the 30 day period beginning on the business day after Steadfast’s annual general meeting; d) at any time a prospectus or similar disclosure document has been lodged with the Australian Securities and Investments Commission and is open for acceptances; and e) at any other times as the Steadfast Board permits. In addition, Designated Persons are prohibited from entering into margin lending arrangements relating to Steadfast’s shares; prohibited from short- term or speculative trading in Steadfast’s shares or in financial products associated with Steadfast’s securities; and prohibited from entering into transactions or arrangements with anyone which could have the effect of limiting their exposure to risk relating to an element of their remuneration that: > has not vested; or > has vested but remains subject to a holding lock. Principle 3 – Promote ethical and responsible decision making Code of Conduct Steadfast has established a Code of Conduct which provides an ethical and legal framework for all Directors, officers, employees, contractors and certain other individuals in the conduct of Steadfast’s business to safeguard the confidence of Steadfast’s stakeholders. Anti-Bribery & Corruption Policy Steadfast has also established an Anti- Bribery & Corruption Policy which sets out the behaviour and standards Steadfast expects its employees, consultants, contractors and agents to comply with in conducting business. The Code of Conduct and the Anti-Bribery & Corruption Policy give employees responsibility for reporting unethical or suspicious behaviour. Securities Trading Policy A Securities Trading Policy has been established to set out Steadfast’s trading policy on buying and selling securities of Steadfast including shares, options, derivatives and other financial products of Steadfast that are able to be traded on a financial market. By law, all Directors, officers, employees, contractors, family and associates are prohibited from trading in the Company’s securities at any time if they are in possession of non-public price sensitive information regarding the Group and its securities (“insider information”). In addition, the policy identifies all Directors, officers, other key management personnel of Steadfast, senior members of the financial team, and any other person designated by the Board from time to time as a “Designated Person”. The definition of a Designated Person extends to include family and associates of Designated Persons. 19 Steadfast Group Annual Report 2013 Corporate Governance Statement (continued) Diversity Policy Steadfast has established a Diversity Policy which outlines Steadfast’s commitment to diversity including gender diversity, Board and senior executive diversity, work and life balance, and ability not disability. Steadfast is committed to an inclusive workplace that embraces and promotes diversity as part of our corporate culture. This involves providing supportive and inclusive diversity-related workplace policies, programs and practices within our business. In terms of gender diversity, the proportion of women employed within the Group is as follows: > Women on the Board: 14% > Women in senior management positions: 33% > Women in the organisation: 54% (corporate office only) The Diversity Policy includes a requirement for the Board to obtain recommendations from management and approve measurable objectives for achieving diversity, including gender diversity, within the organisation. The Board will also receive an annual report from management on the progress against the objectives. Steadfast will provide its measurable objectives for achieving gender diversity and its progress in achieving those objectives in future annual reports. Principle 5 – Make timely and balanced disclosure; and Principle 6 – Respect the rights of shareholders Disclosure & Communication Policy Steadfast has established a Disclosure & Communication Policy which firstly, ensures that the Group complies with the continuous disclosure requirements of the ASX Listing Rules and the Corporations Act; and secondly, provides effective communication to the market and Steadfast shareholders. The Disclosure & Communication Policy outlines the processes that Steadfast implements to ensure compliance with its continuous disclosure obligations, particularly at the senior executive level through the establishment of a Disclosure Committee which currently comprises the Managing Director & CEO, Chief Financial Officer and Group Company Secretary & General Counsel. The Group is required to immediately disclose to the ASX any information concerning Steadfast which is not generally available and which, if it was made available, a reasonable person would expect to have a material effect on the price or value of Steadfast’s securities. Steadfast’s Disclosure & Communications Policy also ensures that Shareholders are informed of all major developments affecting Steadfast through effective communication materials and processes. Shareholder communications include half yearly and annual reports, market announcements and media releases, all of which are available in the Investor section of the Steadfast website in addition to background information on the Steadfast Group. Shareholders are encouraged to attend general meetings for the opportunity to meet the Board and senior management. Principle 4 – Safeguard integrity in financial reporting Audit & Risk Committee The Board has established an Audit & Risk Committee to: > > > > Ensure the integrity of external financial reporting; Safeguard the independence of the external auditor; Ensure that Directors are provided with financial and non-financial information that is of high quality and relevance; Ensure that systems or procedures are in place so that Steadfast complies with relevant statutory and regulatory requirements, including the Risk Management Framework, Compliance Management Framework and Internal Audit Plan; and > Assess financial and other risks arising from the Group’s operations and consider the adequacy of measures taken to moderate those risks. The Audit & Risk Committee is currently comprised of 6 Non-Executive Directors, the majority of whom are independent including the Chairman. The Directors currently serving on the Audit & Risk Committee are Anne O’Driscoll (Chair), Frank O’Halloran, David Liddy, Philip Purcell, Greg Rynenberg and Jonathan Upton. A charter has been adopted for the Audit & Risk Committee which discloses that the committee’s responsibilities in relation to the external audit include: > > to conduct audit tenders when considered necessary and recommend the appointment of an external auditor; and to assess the performance of the external auditor on an annual basis and to consider whether it is appropriate to propose to the Board that an auditor be removed, or that competitive tenders for audit work be sought. 20 Steadfast Group Annual Report 2013 Principle 7 – Recognise and manage risk Risk Management Policy Steadfast has established a Risk Management Policy which sets out its approach to the oversight and management of risks. The Board is responsible for reviewing and approving Steadfast’s overall risk management strategy, including determining the Group’s appetite for risk. In determining the risk appetite for Steadfast, the Board has determined that the Group has a moderate tolerance for risk taking. Where Steadfast enters into a transaction or acts on a particular decision, the risks are justified by greater rewards and action taken to mitigate the exposure to risk. While Steadfast is willing to take on a moderate level of risk, Steadfast remains risk aware. As a result management has incorporated risk management into strategic planning and decision making to understand and prioritise the management of material business risks. The Board has delegated to the Audit and Risk Committee responsibility for recommending to the Board the Group’s risk versus reward strategy, approving frameworks and setting the Group’s risk appetite. The Audit & Risk Committee: reviews the Group’s risk appetite, including strategic, operational, financial, legal and regulatory, reputational and counterparty risk; reviews the limits and conditions that apply to the taking of risk, including the authority delegated by the Board to the Managing Director & CEO and Executive Management Team; > provides recommendations to the Board on the Group’s risk-reward strategy; and > monitors the risk profile, performance, and exposure against risk appetite and the management and control of the Group’s risks. > > > Steadfast management is responsible for managing operational risk and implementing risk mitigation measures. Steadfast appointed a Chief Risk Officer in June 2013 who reports to the CFO to: > > > co-ordinate the implementation of the risk management frameworks, risk profile and treatment strategies; facilitate, challenge and drive risk management development within the Group; and report to senior management and the Audit & Risk Committee at regular intervals on the risk management process and material business risks. Management has reported to the Board as to the effectiveness of Steadfast’s material business risks. The Board has a process in place to receive written assurances from the Managing Director & CEO and Chief Financial Officer that the declarations that will be provided under section 295A of the Corporations Act are founded on a sound system of risk management and internal control and that the system is operating in all material respects in relation to financial reporting risks. The Board will seek these assurances prior to approving future annual financial statements, and all half year and full year results. The Board obtained these assurances prior to approving the annual financial statements for the year ended 30 June 2013. The Remuneration & Succession Planning Committee is currently comprised of 6 Non-Executive Directors, the majority of whom are independent including the Chairman. The Directors currently serving on the Remuneration & Succession Planning Committee are David Liddy (Chair), Frank O’Halloran, Anne O’Driscoll, Philip Purcell, Greg Rynenberg and Jonathan Upton. The Remuneration & Succession Planning Committee is responsible for reviewing and recommending to the Board remuneration arrangements of senior executives and Directors, equity-based incentive plans and other employee benefit programs. Steadfast distinguishes the remuneration of executive Directors and senior executives from that of Non-Executive Directors by offering the Managing Director & CEO and other senior executives a mix of fixed and incentive remuneration in certain circumstances (e.g., under the short term incentive plan and long term incentive plan). Remuneration of Non-Executive Directors is fixed. Steadfast does not currently have in place any schemes for retirement benefits, other than superannuation, for Non-Executive Directors. Remuneration & Succession Planning Committee The Board has established a Remuneration & Succession Planning Committee which: > > establishes, reviews and recommends to the Board the compensation and incentive plans for Steadfast’s executive team and reviews the performance of Steadfast’s executive officers with respect to these elements of compensation; and reviews the succession planning for key executives of Steadfast as well as the key executives of the 20 largest Steadfast Equity Brokers, measured by size of brokerage income. 21 reviews and approves the frameworks for managing risk and compliance; Principle 8 – Remunerate fairly and responsibly Steadfast Group Annual Report 2013 2013 Financial Report Contents 21 Directors’ report 28 Remuneration report – audited 41 Lead auditor’s independence declaration Notes to the financial statements 46 Note 1. General information 46 Note 2. Significant accounting policies Financial statements 53 Note 3. Critical accounting judgements, estimates and assumptions 42 Statement of comprehensive income 54 Note 4. Operating segments 43 Statement of financial position 44 Statement of changes in equity 45 Statement of cash flows 46 Notes to the financial statements 89 Directors’ declaration 55 Note 5. Revenue 55 Note 6. Expenses 56 Note 7. Income tax expense/(benefit) 57 Note 8. Current assets – cash and cash equivalents 57 Note 9. Current assets – trade and other receivables 57 Note 10. Current assets – other 90 Independent auditor’s report 57 Note 11. Non-current assets – investments 58 Note 12. Non-current assets – property, plant and equipment 59 Note 13. Non-current assets – intangible assets and goodwill 61 Note 14. Non-current assets – deferred tax assets 61 Note 15. Current liabilities – trade and other payables 62 Note 16. Current liabilities – borrowings 62 Note 17. Current liabilities – income tax payable 62 Note 18. Current liabilities – provisions 63 Note 19. Non-current liabilities – other payables 63 Note 20. Non-current liabilities – borrowings 64 Note 21. Non-current liabilities – deferred tax liabilities 65 Note 22. Non-current liabilities – provisions 65 Note 23. Equity – issued capital 67 Note 24. Equity – reserves 68 Note 25. Equity – non-controlling interest 68 Note 26. Equity – dividends 69 Note 27. Financial instruments 71 Note 28. Key management personnel disclosures 72 Note 29. Remuneration of auditors 73 Note 30. Contingent assets 73 Note 31. Contingent liabilities 73 Note 32. Commitments 73 Note 33. Related party transactions 75 Note 34. Parent entity information 76 Note 35. Business combinations 80 Note 36. Subsidiaries 81 Note 37. Investments in associates 82 Note 38. Interests in joint venture 83 Note 39. Events after the reporting period 87 Note 40. Reconciliation of profit/(loss) after income tax to net cash from operating activities 87 Note 41. Earnings per share 88 Note 42. Share based payments 22 Steadfast Group Annual Report 2013 Directors’ report The Directors present their report together with the consolidated financial statements of the Group comprising of Steadfast Group Limited (the Company), and its subsidiaries, and the Group’s interest in associates and jointly controlled entities (the Group) for the financial year ended 30 June 2013 and the auditor’s report thereon. Directors The Directors of the Company at any time during or since the end of the financial year are as follows. Directors were in office for the entire period unless otherwise stated. Name Chairman Date of appointment/resignation Frank O’Halloran, AM Appointed 21 October 2012 Other Directors Robert Kelly David Liddy Anne O’Driscoll Philip Purcell Greg Rynenberg Jonathan Upton Former Directors Christopher Baker Cameron Bott Michael Olofinsky Richard Post Shayne Smith Graham Stevens Gregory Stewart Joseph Vella John Wolozny Appointed 18 April 1996 Appointed 1 January 2013 Appointed 1 July 2013 Appointed 1 February 2013 Appointed 10 August 1998 Appointed 9 May 2005 Resigned 6 October 2012 Resigned 6 October 2012 Resigned 6 October 2012 Resigned 6 October 2012 Resigned 6 October 2012 Resigned 20 August 2012 Resigned 6 October 2012 Resigned 6 October 2012 Resigned 6 October 2012 Cameron McCullagh Appointed 6 October 2012 and resigned 25 March 2013 Directorships of other listed companies Directorships of other listed companies held by the Directors in the three years preceding the end of the financial year are as follows. Name Company Period of directorship Frank O’Halloran, AM QBE Insurance Group Limited From 1984 to August 2012 Robert Kelly David Liddy Anne O’Driscoll Philip Purcell Greg Rynenberg Jonathan Upton None Bank of Queensland Limited From April 2001 to August 2011 Collection House Limited From March 2012 Emerchants Limited From April 2012 None None None None Particulars of the Directors’ qualification and experience are set out under Board of Directors on page 8. 21 Steadfast Group Annual Report 2013 Directors’ report (continued) Company secretary Linda Ellis, BEc, LLB (Hons class1) Linda Ellis joined the Company in June 2013 as Group Company Secretary & General Counsel. Linda is a lawyer with 15 years experience. Further details of Linda’s experience are set out under Executive Management Team on page 9. Peter Roberts, BBus, CA Peter Roberts was appointed Company Secretary in May 2013 and has over 20 years experience in the fields of chartered accountancy and specialised back office services to the financial services sector. Directors’ meetings The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Company during the financial year are as follows. Director Total number of meetings held Current Directors Frank O’Halloran, AM(a) Robert Kelly David Liddy(a), (b) Philip Purcell(a) Greg Rynenberg Jonathan Upton Former Directors(c) Christopher Baker Cameron Bott Michael Olofinsky Richard Post Shayne Smith Graham Stevens Gregory Stewart Joseph Vella John Wolozny Cameron McCullagh Note: Remuneration & Succession Board Planning Committee 12 1 Eligible to attend as a member Attended as a member Eligible to attend as a member Attended as a member 9 12 8 8 12 12 3 3 3 3 3 2 3 3 3 3 9 12 4 8 11 12 3 3 3 3 3 2 3 3 3 3 1 – 1 1 1 1 – – – – – – – – – – 1 – 1 1 1 1 – – – – – – – – – – (a) Frank O’Halloran, David Liddy and Philip Purcell were appointed during the financial year on 21 October 2012, 1 January 2013 and 1 February 2013, respectively. Anne O’Driscoll was appointed subsequent to the financial year on 1 July 2013. (b) David Liddy was on leave arranged prior to joining the Board and unable to attend certain Board meetings held during May and June 2013. (c) These directors resigned during the financial year. In addition to the Remuneration & Succession Planning Committee, the Board also established the Audit & Risk Committee and the Nomination Committee. These committees held their first meetings after the end of the financial year ended 30 June 2013. Particular details of the responsibilities and members of the Board and the various committees are set out in the Corporate Governance Statement on pages 16 to 19. 22 Steadfast Group Annual Report 2013 Principal activities The principal activities of the Group during the financial year were: > > > the provision of services to ~280 insurance broking businesses in Australia and New Zealand. Between December 2012 and April 2013, the Company acquired equity interests in four broking businesses including its first in New Zealand, Rothbury Group; equity interests in two underwriting agencies, including Sports Underwriting which was acquired during December 2012; and a 50% interest in Macquarie Premium Funding, one of the largest originators of premium funding products in Australia. Operating and financial review Operating results for the financial year EBITA – consolidated entities Share of EBITA from associates and joint venture EBITA from core operations Less: Due diligence and restructure costs Share based payment expense on re-weighting of shares EBITA Finance costs – consolidated entities Finance costs – associates and joint venture (note 37) Amortisation expense – consolidated entities Amortisation expense – associates and joint venture (notes 37, 38) Net profit/(loss) before income tax Income tax (expense)/benefit– consolidated entities Income tax (expense)/benefit – associates and joint venture (notes 37, 38) Net profit/(loss) after income tax (expense)/benefit for the year Non-controlling interest Net profit/(loss) after income tax attributable to owners of Steadfast Group Limited 2013 $’000 7,871 4,472 12,343 2012 $’000 5,850 3,845 9,695 (13,304) (1,165) (10,478) – (11,439) 8,530 (1,188) (17) (521) (235) (13,400) 1,421 (1,288) (13,267) (170) (13,437) (4) – (9) – 8,517 (1,205) (1,138) 6,174 – 6,174 The Group’s net loss after income tax attributable to owners for the financial year was $13,437,000 (2012: profit after tax of $6,174,000). The Group’s net loss before income tax was $13,400,000, which compares favourably to the forecast of $15,700,000 included in the prospectus issued for the initial public retail and institutional offer. The Group’s earnings from core operations before interest expense, tax and amortisation expenses (EBITA) for the financial year were a profit of $12,343,000 (2012: earnings of $9,695,000). The increase in net loss after tax and decrease in EBITA were mainly due to: > > a net profit and EBITA of $1,267,000 and $2,537,000, respectively, generated/shared from the subsidiaries and associate acquired during the financial year; an increase in non-recurring expenses which arose due to specific activities to facilitate the Company restructure and listing on the Australian Securities Exchange (ASX). The significant expenses were: – – $13,304,000 in relation to due diligence and restructure on acquisition of equity interests in subsidiaries, associates and other business assets, including certain costs incurred during the financial year for those acquisitions completed in August 2013; and $10,478,000 of share based payment expenses recognised in relation to the re-weighting of shares allocated to the existing shareholders; and > an increase in finance costs of $1,184,000 in relation to increased in loans and borrowings to fund the acquisition of subsidiaries, associates and business assets during the financial year. Some of the financial data in the table above, namely the EBITA related items, are not disclosed in accordance with current Australian Accounting Standards requirements. However, all financial data is based on the information disclosed in the audited financial statements and notes to the financial statements of the Group and follow the recognition requirements of Australian Accounting Standards. 23 Steadfast Group Annual Report 2013 Directors’ report (continued) Review of financial condition Financial position The total assets of the Group as at 30 June 2013 were $97.729 million compared to $33.446 million as at 30 June 2012. The increase was mainly attributable to: > an increase in various assets (including identifiable assets, identifiable intangibles and goodwill) due to the acquisition of subsidiaries, associates and business assets as follows: – – – – – – 100% interest in Wasal Holdings Pty Ltd and its wholly owned subsidiary, Wagland Salter & Associates Pty Limited on 30 November 2012; 80% interest in Sports Underwriting Australia Pty Limited on 12 December 2012; 100% interest in DMA Insurance Brokers Pty Limited on 30 January 2013; business assets of Newmarket Insurance Brokers Pty Limited on 28 February 2013; 17.9% interest in Rothbury Group on 1 April 2013; business assets of an Authorised Representative of Wagland Salter & Associates Pty Limited on 10 May 2013; and > an increase in prepayment of $1.177 million primarily due to the costs on due diligence and restructure costs to facilitate the listing of the Company on the ASX. These costs will be deducted from the issued capital in the next financial year when the listing of the Company is completed. The total liabilities of the Group as at 30 June 2013 were $85.347 million compared to $18.975 million as at 30 June 2012. The increase was mainly attributable to: > > an increase in various liabilities due to the acquisition of subsidiaries; and an increase in loans and borrowings to partially fund the acquisition of subsidiaries, associates and business assets. These loans were repaid in August 2013 following the capital raising and listing of the Company on the ASX. The decrease in the Group’s equity from $14.471 million at 30 June 2012 to $12.382 million at 30 June 2013 largely reflects a decrease in net profit attributable to the owners of the Company due to the one off due diligence and restructure costs. Cash from operations The net cash inflow from operating activities for the financial year ended 30 June 2013 was $2.946 million compared to $2.139 million for the prior financial year. The increase is mainly due to: > > an increase in gross cash inflows and outflows from operating activities of the acquired subsidiaries; and an increase in cash flows from core operations. The majority of the transaction costs on listing of the Company on the ASX were paid upon successful listing in August 2013. The Group invested into a number of businesses as outlined above in anticipation of the listing on the ASX. These acquisitions were primarily funded by bank borrowings which were repaid in August 2013 as planned from the proceeds of the initial public retail and institutional offer. Capital management On 14 June 2013, an Extraordinary General Meeting was held to change the constitution of the Company to facilitate the listing of the Company on the ASX. In August 2013, the Company successfully listed on the ASX. During the Extraordinary General Meeting, the shareholders also voted to adopt a re-weighting of shares between owners from an equal allocation basis to a combination of equal allocation and one based on past support of various products and businesses. This re-weighting did not change the existing dollar value of share capital as at 30 June 2013 or at listing in August 2013. However, it had a one-off effect of causing a share based payment expense of $10.478 million, offset by an increase in retained earnings for the financial year. As at the date of this report, the Company has a total of 500.873 million ordinary shares on issue resulting from: > 65.588 million for re-weighting shares; > > 10.900 million for executive shares; 134.210 million for consideration shares; and > 290.175 million for individual and institutional investors. 24 Steadfast Group Annual Report 2013 In addition, there are 1,395 preferred capital shares which arose from the conversion of the ordinary share capital on issue as at 30 June 2013. Pursuant to the resolution of the Extraordinary General Meeting held on 14 June 2013, the rights of these shares were substantially diminished as a result of the successful listing on the ASX. Refer to note 23 for further details of the change in capital structure subsequent to 30 June 2013. Likely developments The Group’s business strategy going forward is to grow shareholder value through maintaining and growing its market position in the provision of insurance and related services, with a core focus on general insurance broking. To achieve this strategy, the Group will in particular focus on: > > > > > > acquiring equity interests in insurance brokers; continuing to support the growth and development of Steadfast Network Brokers, Steadfast underwriting agencies, Premium funders and other ancillary businesses; maintaining and developing its relationship with Strategic Partners; realisation of back office synergies; executing acquisitions of non-insurance broking businesses (such as underwriting agencies and premium funders) which offer complementary products and services; and the cross-sell of products and services between Steadfast Network Brokers and other businesses with which the Group has a relationship. In assessing future business acquisitions described above, certain acquisition criteria will be applied, including that an acquisition is expected to be earnings per share accretive for the Group within 12 months of the acquisition concerned (assuming the acquisition is at least 85% equity funded). The Group intends to work closely with the existing management team of each acquired business, and allow each business to operate in a manner consistent with the Group’s co-ownership model. In most cases, this model involves ongoing equity participation of key management personnel in the business acquired. Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. Dividends Details of dividends paid or declared by the Company are set out in note 26. No dividends were declared by the Company during the financial year or subsequent to the reporting date. $168,000 of the declared dividends for the last financial year were paid during the financial year ended 30 June 2013. Significant changes in the state of affairs During this financial year: > > The Company acquired interests in four insurance broking businesses (including one in New Zealand) and an underwriting agency. Refer to note 35 for further details. The Company was restructured in anticipation of its listing on the ASX. This included significant due diligence costs on potential acquisitions, changing the constitution of the Company at the Extraordinary General Meeting and preparation of a Prospectus to assist in the equity raising to fund further acquisitions and repay debt obtained for the purchase of businesses. The Company successfully listed on the ASX in August 2013. Apart from the above, there were no other significant changes in the state of affairs of the Group. Events subsequent to reporting date Subsequent to 30 June 2013, the following matters have arisen: > > > listing of the Company on the ASX including the raising of $333.703 million of cash proceeds in the initial public retail and institutional offer and the issue of 500.873 million ordinary shares; completion of 64 acquisitions of subsidiaries, associates and business assets as planned. The total consideration paid for these acquisitions were $379.180 million. These acquisitions were partially funded by the proceeds of the initial public retail and institutional offer and partially funded by the Company’s ordinary shares issued (consideration shares); and repayment of $36.623 million of bank borrowings which were used for funding the acquisition of businesses during the financial year. Further details of matters subsequent to the end of the financial year are set out in note 39. 25 Steadfast Group Annual Report 2013 Directors’ report (continued) Environmental regulation The Group’s operations are not subject to any particular and significant environmental regulation under a law of the Commonwealth or of a State or Territory legislation. Directors’ interests In August 2013, the Company listed on the ASX with ordinary shares on issue of 500.873 million shares. The holdings of ordinary shares by the Company’s Directors might include re-weighting shares, considerations shares, executive shares and/or acquisitions through the initial public retail offer. The relevant interest of each Director in the listed securities, ordinary shares by the Company, as notified by the Directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows. Frank O’Halloran, AM Robert Kelly David Liddy Anne O’Driscoll Philip Purcell Greg Rynenberg Jonathan Upton Shares held directly Shares held indirectly* 521,739 5,000,000 – – – – – 626,086 248,721 217,391 108,695 86,956 534,238 2,196,099 * These shares are held by the Directors or their related parties, inclusive of entities controlled, jointly controlled or significantly influenced by the Directors, as notified by the Directors to the ASX in accordance with S205G of the Corporations Act 2001. No share options have been granted during or after the financial year. Indemnification and insurance of officers The Company has entered into deeds of access, insurance and indemnity, with each Director and officer which contain rights of access to certain books and records of the Company for a period of seven years after the Director and officer ceases to hold office. This seven year period can be extended where certain proceedings or investigations commence before the seven year period expires. In respect of the indemnity of the Directors and officers, the Company is required, pursuant to the constitution, to indemnify all Directors and officers, past and present, against all liabilities allowed under law. Under the deed of access, insurance and indemnity, the Company indemnifies parties against all liabilities to another person that may arise from their position as a Director or an officer of the Company or its subsidiaries to the extent permitted by law. The deed stipulates that the Company will meet the full amount of any such liabilities, including reasonable legal costs and expenses. In respect of insurance being obtained on behalf of the Directors and officers, the Company may arrange and maintain Directors’ and officers’ insurance for its Directors and officers to the extent permitted by law. Under the deed of access, insurance and indemnity, the Company must obtain such insurance during each Director’s and officer’s period of office and for a period of seven years after a Director or an officer ceases to hold office. This seven year period can be extended where certain proceedings or investigations commence before the seven year period expires. Disclosure of the insurance premiums and the nature of liabilities covered by such insurance are prohibited by the relevant contract of insurance. 26 Steadfast Group Annual Report 2013 Non-audit services During the financial year KPMG, the Group’s auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services during the financial year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: > > all non-audit services were subject to the corporate governance procedures adopted by the Group and have been reviewed by the Board to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing risks and rewards. Details of the amounts paid to the auditor of the Group, KPMG, and its network firms, for audit and non-audit services provided during the financial year are set out below. Services other than audit and review of financial statements Other assurance services Due diligence services Investigating accountant services Other services Taxation advisory services Other services Audit services Audit or review of the financial statements 2013 $ 1,212,212 1,909,968 140,097 267,296 3,529,573 438,200 3,967,773 Officer who was previously a partner of the auditor Stephen Humphrys is currently an officer of the Group and was previously managing partner of Moore Stephens Sydney, the Company’s former auditor, at the time when Moore Stephens Sydney was the auditor of the Company. Lead auditor’s independence declaration The Lead auditor’s independence declaration is set out on page 41 and forms part of the Directors’ report for the financial year ended 30 June 2013. Rounding off The Group is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the financial report and Directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. 27 Steadfast Group Annual Report 2013 Directors’ report (continued) Remuneration Report – Audited Introduction The remuneration report outlines Steadfast Group’s remuneration philosophy, framework and outcomes for the financial year ended 30 June 2013 (FY13) for all key management personnel, including all Non-executive Directors and the Executive Team made up of the Managing Director & CEO (MD & CEO) and his direct reports. Key management personnel (KMP) are those persons having authority and responsibility for planning, directing and controlling the activities of the entity. The Company successfully listed on the ASX in August 2013. This remuneration report for the financial year ended 30 June 2013 is the Group’s first remuneration report. The current key management personnel of the Group for the entire financial year unless otherwise stated, are as follows. Table 1 – Executive Team Name Robert Kelly Role Managing Director & CEO Cameron McCullagh Chief Operating Officer Stephen Humphrys Chief Financial Officer Allan Reynolds Executive General Manager Samantha Hollman Executive General Manager – Strategic Projects Linda Ellis Group Company Secretary & General Counsel Table 2 – Non-executive Directors Name Frank O’Halloran, AM David Liddy Philip Purcell Greg Rynenberg Jonathan Upton Date of appointment 18 April 1996 28 April 2011 2 January 2013 5 December 2002 4 January 2000 3 June 2013 Date of appointment 21 October 2012 1 January 2013 1 February 2013 10 August 1998 9 May 2005 Anne O’Driscoll was appointed a Non-executive Director and Chairman of the Audit & Risk Committee from 1 July 2013. David Liddy is Chairman of the Remuneration & Succession Planning Committee. When reviewing independence of Directors, the Board decided to rebase tenure for Greg Rynenberg from 2013 in view of the significant changes in the Group’s operations post its restructure and listing. Tables 1 and 2 do not include key management personnel who resigned or retired during the current financial year. Their names and remuneration is disclosed in Tables 5 and 8. Executive remuneration structure and governance This report meets the remuneration reporting requirements of the Corporations Act 2001 and Accounting Standard AASB 124 Related Party Disclosures. The term remuneration used in this report has the same meaning as compensation as prescribed in AASB 124. Remuneration & Succession Planning Committee The Remuneration & Succession Planning Committee of the Board is responsible for reviewing and determining remuneration arrangement for the Non-executive Directors and the Executive Team made up of the Managing Director & CEO and his direct reports. 28 Steadfast Group Annual Report 2013 Remuneration philosophy The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for shareholders and conforms to market practice for delivery of reward. The Board embodies the following principles in its remuneration framework: > > > > a performance based reward structure; competitive and reasonable rewards to attract and retain high calibre executives; strong links between executive rewards and shareholder value; a significant proportion of executive remuneration is at risk, that is linked to achievement of pre-determined performance targets; and > transparent reward structures. Involvement of external remuneration advisors The Remuneration & Succession Planning Committee (Committee) directly engages and considers market remuneration data from remuneration consultants as required. The data provided by remuneration consultants is used as a guide and all remuneration decisions in respect of the Executive Team are made by the Board. For the financial year ended 30 June 2013, no remuneration consultant was engaged to provide services to the Committee. Going forward, the Committee intends to engage remuneration consultants. Remuneration structure The Group aims to reward executives with a level of remuneration commensurate with their responsibilities and position within the Group and their ability to influence shareholder value creation. The remuneration framework links rewards with the strategic goals and performance of the Group and provides a market competitive mix of both fixed and variable rewards including a blend of short and long term incentives. The Group has adopted an approach to position fixed remuneration at the market median with total remuneration at the upper quartile (depending on the time the executive has been in their position). The targeted remuneration mix for the Executive Team is 40% fixed and 60% variable (at risk). Table 3 below outlines the details of key elements of executive remuneration, the purpose, performance hurdles (where applicable) and the FY13 outcome. Remuneration structure for the financial year ended 30 June 2013 In FY13, the Executive Team was awarded the following types of remuneration: > > > cash salary and superannuation contribution (based on legislative requirements); non-monetary benefits in the form of car parking (and FBT) and income protection and life insurance; and conditional rights, refer to Additional information – conditional rights and Table 9 for further details. No short term incentive (in the form of either cash or deferred equity awards) or long term incentive were paid or awarded. Remuneration structure for the financial year ending 30 June 2014 The listing of the Company has necessitated a review of the remuneration structure to commence operation from 1 July 2013 (FY14). New short term incentive and long term incentive plan with performance hurdles set to align and link to shareholder value have been put in place for the Executive Team. Earnings per share growth has been chosen as the performance hurdle that members of the Executive Team are required to meet to ensure alignment with shareholder objectives. Tables 12 and 13 outline the remuneration structure and details of maximum potential remuneration from short term and long term incentive plans which are available to the Executive Team for FY14 as approved by the Committee. Upon successful listing of the Company on the ASX, $10.900 million of Executive loans were provided to four members of the Executive Team to acquire 10.900 million Executive Shares at $1.00 per share. Refer to Executive loans and Executive Shares section for further details. 29 Steadfast Group Annual Report 2013 Directors’ report (continued) Table 3 – Key elements of executive remuneration Purpose and link to strategy Operation and outcome for FY13 Opportunity Performance metrics Fixed remuneration: Cash salary and superannuation Helps to attract and retain high calibre executives Reflects individual role, experience and performance Personal objectives set each year FY13 100% of total remuneration FY14 Target at 40% of total remuneration Reviewed annually by the Remuneration & Succession Planning Committee and fixed for 12 months, with any changes effecting from 1 July each financial year. Decision influenced by: > > > role, experience and performance reference to comparative remuneration in the market total organisational salary budgets Non-monetary benefits Helps to attract and retain high calibre executives Executive Team is provided with car parking, income protection and life insurance Car parking cost per annum: $4,000 Personal objectives set each year Income protection and life insurance: $9,000 Variable and at risk remuneration: Short term incentive (STI) Recognises the contributions and achievements of the Executive Team For FY13, no short term incentive (in cash) was awarded New short term incentive plan consisting of cash and deferred equity awards is effective in FY14 EPS growth will be measured against the FY13 forecast EPS of 5.4 cents FY14 Both STI and LTI are discretionary, performance based, at risk reward arrangements The combined total of STI and LTI is targeted at 60% of total remuneration Long term incentive (LTI) Provides opportunity for the Executive Team to acquire equity in the Company as a reward for increasing EPS over the longer term LTI was not in operation for FY13 This is a new remuneration incentive plan and is effective in FY14 EPS growth will be measured against the FY13 forecast EPS of 5.4 cents Applicable for FY14 onwards STI – Cash award > > achievements of personal objectives earnings per share (EPS) minimum growth hurdle of 5% to be met STI – Deferred equity award > continuous employment and performance rating to be met for the three year vesting period; and > EPS minimum growth of 5% to be met Applicable for FY14 onwards LTI – Deferred equity award > > continuous employment and performance rating to be met for the five year vesting period; and the Group’s average diluted EPS increasing by a compound 10% per annum over the five year vesting period 30 Steadfast Group Annual Report 2013 Shareholding requirements There is no specific policy requiring the Executive Team to hold any ordinary shares of the Company. However, the Executive Team will hold ordinary shares, post listing of the Company, by the following means: > > > > re-weighting shares allocated to the shareholders who held ordinary shares before the Company’s change of constitution as approved by its Extraordinary General Meeting in June 2013; for four members, acquisition of Executive Shares through the Executive Loans Arrangement (refer to Executive loans and Executive Shares section and Table 10 – Executive loans for details); conditional rights conversion into ordinary shares at the end of August 2014 (refer to Table 9 – Conditional rights allocated to the Executive Team for details); and potential vesting of equity awards granted through the short term and long term incentive plans in the financial years from 1 July 2013 onwards (refer to Table 3 – Key elements of executive remuneration for further details of the incentive plans). Historical analysis of financial performance The following table outlines the returns of the Group delivered to its shareholders. The Company has gone through significant development and transformation to facilitate its successful listing on the ASX in August 2013. As a result, historical analysis of financial performance for the financial years prior to 2013 does not provide meaningful comparative information to the users of this report. Table 4 – Key financial performance indicators Net profit/(loss) attributable to owners of the Company ($’000) 1,064 2009 2010 3,581 2011 2,810 2012 2013 6,174 (13,437) Dividends paid in 2010 and 2012 were $950.183 per share and $1,351.250 per share, respectively. The dividends per share calculated were based on 1,425 and 1,395 shares on issue as at 30 June 2010 and 2012, respectively. Upon ASX listing, 500.873 million shares were issued. The historical comparative basic and diluted earnings per share, dividend paid per share cannot be used as an indication of further earnings and dividends per share. 31 Steadfast Group Annual Report 2013 Directors’ report (continued) Executive remuneration in details The table below provides remuneration details for the Executive Team (including the MD & CEO and his direct reports). For an executive who was newly appointed to the Executive Team during either financial year, the remuneration information provided in the table below relates to the period from the date of their appointment as key management personnel (KMP) to the year ended 30 June. Refer to Table 1 – Executive Team for KMP who were appointed during the financial year ended 30 June 2013. The table below also contains remuneration information of KMP who resigned during the current financial year from 1 July to the date of their resignation. Table 5 – Total executive remuneration of the Group Post Other long term Sub total (excluding Table note (1) Short term employment benefits (2) (3) benefits (4) employment employment Termination benefits share based Share based payments (6) payments) Cash salary and leave accruals $ Non- Short term monetary benefits $ incentive $ Superann- uation $ Value of rights granted $ $ $ benefits (5) Long service leave accruals $ Total $ Current Executive Team (including Managing Director): Robert Kelly, Managing Director & CEO 2013 2012 869,013 585,257 – – 16,727 21,784 52,093 6,792 7,228 30,357 Cameron McCullagh, Chief Operating Officer(7) 2013 2012 529,773 183,086 – – 8,995 18,243 14,677 7,944 17,582 7,769 Stephen Humphrys, Chief Financial Officer, KMP since 2 January 2013 – – – – 959,617 629,634 571,688 216,381 – – – – 959,617 629,634 571,688 216,381 2013 190,375 – 6,962 8,235 3,875 – 209,447 6,519 215,966 Allan Reynolds, Executive General Manager 2013 2012 330,807 285,661 – – 9,362 21,784 13,029 2,141 29,246 7,917 Samantha Hollman, Executive General Manager – Strategic Projects 2013 2012 219,514 179,492 – – 9,867 5,049 19,252 2,470 14,956 (22,369) Linda Ellis, Group Company Secretary & General Counsel, KMP since 3 June 2013 2013 19,635 – 550 1,373 358 – – – – – 374,982 6,519 381,501 324,965 – 324,965 251,103 3,259 254,362 177,128 – 177,128 21,916 2,933 24,849 Former key management personnel ceased during the financial year: Dana Williams, former Chief Financial Officer, KMP from 13 August 2012 to 9 November 2012 2013 70,930 – 1,238 5,070 – – 77,238 Jenny Varley, former Company Secretary, KMP until 31 May 2013(8) 2013 2012 258,928 230,075 – – 6,968 18,851 13,558 284,271 582,576 1,758 20,215 9,234 – 261,282 – – – 77,238 582,576 261,282 32 Steadfast Group Annual Report 2013 Table note (1) Cash salary includes amounts paid in cash plus any salary sacrifice items. Annual leave accruals are determined as per Accounting Standard, AASB 119 Employee Benefits. In prior year, Mr Kelly’s service to the Group was mainly charged as service fee and he did not request to contribute part of his service fee to a superannuation fund. (2) No short term incentive payment was awarded to any KMP for the current and prior financial year. (3) This amount includes car parking and the relevant fringe benefit tax, cost of income protection and life insurance and other benefits provided by the Group. (4) Superannuation contribution is paid in line with legislative requirements. (5) Long service leave accruals are determined as per AASB 119 Employee Benefits. (6) (7) (8) During the financial year, some members of the Executive Team were allocated with conditional rights which will convert to the Company’s ordinary shares free of costs at the end of August 2014 subject to continuing employment at that time and their performance meeting the minimum criteria as agreed. An allocated portion of the unvested conditional rights is included in the total remuneration disclosure above. The value of the conditional rights is calculated based on the expected share price, less expected dividends without discounting (due to immaterial time value over the vesting period). Refer to Note 42 Share based payments for further details. Cameron McCullagh was appointed a Director of the Company from 6 October 2012 to 25 March 2013. Mr McCullagh did not receive any other remuneration in the officer role as a director. Jenny Varley ceased as key management personnel on 31 May 2013. However, her termination date will be at the end of September 2013. The termination benefits represent the total estimated payments to be settled. Executive service agreements Steadfast Group Limited has ongoing executive service agreements (Executive Agreements) with each of the member of the Executive Team. These Executive Agreements may be terminated by written notice from either party or by the Company making a payment in lieu of notice. The Executive Agreements outline the components of remuneration paid to executives and require the remuneration of executives to be reviewed annually. The Executive Agreements do not require the Company to increase base salary, pay a short term incentive or offer a long term incentive in any given year. 33 Steadfast Group Annual Report 2013 Directors’ report (continued) The table below contains the key terms of the Executive Team’s Executive Agreements. The Executive Agreements do not provide for any termination payments, other than payment in lieu of notice by the Company. Table 6 – Key terms of executive service agreements Name Robert Kelly Cameron McCullagh Stephen Humphrys Allan Reynolds Samantha Hollman Linda Ellis Termination notice Notice period by the employee not earlier than from the Company Notice period from the employee Termination provisions in relation to payment in lieu of notice 21/10/2015 01/07/2014 01/07/2014 01/07/2014 01/07/2014 01/07/2014 12 months 12 months 12 months fixed remuneration 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months fixed remuneration 6 months fixed remuneration 6 months fixed remuneration 6 months fixed remuneration 6 months fixed remuneration In accordance with the Corporations Act 2001 requirements, termination provisions could include the payment of unused annual leave and long service leave accruals where applicable. Retrenchment entitlements In the event of redundancy, Robert Kelly will be paid an amount equal to 12 months fixed remuneration. Termination under other situations In the event of gross negligence or gross misconduct, the Company may terminate the Executive Agreement immediately by notice in writing and without payment in lieu of notice. Non-executive Directors remuneration Structure and policy Non-executive Directors fees are determined within an aggregate Directors’ fee pool limit which is reviewed periodically and recommended for approval by shareholders. The fee structure is designed to provide the Group with the ability to attract and retain directors of the highest calibre. The aggregate amount of remuneration sought to be approved by shareholders and the manner in which it is paid to Directors is reviewed annually. The Board considers advice from external consultants as well as fees paid to Non-executive Directors of comparable companies when undertaking the review process. Board and committee fees Non-executive Director remuneration consists of three components: > > > Board fees; committee fees and where relevant subsidiary board fees; and superannuation which is paid in line with legislative requirements. Directors do not receive retirement benefits beyond statutory superannuation contributions and do not participate in any incentive programs. Directors may also be reimbursed for travel and other expenses incurred in attending to the Company’s affairs. In the Extraordinary General Meeting held on 14 June 2013, the shareholders approved the maximum aggregate directors’ fee pool of $900,000 per annum for each financial year effective 1 July 2013. 34 Steadfast Group Annual Report 2013 Table 7 – Steadfast’s board or committee annual fee (inclusive of superannuation) Board/committee Board Audit & Risk Committee Role Chairman Non-executive Directors Chairman Non-executive Directors Remuneration & Succession Planning Committee Chairman Non-executive Directors No additional remuneration will be paid for the Chairman and members of the Nomination Committee. 2013 $ 200,000 100,000 7,500 Nil 7,500 Nil Non-executive Director remuneration in details The table below provides remuneration details of the Non-executive Directors (including those Non-executive Directors who retired during the financial year) on the Company’s Board. For those Directors who appointed during the financial year, the remuneration information provided in the table below relates to the period from the date of their appointment to the year ended 30 June. Table 8 – Total director remuneration of the Group Short term employment benefits Other boards and committee fees $ Board fees $ Post employment benefits Super- annuation $ Total $ Current Directors: Frank O’Halloran, AM, appointed 21 October 2012 2013 David Liddy, appointed 1 January 2013 2013 Philip Purcell, appointed 1 February 2013 2013 Greg Rynenberg 2013 2012* Jonathan Upton 2013 2012* 127,780 49,313 38,226 – – – 11,468 139,248 4,438 53,751 3,440 41,666 80,982 77,500 22,652 52,500 6,227 109,861 – 130,000 107,986 12,000 4,817 124,803 115,750 – – 115,750 * These directors charged the Group a service fee for being holding the office as a director for the Company’s or its subsidiaries board and committees. They did not request to contribute any of their service fees to their superannuation funds. 35 Steadfast Group Annual Report 2013 Directors’ report (continued) Table 8 – Total director remuneration of the Group (continued) Post employment benefits Short term employment benefits Other boards and committee fees $ Board fees $ Former Directors retired during the financial year: Christopher Baker, retired 6 October 2012 2013 2012* Cameron Bott, retired 6 October 2012 2013* 2012* Michael Olofinsky, retired 6 October 2012 2013 2012* Richard Post, retired 6 October 2012 2013 2012* Shayne Smith, appointed 19 October 2011 and retired 6 October 2012 2013* 2012* Graham Stevens, retired 20 August 2012 2013* 2012* Gregory Stewart, retired 6 October 2012 2013* 2012* Joseph Vella, retired 6 October 2012 2013* 2012* John Wolozny, retired 6 October 2012 2013* 2012* 12,014 30,000 31,554 21,000 22,313 30,000 22,050 12,250 29,214 30,000 12,014 30,000 13,125 20,000 13,125 30,000 22,313 81,000 13,125 30,000 36,094 82,500 – – – – – – – – 55,125 52,500 – – – – Total $ 44,679 51,000 44,363 42,250 30,625 30,000 13,125 30,000 13,125 20,000 13,125 30,000 77,438 133,500 13,125 30,000 36,094 82,500 Super- annuation $ 1,111 – – – 1,411 – 1,111 – – – – – – – – – – – * These directors charged the Group a service fee for being holding the office as a director for the Company’s or its subsidiaries board and committees. They did not request to contribute any of their service fees to their superannuation funds. Shareholdings requirements Non-executive Directors are not required under the Company’s constitution to hold any ordinary shares of the Company. However, contained in each Director’s letter of appointment from the Company is a term and condition that the Non-executive Directors must hold an amount equal to 50% of their annual remuneration in the Company’s ordinary shares by the end of their second year in office. At the date of this report, all Directors have complied with the requirement. 36 Steadfast Group Annual Report 2013 Additional information In August 2013, the Company successfully listed on the ASX. The Executive Team and Non-executive Directors acquired equity interests in the Company through a range of specific arrangements. Those arrangements or additional interests obtained are provided as follows. Conditional rights During the financial year, the Remuneration & Succession Planning Committee approved the allocation of conditional rights to selected employees who have contributed to the listing of the Company. The conditional rights allocated are free of costs, will convert to one ordinary share per right at the end of August 2014 subject to the continuing employment at that time and the performance of the employee meeting the minimum criteria as agreed by management (or the Remuneration & Succession Planning Committee for the Executive Team). The table below provides the number of conditional rights allocated to four members of the Executive Team on 31 May 2013. Table 9 – Conditional rights allocated to the Executive Team Stephen Humphrys Allan Reynolds Samantha Hollman Linda Ellis Rights allocated Rights held at during the year 30 June 2013 Number Number 100,000 100,000 100,000 100,000 50,000 45,000 50,000 45,000 295,000 295,000 The fair value of the conditional rights as recognised at 30 June 2013 is $0.98. Executive loans and Executive Shares In the Extraordinary General Meeting held on 14 June 2013, the shareholders approved the Company to make full recourse loans to four members of the Executive Team. They have entered into loan agreements with the Company (Executive Loan Agreements). Under the Executive Loan Agreements, the Company provided loans to the executives with the loan proceeds to be used only to fund the purchase of Executive Shares at a fixed price of $1.00 per Executive Share upon the successful float of the Company on the ASX. The loans are intended: > > > to recognise and reward the services and contributions provided by these executives to the development and ongoing transformation of the Company; to assist in the retention of these executives; and are part of the Company’s remuneration strategy to align the interests of the Executive Team to shareholder value. The key terms of the Executive Loan Agreements are: > > interest free, unsecured and full recourse loans; and to be repaid in full five years after the date on which the loans are provided. The Executive Shares will be subject to escrow restrictions. The key restrictions are: > the executives agreed not to, for the period from the receipt by the executives of the Executive Shares until the end of the term of the loan (or upon the loan being accelerated due to an event of default), dispose of the Executive Shares or grant security over the Executive Shares (subject to certain exceptions as set out below) without the prior consent of the Board; and > the executives agreed to the application of a holding lock in respect of the Executive Shares. In FY14, the Executive loans will be recognised at fair value. The Executive loans are interest free loans, and the Executive Shares are issued at a fixed price of $1.00 (being the minimum price to meet the condition of listing). The fixed price is different to the final share price of the Company determined by the Board under the terms of the initial public offering. A share based employment benefit will be recorded to recognise the difference between the cost and the fair value of the Executive loans. 37 Steadfast Group Annual Report 2013 Directors’ report (continued) The exceptions to the above escrow restrictions on Executive Shares are: > if the disposal does not cause the executive to breach the trading restrictions and the Executive Shares are disposed of during the permitted trading window under the Executive Loan Agreements. Under the trading restrictions, each executive may only sell their Executive Shares as below: Period Amount of Executive Shares may be sold 12 months ended 31 August 2015 ≤ 20% of total Executive Shares 12 months ended 31 August 2016 ≤ 40% of total Executive Shares 12 months ended 31 August 2017 ≤ 60% of total Executive Shares 12 months ended 31 August 2018 ≤ 80% of total Executive Shares 12 months ended 31 August 2019 ≤ 100% of total Executive Shares > > the proceeds from the disposal of the Executive Shares will be applied towards the repayment of the Executive loans first in the same proportion as the percentage of total Executive Shares disposed. The executives are entitled to retain any profits or gains from the disposal of the Executive Shares. the disposal is made in the event of the death of the executive, the executive being declared bankrupt or the executive ceasing to be employed by the Company as a consequence of any applicable contract of employment, ill health or retirement. The table below provides the amount of the executive recourse loans provided to these four executives. Table 11 provides details of Executive Shares acquired on 2 August 2013 (date of listing of the Company). Executive loans $ 5,000,000 4,000,000 1,000,000 900,000 10,900,000 Table 10 – Executive loans Robert Kelly Cameron McCullagh Stephen Humphrys Allan Reynolds 38 Steadfast Group Annual Report 2013 Shareholdings of the Executive Team and Non-executive Directors Following the successful listing of the Company in August 2013, the Executive Team and Non-executive Directors acquired the Company’s ordinary shares through the initial public retail offer, re-weighting shares, consideration shares and Executive Shares. These shares are held directly by the Executive Team and Non-executive Directors or indirectly by the Executive Team’s and Non-executive Directors’ related parties, inclusive of entities controlled, jointly controlled or significantly influenced by them. The table below summarises all these allocations. Table 11 – Shareholdings of the Executive Team and Non-executive Directors Frank O’Halloran, AM Robert Kelly David Liddy Anne O’Driscoll Philip Purcell Greg Rynenberg Jonathan Upton Cameron McCullagh Stephen Humphrys Allan Reynolds Samantha Hollman Linda Ellis Initial public Re-weighting Consideration shares Number shares Number retail offer 1,147,825 98,260 217,391 108,695 86,956 – 150,461 – – – 247,824 286,414 – – – – – – 17,390 478,709 1,700,000 Executive Shares Number Total Number – 1,147,825 5,000,000 5,248,721 – – – – – 217,391 108,695 86,956 534,238 2,196,099 26,086 – 13,043 173,913 60,869 – – – – – – – – – – 4,000,000 4,026,086 1,000,000 1,000,000 900,000 913,043 – – 173,913 60,869 Other information Anne O’Driscoll, a Director of the Company from 1 July 2013, was engaged as a consultant to the Company to assist in managing the Restructure and Listing between December 2012 and June 2013. Her total remuneration for these services up to 30 June 2013 amounted to $224,965. Potential remuneration of the Executive Team Table 12 outlines the potential remuneration of the Executive Team for the financial year ending 30 June 2014 (FY14) as approved by the Remuneration & Succession Planning Committee. This reflects the new remuneration structure of the Company from 1 July 2013 onwards. Table 13 outlines the maximum allocation of an award under the short term incentive plan (STI Plan) which varies by executive and will only be vested if the performance hurdles and earnings per share (EPS) growth threshold set out in the schedule in this table are achieved. EPS growth will be measured against the FY13 forecast EPS of 5.4 cents. The performance hurdles for the long term incentive plan (LTI Plan) are: > > continuous employment and performance rating to be met for the five year vesting period; and the Group’s average diluted EPS increasing by a compound 10% per annum over the five year vesting period. Table 12 – Potential remuneration of the Executive Management Team for FY14 Robert Kelly Cameron McCullagh Stephen Humphrys Allan Reynolds Samantha Hollman Linda Ellis Maximum award as a % of fixed remuneration Fixed remuneration LTI – deferred STI – cash equity awards equity awards STI – deferred $780,000 $572,000 $425,000 $340,827 $252,578 $277,410 75% 45% 45% 30% 30% 30% 50% 30% 30% 20% 20% 20% 50% 35% 35% 15% 15% 15% 39 Steadfast Group Annual Report 2013 Directors’ report (continued) Table 13 – STI Plan performance hurdle for FY14 FY14 STI Plan maximum award as a % of fixed remuneration Proportional allocation FY14 EPS growth achieved <5.0% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% Cameron McCullagh Allan Reynolds, Samantha and Stephen Hollman and Linda Ellis Humphrys Robert Kelly 0.0% 20.0% 37.5% 55.0% 72.5% 90.0% 107.5% 125.0% 0.0% 20.0% 29.2% 38.3% 47.5% 56.7% 65.8% 75.0% 0.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% STI – deferred equity awards 0.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% STI – cash 0.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% Signed at Sydney this 30th August 2013 in accordance with a resolution of the Directors. Frank O’Halloran AM Chairman Robert Kelly Director 40 Steadfast Group Annual Report 2013 Lead auditor’s independence declaration under Section 307C of the Corporations Act 2001 To the directors of Steadfast Group Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2013 there have been: > > no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Andrew Dickinson Partner Sydney 30 August 2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 41 Steadfast Group Annual Report 2013 Statement of comprehensive income For the year ended 30 June 2013 Revenue Other income Share of profits of associates and joint venture accounted for using the equity method Expenses Employment expenses Occupancy expenses Other expenses (include selling and administration expenses) Member rebates Depreciation and amortisation expenses Finance costs Due diligence and restructure costs Profit/(loss) before income tax (expense)/benefit Income tax (expense)/benefit Profit/(loss) after income tax (expense)/benefit for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Net movement in foreign currency translation reserve Income tax expense on other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Steadfast Group Limited Profit/(loss) for the year is attributable to: Non-controlling interest Owners of Steadfast Group Limited Total comprehensive income for the year is attributable to: Non-controlling interest Owners of Steadfast Group Limited Consolidated Note 2013 $’000 2012 $’000 5 34,769 31,337 6 6 6 7 7 24 97 2,932 37,798 (10,566) (610) (9,433) 93 2,706 34,136 (5,982) (249) (7,284) (5,894) (11,809) (1,013) (1,188) (23,782) (14,688) 1,421 (13,267) (264) (4) (1,165) 7,379 (1,205) 6,174 224 (67) 157 – – – (13,110) 6,174 170 (13,437) (13,267) 170 (13,280) (13,110) – 6,174 6,174 – 6,174 6,174 Basic earnings per share (1,395 shares on issue) Diluted earnings per share (1,395 shares on issue) $ $ 41 41 (9,632.258) 4,446.208 (9,632.258) 4,446.208 The above statement of comprehensive income should be read in conjunction with the notes to the financial statements. 42 Steadfast Group Annual Report 2013 Statement of financial position As at 30 June 2013 Assets Current assets Cash and cash equivalents Trade and other receivables Other Total current assets Non-current assets Investments Property, plant and equipment Intangible assets and goodwill Deferred tax assets Other Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Income tax payable Provisions Total current liabilities Non-current liabilities Other payables Borrowings Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Equity attributable to the owners of Steadfast Group Limited Non-controlling interest Total equity Consolidated Note 2013 $’000 2012 $’000 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11,478 20,097 1,506 9,990 14,677 329 33,081 24,996 15,510 12,944 36,054 138 2 4,005 3,717 – 726 2 64,648 8,450 97,729 33,446 37,084 4,747 3,094 1,001 7,354 48,533 1,524 33,529 1,021 740 36,814 85,347 12,382 317 157 11,195 11,669 713 50 – 12,114 16,911 – – 1,774 290 2,064 18,975 14,471 317 – 14,154 14,471 – 12,382 14,471 The above statement of financial position should be read in conjunction with the notes to the financial statements. 43 Steadfast Group Annual Report 2013 Statement of changes in equity For the year ended 30 June 2013 Consolidated – 2012 Balance at 1 July 2011 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 23) Shares bought back during the year (notes 23, 24) Dividends paid (note 26) Balance at 30 June 2012 Consolidated – 2013 Balance at 1 July 2012 Profit/(loss) after income tax (expense)/benefit 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 payment on re-weighting shares (note 6) Acquisition of subsidiary with non-controlling interest (note 35) Issued capital $’000 246 – – – 89 (18) – 317 Issued capital $’000 317 – – – – – Total equity $’000 10,145 6,174 – 6,174 89 (52) (1,885) 14,471 Total equity $’000 Retained profits $’000 Non- controlling interest $’000 Reserves $’000 – – – – – – – – Non- controlling interest $’000 9,865 6,174 – 6,174 – – (1,885) 14,154 Retained profits $’000 14,154 (13,437) 34 – – – – (34) – – Reserves $’000 – – 157 157 – 14,471 170 (13,267) – – 157 (13,437) 170 (13,110) – – 10,478 – – 543 713 10,478 543 12,382 Balance at 30 June 2013 317 157 11,195 The above statement of changes in equity should be read in conjunction with the notes to the financial statements. 44 Steadfast Group Annual Report 2013 Statement of cash flows For the year ended 30 June 2013 Cash flows from operating activities Receipts from customers Payments to suppliers and employees and members rebate Dividends received from associates and joint venture Interest received Interest and other finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payment for acquisitions of subsidiaries and business assets, net of cash acquired Payments for property, plant and equipment Payments for intangible assets Payments for investments in associates and joint venture Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from borrowings Payments for share buy-backs Dividends paid Repayment of borrowings Net cash from/(used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 8 11,478 The above statement of cash flows should be read in conjunction with the notes to the financial statements. Consolidated Note 2013 $’000 2012 $’000 36,988 23,246 (35,308) (23,919) 2,778 300 (1,188) (624) 2,946 (18,173) (9,446) (103) (8,780) (36,502) 40 12 13 23 – 38,872 – 2,420 396 (4) – 2,139 – (50) (9) – (59) 89 – (52) 26 (168) (1,717) (3,660) 35,044 1,488 9,990 – (1,680) 400 9,590 9,990 45 Steadfast Group Annual Report 2013 Notes to the financial statements For the year ended 30 June 2013 Note 1. General information The financial report covers Steadfast Group Limited as a consolidated entity consisting of Steadfast Group Limited and the entities it controlled and the Group’s interests in associates and joint venture. The financial report is presented in Australian dollars, which is Steadfast Group Limited’s functional and presentation currency. Steadfast Group Limited is a for profit listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is Level 3, 99 Bathurst Street, Sydney NSW 2000. 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 report. The financial report was authorised for issue, in accordance with a resolution of Directors, on 30 August 2013. Note 2. Significant accounting policies Statement of compliance This financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board and the ASX listing rules, as appropriate for for-profit oriented entities. International Financial Reporting Standards (IFRS) refer to the overall framework of standards and pronouncements approved by the International Accounting Standards Board. IFRS forms the basis of the Australian Accounting Standards. This financial report of the consolidated entity complies with IFRS. Basis of preparation of the financial report The significant accounting policies adopted in the preparation of this financial report are set out below. The accounting policies adopted in the preparation of this financial report have been applied consistently by all entities in the consolidated entity and are the same as those applied for the previous reporting period unless otherwise noted. Historical cost convention The financial statements have been prepared under the historical cost convention, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. New Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new recognition and measurement requirements, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board that are mandatory for the year ended 30 June 2013. These Accounting Standards and Interpretations have not had any material effect on the financial position and performance of the Group. For those new accounting standards not applicable for the financial year ended 30 June 2013, refer to New Accounting Standards and Interpretations not early adopted section in this note for further details and potential impact to the consolidated entity. Going concern The consolidated financial statements have been prepared on a going concern basis. As of 30 June 2013 the consolidated entity’s current liabilities exceed current assets by $15.452 million. This is mainly due to $8.340 million of deferred consideration payable for the acquisition of businesses in the period being shown as a current liability as well as $3.094 million of current bank loans in relation to the acquisition of businesses during the financial year. In August 2013, the Company was successfully listed on the ASX, raised $333.703 million capital in cash for settlement of the acquisition of businesses completed during the financial year ended 30 June 2013 as well as business acquired upon listing, repayment of debt facilities, payment of due diligence and restructure costs related to the successful listing of the Company and to raise $25.000 million for future acquisitions. The Directors therefore believe the going concern assumption to be appropriate. Comparative information Prior year comparative information has been revised in this financial report, purely for reclassification purposes in accordance with the Group’s current business model. The reclassifications include: > > > > > Expenses categories in the statement of comprehensive income Dividend received classified as operating cash inflows in the statement of cash flows Cash and cash equivalents categories in note 8 Current assets – cash and cash equivalents Dividend receivable from joint venture included in other receivable in note 9 – trade and other receivables Investment in joint venture in note 11 – investments Rounding Amounts in this financial report have been rounded to the nearest thousand dollars, unless otherwise stated. The consolidated entity is the kind referred to in the class order 98/100 dated 10 July 1998 issued by the Australian Securities & Investments Commission. All rounding has been conducted in accordance with that class order. Principles of consolidation The consolidated financial statements of Steadfast Group Limited (the Company or parent entity) and its subsidiaries (consolidated entity or the Group) incorporate the assets and liabilities of the Company and all subsidiaries and the results of the Company and all subsidiaries. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. 46 Steadfast Group Annual Report 2013 Note 2. Significant accounting policies (continued) 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. 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 entity. Where the parent 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 parent 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. 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. Marketing and administration fees The Company has negotiated with Strategic Partners to receive marketing and administration fees based on the amount of business placed with those companies for the consolidated entity’s preferred products. These amounts are recognised as revenue when base premium is placed (in the case of insurers and underwriting agencies) or premiums funded (in the case of premium funders). Fees and commission income Commission, brokerage and fees are recognised when the related service has been provided and it is probable that the consolidated entity will be compensated for services rendered and the amount of consideration for such services can be reliably measured. This is deemed to be the invoice date. An allowance is made for anticipated lapses and cancellations. Interest revenue Interest revenue is recognised on an accruals basis using the effective interest method. Dividends revenue Dividends revenue is recognised when the right to receive a dividend has been established. Dividends received from associates and joint venture entities are accounted for in accordance with the equity method of accounting as a reduction in the carrying amount of the investment. Claims experience benefit The consolidated entity may receive a claims experience benefit payment or payments in respect of the Erato Professional Indemnity scheme. Revenue is recognised for a claims experience benefit for a particular policy year when it is likely that a claims experience benefit is receivable and the amount can be measured reliably. Factors taken into account in recognising a claims experience benefit include the number of years that have passed since the end of a policy year and whether various claims have been closed or can be reliably measured. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Finance costs Finance costs include interest, which is accrued at the contracted rate and included in payables, amortisation of transaction costs which are capitalised, presented together with the borrowings, and amortised over the life of the borrowings or a shorter period if appropriate. Share based payments with non employees Share based payments with non employees are measured at the fair value of the equity instruments granted at the date services or goods were received, or at the grant date if no goods or services are identified. An expense is recognised as the good or service is received, or on the grant date if no good or service is identified. Employee benefits Short term employee benefits Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short term cash bonus or profit sharing plans if the consolidated entity has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. Share based payment transactions The grant date fair value of share based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in provision for employee benefits, over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share based payment awards with non-vesting conditions, the grant date fair value of the share based payment is measured to reflect such conditions, and there is no true-up for differences between expected and actual outcomes. The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is recognised as an expense with a corresponding increase in liabilities, over the period that the employees unconditionally become entitled to payment. The liability is remeasured at each reporting date and at settlement date based on the fair value of the share appreciation rights. Any changes in the liability are recognised as employee benefit expenses in profit or loss. 47 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 2. Significant accounting policies (continued) Income tax The income tax expense or benefit for a period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and unutilised tax losses and an adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply 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 investments in subsidiaries, associates or interests in 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 amounts 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 and either the same taxable entity or different taxable entities which intend to settle simultaneously. 48 The Company (the head entity) and its wholly owned Australian controlled entities have formed an income tax consolidated group under the tax consolidation regime. The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the standalone taxpayer 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 controlled entities 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 in proportion to their contribution to the consolidated entity taxable income. Differences between the amount of net tax asset or liability derecognised and the net amounts recognised pursuant to the funding agreements are recognised as either a contribution by, or distribution from, the subsidiaries to the head entity. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve, in equity. However, if the foreign operation is a non-wholly owned subsidiary, then the relevant proportion of the translation difference is allocated to the non-controlling interests. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such items are considered to form part of the net investment in the foreign operation and are recognised in other comprehensive income, and presented within equity in the translation reserve. Earnings per share Basic earnings per share is calculated as net profit attributable to owners of the parent entity, divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit attributable to owners of the parent entity, adjusted for: > > the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and other non-discretionary changes in revenues or expenses during the period that would result from the conversion of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares. Steadfast Group Annual Report 2013 Note 2. Significant accounting policies (continued) Cash and cash equivalents Cash and cash equivalents includes cash in bank, deposits held at call with financial institutions, and 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. Cash also includes balances from insurance broking and underwriting agency accounts in respect of controlled entities, but transactions to and from these accounts have been excluded from the cash flow statements. Cash held on trust relates to cash held for insurance premiums received from policyholders which will ultimately be paid to underwriters. Cash held on trust cannot be used to meet business operations/operating expenses other than payments to underwriters and/or refunds to policyholders. 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 to 60 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. Other receivables are recognised at amortised cost, less any provision for impairment. Investments in associates Investments in associates are accounted for using the equity method and are carried at the lower of the equity accounted amount and the recoverable amount. Associates are entities over which the consolidated entity has significant influence but not control or joint control. Investments in associates are carried in the statement of financial position at cost plus post-acquisition changes in the consolidated entity’s share of net assets of the associates. The investor’s share of the post tax profit or loss of the investee is included in the profit or loss of the consolidated entity and disclosed as a separate line in the statement of comprehensive income. Dividend received or receivable reduce the carrying amount of the investment and are not included as dividend revenue of the consolidated entity. Movements in the total equity of the investee that are not recognised in the profit or loss of the investee are recognised directly in equity of the consolidated entity and disclosed in the statement of changes in equity. When the consolidated entity’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long term receivables, the consolidated entity does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. When the associate subsequently makes profit, the consolidated entity will resume recognising its share of those profits once its share of the profits equals the share of the losses not recognised. Investment in joint ventures Investments in joint ventures are accounted for using the equity method and are carried at the lower of the equity accounted amount and the recoverable amount. A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Under the equity method, the share of the post tax profits or losses of the joint venture is recognised in profit or loss and the share of the movements in equity is recognised in other comprehensive income. Dividends earned from joint venture entities reduce the carrying amount of the investment. Property, plant and equipment Buildings, plant and equipment are 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 property, plant and equipment over its expected useful life as follows: > > > > buildings 40 years; freehold improvements 3 to 10 years; motor vehicles 4 to 5 years; fittings and other equipment 1 to 10 years. The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Gains and losses between the carrying amount and the disposal proceeds are taken to the statement of comprehensive income. Software Significant costs associated with development of software will be deferred and amortised on a straight-line basis over the period of their expected benefit. 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 ownership of leased assets; and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Operating lease payments, net of any incentives received from the lessor, are charged to statement of comprehensive income on a straight-line basis over the term of the lease. 49 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 2. Significant accounting policies (continued) Business combinations The acquisition method of accounting is used to account for all business combinations. Cost is measured as the fair value of the assets given, shares issued or liabilities assumed at the date of exchange. All acquisition costs including stamp duty and legal fees are recognised in the statement of comprehensive income as incurred. A change in the ownership interest in a controlled entity (without loss of control) is accounted for as a transaction with owners in their capacity as owners, and these transactions will not give rise to a gain or loss. Where there is a change in ownership and the consolidated entity loses control, the gain or loss will be recognised in the statement of comprehensive income. The carrying value of non-controlling interest is reset to fair value. In the period a new business is acquired, an estimate is made of the fair value of the future contingent consideration. Any variation to this amount in future periods is recognised through the statement of comprehensive income. Over accruals are recognised as income in the period the amount is reversed, and any under accruals are charged as an expense against profits in the statement of comprehensive income. All identifiable assets acquired and liabilities and contingent liabilities assumed in the business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The contingent consideration is carried in the statement of financial position at net present value. The unwinding of the discount is recognised as an interest expense in the statement of comprehensive income. This is offset to an extent by a deferred tax credit. Revaluation When a business combination occurs, the acquiree’s identifiable assets and liabilities are restated to their fair value at the date of the exchange transaction to determine the amount of any goodwill associated with the transaction. Any adjustment to those fair values relating to previously held interests of the acquiree is accounted for as an adjustment to fair value and the movement is reflected in the statement of comprehensive income as either a profit or loss. Intangible assets Goodwill Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the fair value of the identifiable net assets acquired at the date of acquisition. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses and is not amortised. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. As at the acquisition date, any goodwill acquired is allocated to each of the cash generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. Where the recoverable amount of the cash generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash generating unit and part of the operation of that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Impairment losses recognised for goodwill are not subsequently reversed. Identifiable intangible assets Identifiable intangible assets acquired separately or in a business combination (mainly customer relationships) are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. The useful lives of these intangible assets are assessed on acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment costs. Internally generated intangible assets are not capitalised and expenditure is charged against profits in the period in which the expenditure is incurred. Intangible assets with finite lives are amortised over the useful life, currently estimated to be up to ten years, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an identifiable intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on identifiable intangible assets with finite lives is recognised in the profit and loss and disclosed in depreciation and amortisation expenses line in the statement of comprehensive income. Gains or losses arising from derecognition of an identifiable intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of comprehensive income when the asset is derecognised. Loans to joint ventures Loans to joint ventures are recognised when cash is advanced. They are initially recognised at fair value, and subsequently measured at amortised cost using the effective interest rate method, less any provision for impairment. Interest income on loans to joint ventures is recognised on an accruals basis. 50 Steadfast Group Annual Report 2013 Note 2. Significant accounting policies (continued) Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial period 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 to 90 days of recognition. Loans and borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, less any directly attributed transaction costs. These 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. Provisions Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. Where discounting is used, the increase in provision due to the passage of time is recognised as a finance cost. Employee benefits Wages and salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits, and annual leave expected to be settled within 12 months of the reporting date are recognised in current liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Long service leave The liability for long service leave is recognised in current and non-current liabilities, depending on the unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Cash flows are presented on a gross basis, except for the GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the tax authority, which 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. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segment, has been identified as the Managing Director & CEO. The liability is 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 national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Contributions to superannuation Contributions are made to employees’ defined contribution superannuation funds and are expensed in the period in which they are incurred. 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 period. Goods and services tax and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated goods and services tax (GST), unless the GST incurred is not recoverable from the tax authority. Where GST is not recoverable, 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. 51 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 2. Significant accounting policies (continued) New Accounting Standards and Interpretations not early adopted The consolidated entity has not early adopted and applied any new, revised or amending Accounting Standards and Interpretations that are not yet mandatory for the financial year ended 30 June 2013. New, revised or amending Accounting Standards and Interpretations will be adopted by the consolidated entity in the operating year commencing 1 July after the effective date of these standards and interpretations as set out in the table below. Title Description Effective date Operating year Note AASB 9 Financial Instruments 1 January 2015 30 June 2016 AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 AASB 2012-6 Amendments to Australian Accounting Standards arising from AASB 9 1 January 2015 30 June 2016 1 January 2015 30 June 2016 1 January 2015 30 June 2016 AASB 10 AASB 11 AASB 12 AASB 13 Consolidated Financial Statements 1 January 2013 30 June 2014 Joint Arrangements 1 January 2013 30 June 2014 Disclosure of Interests in Other Entities 1 January 2013 30 June 2014 Fair Value Measurement 1 January 2013 30 June 2014 AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 1 January 2013 30 June 2014 AASB 127 Separate Financial Statements (Revised) 1 January 2013 30 June 2014 AASB 128 Investments in Associates and Joint Ventures (Revised) 1 January 2013 30 June 2014 A A A A A A B A A A A AASB 119 Employee Benefits (September 2011) 1 January 2013 30 June 2014 A, B AASB 2010-10 Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements 1 January 2013 30 June 2014 A, B 1 July 2013 30 June 2015 AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards 1 January 2013 30 June 2014 AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities 1 January 2013 30 June 2014 AASB 2012-3 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities 1 January 2014 30 June 2016 AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle 1 January 2013 30 June 2014 AASB 2012-9 Amendment to AASB 1048 arising from the Withdrawal of Australian Interpretation 1039 1 January 2013 30 June 2014 AASB 2012-10 Amendments to Australian Accounting Standards – Transition Guidance and Other Amendments AASB 2013-3 Amendments to AASB 136 – Recoverable Amounts Disclosures for Non-Financial Assets 1 January 2013 30 June 2014 1 January 2014 30 June 2016 Table note A B These changes are not expected to have a significant, if any, financial impact. These changes will impact disclosures when preparing the annual financial report. C Not applicable. 52 B A C C A A A B Steadfast Group Annual Report 2013 Share based payment expense on re-weighting of shares During the Extraordinary General Meeting held in June 2013, the shareholders voted to adopt a re-weighting of shares between owners from an equal allocation basis to a combination of equal allocation and one based on past support of various products and businesses. This resulted in a share based payment expense for those brokers receiving more than the average shareholding. The Group applied judgement in determining the fair value of services provided by the brokers who were the recipients of the re-weighted shares in excess of average shareholding post the re-weighting of shares assessment. Note 3. 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 may differ from 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. Fair value of assets acquired The consolidated entity measures the net assets acquired in a business combination at their fair value at the date of acquisition. Fair value is estimated with reference to the market transactions for similar assets or discounted cash flow analysis. Deferred consideration The consolidated entity has made a best estimate of the amount of consideration payable for the acquisitions where there is a variable purchase price (for example, a multiple of future period earnings before interest expense, tax and amortisation (EBITA)) after performing due diligence on the acquisition. Should the final EBITA vary from these best estimates, the consolidated entity will be required to finance or reduce the final consideration payable and recognise the difference as expense or income. Estimation of useful lives of assets The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Goodwill Goodwill is assessed annually for impairment. Recoverable amount of goodwill is estimated using discounted cash flow analysis of the relevant cash generating unit (CGU) deducting the carrying amount of the identifiable net assets of the CGU. Key assumptions used in the calculation of recoverable amounts are the discount rates, terminal value growth rates and EBITA growth rates. Intangible assets The carrying amounts of intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of the intangible asset exceeds its recoverable amount. 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. Rebates provision The provision represents the rebates from the consolidated entity to Steadfast Network brokers and is calculated based on a percentage of eligible income received from the consolidated entity’s preferred insurance and funder partners. The actual amount of rebate finally paid may vary from the estimated amount. 53 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 4. Operating segments The Company’s corporate structure includes equity investments in insurance intermediary entities (insurance broking and underwriting agencies). Discrete financial information about each of these entities is reported to management on a regular basis and accordingly management considers each entity to be a discrete business operation. The Company believes that all of the Group’s equity investments in insurance intermediary entities exhibit similar economic characteristics and have therefore been aggregated into a single reporting segment, being the general insurance intermediary sector. This assessment is based on each of the business operations having similar products and services, similar types of customer, employing similar operating processes and procedures and operating within a common regulatory environment. The Group is in the business of distributing and advising on insurance products in Australia and New Zealand. In addition to reviewing performance based on statutory profit after tax, the Chief Operating Decision Maker (being the Managing Director & CEO) also reviews the additional performance measure, earnings before interest expense, tax, and amortisation (EBITA) broken down by consolidated entities, and associates and joint venture. The additional performance measure, EBITA, and other related information broken down by consolidated entities, and associates and joint venture provided on a regular basis to the Chief Operating Decision Maker is outlined in the table below. EBITA – consolidated entities Share of EBITA from associates and joint venture EBITA from core operations Less: Due diligence and restructure costs Share based payment expense on re-weighting of shares EBITA Finance costs – consolidated entities Finance costs – associates and joint venture (note 37) Amortisation expense – consolidated entities Amortisation expense – associates and joint venture (notes 37, 38) Net profit/(loss) before income tax Income tax (expense)/benefit – consolidated entities Income tax (expense)/benefit – associates and joint venture (notes 37, 38) Profit/(loss) after income tax (expense)/benefit for the year Non-controlling interest Net profit/(loss) after income tax attributable to owners of Steadfast Group Limited 2013 $’000 7,871 4,472 12,343 2012 $’000 5,850 3,845 9,695 (13,304) (1,165) (10,478) – (11,439) 8,530 (1,188) (17) (521) (235) (13,400) 1,421 (1,288) (13,267) (170) (13,437) (4) – (9) – 8,517 (1,205) (1,138) 6,174 – 6,174 54 Steadfast Group Annual Report 2013 Note 5. Revenue Sales revenue Marketing and administration fees Fee and commission income Other revenue Interest Other revenue Revenue Note 6. Expenses Profit/(loss) before income tax includes the following specific expenses: Due diligence and restructure costs(a) Due diligence and restructure costs on acquisition of businesses Share based payment expenses on re-weighting of shares(b) Due diligence and restructure costs Consolidated 2013 $’000 2012 $’000 24,513 21,663 5,623 – 30,136 21,663 340 4,293 4,633 396 9,278 9,674 34,769 31,337 Consolidated 2013 $’000 2012 $’000 13,304 10,478 23,782 1,165 – 1,165 (a) (b) The due diligence and restructure costs are expected to be non-recurring expenses and arose due to specific activities to facilitate the Company listing on the ASX in August 2013. At the Extraordinary General Meeting of shareholders in June 2013, the shareholders agreed to restructure the shareholdings from an equal holding to a combination of an equal and proportionate holding based on past services provided to the Group. This resulted in a share based payment expense for those brokers receiving more than the average shareholding. The retained earnings of the Group were increased by a corresponding amount. Depreciation and amortisation Depreciation expense (note 12) Amortisation expense (note 13) Total depreciation and amortisation Finance costs Interest and finance charges paid/payable Rental expense relating to operating leases Minimum lease payments Employee benefits Contributions to defined contribution superannuation funds Share based payments Transfers to provisions charged to profit or loss Restructuring provision 492 521 1,013 1,188 251 687 64 255 9 264 4 9 310 – 400 – 55 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 7. Income tax expense/(benefit) Income tax expense/(benefit) Current tax Deferred tax – origination and reversal of temporary differences Aggregate income tax expense/(benefit) Deferred tax included in income tax expense/(benefit) comprises: Increase in deferred tax assets (note 14) Increase/(decrease) in deferred tax liabilities (note 21) Deferred tax – origination and reversal of temporary differences Numerical reconciliation of income tax expense/(benefit) and tax at the statutory rate Profit/(loss) before income tax expense/(benefit) Tax at the statutory tax rate of 30% Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Non-deductible expenses – share based payment expenses on re-weighting of shares Share of after tax profits of associates and joint venture Non-deductible expenses – other (including restructure costs) Prior year tax losses not recognised now recouped Income tax expense/(benefit) Amounts charged directly to equity Deferred tax liabilities (note 21) Consolidated 2013 $’000 2012 $’000 1,495 (2,916) (1,421) (1,200) (1,716) (2,916) – 1,205 1,205 (558) 1,763 1,205 (14,688) 7,379 (4,406) 2,214 3,144 (880) 721 (1,421) – – (814) 11 1,411 (206) (1,421) 1,205 Consolidated 2013 $’000 2012 $’000 67 – 56 Steadfast Group Annual Report 2013 Note 8. Current assets – cash and cash equivalents Cash and cash equivalents Cash and cash equivalents – trust Note 9. Current assets – trade and other receivables Trade receivables Other receivables Note 10. Current assets – other Prepayments Consolidated 2013 $’000 3,235 8,243 11,478 2012 $’000 9,189 801 9,990 Consolidated 2013 $’000 19,367 730 2012 $’000 7,962 6,715 20,097 14,677 Consolidated 2013 $’000 1,506 2012 $’000 329 As at 30 June 2013, the balance of prepayments included transaction costs of $1,359,000 in relation to the issue of share capital resulting from the restructure and successful listing of the Company on the ASX in August 2013. These transaction costs will net off against share capital issued in the next reporting period. Note 11. Non-current assets – investments Investments in associates (note 37) Miramar Underwriting Agency Pty Ltd Rothbury Group Limited SME Insurance Survey’s Pty Ltd Investment in joint venture (note 38) Macquarie Premium Funding Pty Ltd Loan to joint venture (note 33) Macquarie Premium Funding Pty Ltd Consolidated 2013 $’000 2012 $’000 1,383 6,836 – 1,521 – 22 8,219 1,543 3,593 2,462 3,698 – 15,510 4,005 57 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 12. Non-current assets – property, plant and equipment Buildings – at cost Less: Accumulated depreciation Freehold improvements – at cost Less: Accumulated depreciation Fittings and other equipment – at cost Less: Accumulated depreciation Motor vehicles – at cost Less: Accumulated depreciation Consolidated 2013 $’000 12,066 (687) 11,379 1,405 (311) 1,094 1,310 (945) 365 120 (14) 106 2012 $’000 3,624 (427) 3,197 587 (263) 324 971 (775) 196 – – – 12,944 3,717 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 2011 Additions Depreciation expense Balance at 30 June 2012 Additions Additions through business combinations (note 35) Depreciation expense Balance at 30 June 2013 Freehold Buildings improvements $’000 $’000 Fittings and other equipment $’000 Motor vehicles $’000 3,287 – (90) 3,197 8,442 – (260) 355 7 (38) 324 818 – (48) 11,379 1,094 280 43 (127) 196 186 153 (170) 365 – – – – – 120 (14) 106 Total $’000 3,922 50 (255) 3,717 9,446 273 (492) 12,944 58 Steadfast Group Annual Report 2013 Note 13. Non-current assets – intangible assets and goodwill Goodwill – at cost Customer relationships – at cost Less: Accumulated amortisation Software – at cost Less: Accumulated amortisation Consolidated 2013 $’000 28,131 28,131 8,339 (421) 7,918 189 (184) 5 36,054 2012 $’000 – – – – – 84 (84) – – 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 2011 Additions Amortisation expense Balance at 30 June 2012 Additions Additions through business combinations (note 35) Amortisation expense Balance at 30 June 2013 Goodwill $’000 Customer relationships $’000 Software $’000 Total $’000 – – – – – 28,131 – 28,131 – – – – – 8,339 (421) 7,918 – 9 (9) – – 9 (9) – 103 103 2 36,472 (100) (521) 5 36,054 59 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 13. Non-current assets – intangible assets and goodwill (continued) Impairment testing of identifiable intangibles and goodwill The recoverable amount of identifiable intangibles (customer relationships) and goodwill arising on consolidation of subsidiaries and acquired business assets is determined based on the higher of the Directors’ estimate of fair value of the cash generating unit (CGU) to which they relate less costs to sell and its value in use. In performing impairment testing, each subsidiary or portfolio of business assets acquired (refer note 35) is considered a separate CGU or grouped into one CGU where operations are linked. The value in use for each CGU has been determined using a discounted cash flow model, based on one year projection period approved by the directors and extrapolated for a further 4 years using a steady revenue growth rate, together with a terminal value. The profit margins are adjusted for extrapolated years to reflect the directors’ estimate of sustainable margins for each CGU. The following key assumptions were used in discounted cash flow models for value in use calculations for all CGUs (comparable assumptions for previous year are not disclosed as there were no identifiable intangibles and goodwill on consolidation): > > > post tax discount rates of 11.2% to 13.1% (pre-tax 15.1% to 17.9%); revenue growth of 4% between the financial years between 2015 and 2018; and long term revenue growth of 2.5% per annum. Post tax discount rates of between 11.2% and 13.1% reflect the consolidated entity’s weighted average cost of capital (WACC), adjusted for additional risks specific to each CGU. The WACC takes into account market risks, size of the business, current borrowing interest rates, borrowing capacity of the businesses and the risk free rate. External expert advice has been sought in relation to the determination of appropriate discount rates to be used. Directors have estimated a revenue growth of 5% for the financial years between 2015 and 2018 based on short term industry forecasts and have no reason to revise this estimation based on current performance. A conservative revenue growth of 4% between 2015 and 2018 is being used in the impairment testing. Directors believe that the long term revenue growth rate of 2.5% is prudent and justified, based on the current economic outlook and market conditions. The fair value assessment for each CGU is based on the directors’ estimates of earnings before interest expense, tax and amortisation (EBITA) tested against current and prior year EBITA. The sustainable EBITA for each CGU is multiplied by an earnings multiple appropriate for similar businesses. Directors may also consider an estimate of fair value with reference to a multiple of after tax earnings, commission and fee income or other measures for each CGU based on market practice for acquisition of similar businesses. Fair value measures were not used to determine the recoverable value of any CGU in the current period. The recoverable values are compared to the carrying value for each CGU and in the event that the carrying value exceeds the recoverable amount, an impairment loss is recognised. No reasonable possible change in assumptions would result in the recoverable amount of a CGU being materially less than the carrying value. 60 Steadfast Group Annual Report 2013 Note 14. Non-current assets – deferred tax assets Deferred tax assets comprise temporary differences attributable to: Amounts recognised in profit or loss: Tax losses Accrued expenses Provisions Software development pool and capitalised projects Expenditure claimable over five years Property other than depreciating assets Others Deferred tax assets Movements: Balance at the beginning of the financial year Credited to profit or loss (note 7) Additions through business combinations (note 35) Balance at the end of the financial year before offset Less: offset against deferred tax liabilities (note 21) Balance at the end of the financial year Note 15. Current liabilities – trade and other payables Trade payables Trust Account (Erato funds) Unearned income Deferred consideration for acquired businesses (note 35) Other tax liabilities Dividend payables Other payables Refer to note 27 for further information on financial instruments. Consolidated 2013 $’000 2012 $’000 – 694 603 205 510 79 1 2,092 726 1,200 166 2,092 (1,954) 138 2 – 196 206 254 57 11 726 168 558 – 726 – 726 Consolidated 2013 $’000 26,211 1,203 198 8,340 616 – 516 2012 $’000 1,056 801 1,125 – 1,591 168 6 37,084 4,747 61 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 16. Current liabilities – borrowings Bank loans Consolidated 2013 $’000 3,094 2012 $’000 50 Refer to note 20 for further information on the bank facilities drawn down and note 27 for further information on financial instruments. Note 17. Current liabilities – income tax payable Provision for income tax Note 18. Current liabilities – provisions Restructuring Employee benefits Rebates Consolidated 2013 $’000 1,001 2012 $’000 – Consolidated 2013 $’000 400 934 6,020 7,354 2012 $’000 – 281 11,833 12,114 Rebates The provision represents the rebates due from the consolidated entity to Steadfast Network brokers and includes a rebate attributable to Macquarie Premium Funding of $Nil (2012: $2,660,000). Movements in provisions Movements in the rebates provision during the current financial year, are set out below: Consolidated – 2013 Balance at the beginning of the financial year Additional provisions recognised Payments Balance at the end of the financial year Rebates $’000 11,833 5,894 (11,707) 6,020 62 Steadfast Group Annual Report 2013 Note 19. Non-current liabilities – other payables Deferred consideration Refer to note 27 for further information on financial instruments. Consolidated 2013 $’000 1,524 2012 $’000 – Refer to note 35 for further information on deferred consideration payable for the acquired businesses during the financial year ended 30 June 2013. Note 20. Non-current liabilities – borrowings Bank loans Refer to note 27 for further information on financial instruments. Consolidated 2013 $’000 33,529 2012 $’000 – Bank facility details As 30 June 2013, the Company had $44.430 million in secured cash advance term and revolving loan facilities (2012: $2.000 million of lines of credit) with Macquarie Bank Limited (Macquarie Bank). The expiry date of the current Macquarie Bank facilities is 12 October 2015. As at 30 June 2013, there was $7.807 million of undrawn facilities (2012: $2.000 million unutilised lines of credit). Repayment subsequent to 30 June 2013 With the successful listing of the Company on the ASX in August 2013, the Macquarie Bank facilities were fully repaid by the Company on 7 August 2013. The repayment was funded by cash raised through the public and institutional offer in relation to the listing of the Company on the ASX. Upon repayment of the Macquarie Bank facilities, the associated guarantee and indemnity were effectively withdrawn. Key terms and conditions of banking facilities The key terms and conditions of the banking facilities are set out below. All the guarantee and indemnity provide by the Group to Macquarie Bank as described below were effectively withdrawn in August 2013 upon the repayment of the facilities outstanding as at 30 June 2013: Interest The Company paid Macquarie Bank interest at a variable rate (2012: variable rate). A line fee is also payable by the Company on any undrawn amounts under the Macquarie Bank facilities. Guarantee The Company and its subsidiaries (the Guarantors) had granted a guarantee and indemnity in favour of Macquarie Bank in respect of the Company’s obligation under the Macquarie Bank facilities. Security 2013: Macquarie Bank facilities The Company and the Guarantors have granted various securities to secure the Macquarie Bank facilities including: > > > security interests over all of their present and after-acquired assets and undertakings in favour of Macquarie Bank; mortgages over Levels 1, 3 and 5, 97-99 Bathurst Street, Sydney NSW 2000 in favour of Macquarie Bank; and mortgages over any money or negotiable instrument received in payment of any claim on, or on cancellation of, any insurance policy in respect of the above property in favour of Macquarie Bank. 63 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 20. Non-current liabilities – borrowings (continued) New subsidiaries The Company provided to Macquarie Bank, in respect of any entity being acquired by the Company in its entirety, guarantee and security in the form of a registered first ranking security over all the present and after acquired assets and undertakings of that acquired entity. 2012: Lines of credit The line of credit was secured by a registered first mortgage, over Level 3, 97-99 Bathurst Street Sydney. The security was discharged on 12 September 2012. Representations, warranties, undertakings and defaults The Macquarie Bank facilities contained a number of representations, warranties and undertakings (including financial covenants and reporting obligations) from the Company and the Guarantors that are customary for a facility of this nature, including covenants ensuring that the Company maintains a Group debt to EBITDA ratio below agreed levels and a Group debt service cover ratio above agreed levels. The Macquarie Bank facility agreements contained a list of events of default which are customary for finance facilities of this nature. These events of default include failure to pay any amounts in accordance with the finance documents, failure to comply with any other provision of the finance documents, misrepresentation of facts pertaining to any finance document, any borrowing or surety becomes prematurely due or is not paid when due, the occurrence of an insolvency event and the occurrence of an event which, in Macquarie Bank’s opinion, may have had a material adverse effect. If an event of default occurs, Macquarie Bank may declare that its obligations under the finance documents are cancelled and/or the balance outstanding under the Macquarie Bank facilities is immediately due and payable. There were no breaches of covenants or default during the financial year. Note 21. Non-current liabilities – deferred tax liabilities Consolidated 2013 $’000 2012 $’000 2,369 519 20 – 67 – 1,757 14 3 – 2,975 1,774 1,774 (1,716) 67 2,850 2,975 (1,954) 1,021 11 1,763 – – 1,774 – 1,774 Deferred tax liabilities comprise temporary differences attributable to: Amounts recognised in profit or loss: Intangible assets Accrued income Property, plant and equipment Prepayments Others Deferred tax liabilities Movements: Balance at the beginning of the financial year Charged/(credited) to profit or loss (note 7) Charged to equity Additions through business combinations (note 35) Balance at the end of the financial year before offset Less: offset against deferred tax assets (note 14) Balance at the end of the financial year 64 Steadfast Group Annual Report 2013 Note 22. Non-current liabilities – provisions Employee benefits Note 23. Equity – issued capital Consolidated 2013 $’000 740 2012 $’000 290 Ordinary shares – fully paid 1,395 1,395 317 2012 No. of shares No. of shares 2013 2013 $’000 2012 $’000 317 Consolidated Consolidated Movements in ordinary share capital Details Balance Share buy-back Shares issued Balance Balance Date No. of shares Issue price $’000 1 July 2011 1,390 25 July 2011 23 April 2012 30 June 2012 30 June 2013 (10) $1,860.00 15 $5,950.67 1,395 1,395 246 (18) 89 317 317 Ordinary shares Ordinary shares on issue at 30 June 2013 entitle the holder to participate in dividends in proportion to the volume of business. Ordinary shares participate in the proceeds on winding up of the parent entity in proportion to the number of shares held. On a show of hands every shareholder present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. 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. 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, take on borrowings or sell assets to reduce debt. 65 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 23. Equity – issued capital (continued) Restructure of capital during the financial year On 14 June 2013, an Extraordinary General Meeting was held to change the constitution of the Company to facilitate the listing of the Company on the ASX. In August 2013, the Company was successfully listed on the ASX. During the Extraordinary General Meeting, the shareholders also voted to adopt a re-weighting of shares between owners from an equal allocation basis to a combination of equal allocation and one based on past support of various products and businesses. In addition, as part of this, and effective from the date of listing on the ASX, the existing 1,395 issued ordinary shares before restructure of capital were converted into 1,395 preferred capital shares upon the issue of re-weighting shares. The terms and conditions of the preferred capital shares are that they: > > > do not carry any voting rights at a general meeting; do not carry any rights to receive dividends; and are entitled to a return of capital of $0.01 per preferred share in priority to the ordinary shares in the event of the winding up of the Company but will not participate in any other distribution of surplus assets or profits. This re-weighting did not change the dollar value of share capital which existed as at 30 June 2013 or at listing in August 2013. However, it had a one-off effect of causing a share based payment expense of $10.478 million, offset by an increase in retained earnings for the financial year. The expense reflected the value transferred to owners whose proportionate holding in the Company increased as a result of past services provided to the Company. Share based payments on re-weighting shares with non employees As explained above, the Company implemented a re-weighting of shares between the existing owners of the Company. The re-weighting determined the number of ordinary shares to be issued to each owner upon successful listing of the Company. The Company considered that it was important that the relative value provided by each of the Company’s existing owners (each of them owned five ordinary shares before the re-weighting of shares assessment) was recognised through their future shareholdings in the Company. Therefore, the re-weighting of shares assessment had reference to a number of factors relating to each owner’s past contribution to the Company. The outcome of the re-weighting assessment resulted in a total of 65.588 million of ordinary shares to be issued to the existing owners in August 2013 upon the listing of the Company. This re-weighting assessment also changed the shareholdings from five ordinary shares per owners to various numbers of shares per owners, with some of the owners holding more than the average number of shares on issue at listing and some of the owners holding less than the average number of shares. There were four elements (Re-weighting criteria) which were taken into account when assessing the number of re-weighting shares an owner was entitled to. The total number of shares assessed from Re-weighting criteria represented the total number of shares to be issued to each existing owner upon successful listing of the Company. The details of the Re-weighting criteria are provided below. Equal allocation An equal allocation of the Company’s shares based on net tangible assets plus a multiple of 6.7 times the estimated normalised ongoing profits of the Company (excluding acquisitions and the profit that the other elements are based on in the re-weighting of shares assessment) divided by 1,395 shares which were held by existing owners. This calculation resulted in each existing owner being allocated 98,000 ordinary shares. Marketing and administration fees contribution 30% of each existing owners’ (who had been an owner since 1 July 2011) rebates for the year ended 30 June 2012 multiplied by 6.5. For those owners who became owners post 1 July 2011, an estimated owner’s rebates would be calculated as if that owner had been an owner for the full financial year ended 30 June 2012. Claims experience benefits contribution The value of the claims experience benefits related to the Erato Professional Indemnity scheme for the 2005 to 2007 policy years, allocated on a pro rata basis for each of those policy years based on the individual owner’s premiums in the respective years. Macquarie Premium Funding contribution The contribution by each owner to the value realised by the Company in relation to its involvement with Macquarie Premium Funding (MPF). This value has been calculated by reference to an estimate of the Company’s interests in MPF multiplied by 5.8. 80% of that value is allocated to those owners who had supported MPF, calculated based on the volume supported by owners over the three years to 31 January 2013. 66 Steadfast Group Annual Report 2013 Note 23. Equity – issued capital (continued) Issue of new capital subsequent to 30 June 2013 In August 2013, the Company has a total of 500.873 million ordinary shares on issue resulting from: > > > > 65.588 million for re-weighting shares; 10.900 million for executive shares; 134.210 million for consideration shares; and 290.175 million for individual and institutional investors. The cash proceeds raised from listing of the Company was $333.703 million. In addition, 1,395 ordinary shares on issue at 30 June 2013 had been converted into 1,395 preferred capital shares. Note 24. Equity – reserves Foreign currency translation reserve Consolidated Balance at 1 July 2011 Share buy-back Balance at 30 June 2012 Other comprehensive income Balance at 30 June 2013 Consolidated 2013 $’000 157 Foreign currency translation reserve $’000 Shares buy-back $’000 – – – 157 157 34 (34) – – – 2012 $’000 – Total $’000 34 (34) – 157 157 Foreign currency translation reserve The foreign currency translation reserve records the foreign currency differences from the translation of the equity accounted associate that has a functional currency other than Australian dollars. Shares buy-back reserve The reserve is used to recognise shares bought back from shareholders. 67 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 25. Equity – non-controlling interest Movements: Balance at the beginning of the financial year Acquisition of subsidiary with non-controlling interest (note 35) Profit/(loss) after income tax (expense)/benefit for the year Balance at the end of the financial year Note 26. Equity – dividends Dividends Dividend paid for the year ended 30 June 2011 Dividend paid for the year ended 30 June 2011 in respect of Macquarie Premium Funding Dividend payable for the year ended 30 June 2012 Consolidated 2013 $’000 2012 $’000 – 543 170 713 – – – – Consolidated 2013 $’000 – – – – 2012 $’000 177 1,540 168 1,885 No dividends declared by the Company during the financial year or subsequent to the reporting date. $168,000 of the declared dividends for the last financial year were paid during the financial year ended 30 June 2013. Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% Consolidated 2013 $’000 4,310 2012 $’000 4,009 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: > > > franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date; franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. 68 Steadfast Group Annual Report 2013 Note 27. Financial instruments Financial risk management objectives The consolidated entity’s activities expose it to a variety of financial risks: 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. 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 risk and ageing analysis for credit risk. Risk management is carried out by senior finance executives (finance) under policies approved by the Board of Directors (the Board). These policies include identification and analysis of the risk exposure of the consolidated entity and appropriate procedures, controls and risk limits. Finance identifies, evaluates and may hedge financial risks within the consolidated entity’s operating units. Finance reports to the Board on a regular basis. Market risk Interest rate risk As at the reporting date, the consolidated entity had the following variable rate bank accounts and borrowings. Consolidated Cash at bank Cash on deposit Bank loans Net exposure to cash flow interest rate risk 2013 2012 Weighted average interest rate % 1.72 4.02 6.95 Weighted average interest rate % 2.89 5.55 8.05 Balance $’000 10,530 937 (36,623) (25,156) Balance $’000 8,985 1,000 (50) 9,935 The consolidated entity held $11,000 (2012: $5,000) cash in hand which did not generate any interest income at the end of the financial year. An official increase/decrease in interest rates of one hundred (2012: one hundred) basis points would have an adverse/favourable effect on profit/(loss) after tax of 176,000 (2012: favourable/adverse effect of $70,000) per annum. The basis point change is based on the expected volatility of interest rates using market data, historical trends over prior years and the consolidated entity’s ongoing relationships with financial institutions. 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 obtains guarantees where appropriate to mitigate credit risk. 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. The consolidated entity does not hold any collateral. Credit risk of the consolidated entity mainly arises from cash and cash equivalents, trade and other receivables and loan to joint venture. Although there is a concentration of cash and cash equivalents held with a major bank, credit risk is not considered significant. The consolidated entity’s exposure to credit risk is concentrated in the financial services industry with parties which are considered to be of sufficiently high credit quality. Trade receivables include amounts due from policyholders in respect of insurances arranged by controlled entities. Insurance brokers and underwriting agencies have credit terms of 90 days from policy inception to pay funds received from policyholders to insurers. Should policyholders not pay, the insurance policy is cancelled by the insurer and a credit given against the amount due. The consolidated entity’s credit risk exposure in relation to these receivables is limited to commissions and fees charged. Commission revenue is recognised after taking into account an allowance for expected revenue losses on policy lapses and cancellations, based on past experience. The loan to joint venture is provided with a fixed maturity date, 7 years from March 2013. The credit risk from the joint venture party is considered to be low as it is a loan secured by all present and future assets of the joint venture party. 69 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 27. Financial instruments (continued) 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. 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. Consolidated – 2013 Non-derivatives Non-interest bearing Trade and other payables Deferred consideration Interest-bearing – variable rate Bank loans Total non-derivatives Consolidated – 2012 Non-derivatives Non-interest bearing Trade and other payables Interest-bearing – variable 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 Over 5 years $’000 $’000 Remaining contractual maturities $’000 28,744 – 8,340 1,524 – – 6.95 3,094 3,094 30,435 40,178 4,618 30,435 – – – – 28,744 9,864 36,623 75,231 Weighted average interest rate 1 year or less $’000 % Between 1 and 2 years $’000 Between 2 and 5 years Over 5 years $’000 $’000 Remaining contractual maturities $’000 4,747 50 4,797 – – – – – – – 4,747 – – 50 4,797 8.05 The cash flows in the maturity analysis above are not reflective of events that occurred subsequent to balance date. The Company successfully completed its capital raising through the initial public retail and institutional offer through the ASX and repaid all bank loans. The capital raised also provided funding for the settlement of deferred consideration payable through a combination of cash and shares. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. The carrying amounts of trade receivables and trade 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. 70 Steadfast Group Annual Report 2013 Note 28. 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 Long term benefits Termination payments Share based payments Consolidated 2013 $ 2012 $ 3,270,649 2,182,255 148,615 100,060 284,271 19,230 89,227 32,908 – – 3,822,825 2,304,390 Shareholding The number of shares in the parent entity 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: 2013 Ordinary shares Robert Kelly Greg Rynenberg Jonathan Upton Christopher Baker * Cameron Bott * Michael Olofinsky * Richard Post * Shayne Smith * Graham Stevens * Gregory Stewart * Joseph Vella * John Wolozny * Balance at the start of Received as part of the year remuneration Additions Disposals/ other Balance at the end of the year 5 5 5 5 5 5 5 5 5 5 5 5 60 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (5) (5) (5) (5) (5) (5) (5) (5) (5) 5 5 5 – – – – – – – – – (45) 15 * Disposals/other – represents the Non-executive Directors who resigned from office and not a disposal of their shareholding during the financial period. 71 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 28. Key management personnel disclosures (continued) 2012 Ordinary shares Robert Kelly Greg Rynenberg Christopher Baker Cameron Bott Michael Olofinsky Richard Post Graham Stevens Gregory Stewart Jonathan Upton Joseph Vella John Wolozny Shayne Smith(a) Stephen Nichols(b) Balance at the start of Received as part of the year remuneration Additions Disposals/ other Balance at the end of the year 5 5 5 5 5 5 5 5 5 5 5 – 5 60 – – – – – – – – – – – – – – – – – – – – – – – – – 5 – 5 – – – – – – – – – – – – (5) (5) 5 5 5 5 5 5 5 5 5 5 5 5 – 60 (a) Additions – represents the Non-executive Director who was appointed to the Board and not an addition of his shareholding during the financial period. (b) Disposals/other – represents the Non-executive Director who resigned from office and not a disposal of his shareholding during the financial period. The shareholdings above represent the shares held by each director’s Australian Financial Services licensed entity. Related party transactions Related party transactions are set out in note 33. Note 29. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by KPMG, the auditor of the Company: Audit services Audit or review of the financial statements (2012: Moore Stephens Sydney) 438,200 41,000 Consolidated 2013 $ 2012 $ Services other than audit and review of financial statements Other assurance services Due diligence services Investigating accountant services Other assurance service Taxation advisory services Other services (2012: Moore Stephens Sydney) 72 1,212,212 1,909,968 140,097 – – – 267,296 190,580 3,529,573 190,580 3,967,773 231,580 Steadfast Group Annual Report 2013 Note 30. Contingent assets Claims experience benefit The Company may receive a claims experience benefit payment or payments in respect of the Erato Professional Indemnity scheme (Erato). Where the revenue recognition criteria listed in note 2 for the Erato claims experience benefit have not been met, the timing and amount of any such payments are still too uncertain and dependent upon future events. In these circumstances it is not practical to include an estimate of the financial effect of any potential claims experience benefit as considered by AASB 137. Note 31. Contingent liabilities During the financial year ended 30 June 2013, the Company appointed joint lead managers to assist in the listing on the ASX under an Offer Management Agreement. Pursuant to that agreement, fees would be payable only if the listing of the Company was completed. The amount of fees payable was contingent on the actual cash raised on initial public retail and institutional offer. Base fees of $9.000 million were paid in August 2013 as a result of successfully raising $333.703 million in the listing. The Company also applied its discretion to pay an incentive fee of $1.669 million. These costs will be disclosed as part of the transaction costs deducted from share capital raised in August 2013. There were no contingent liabilities as at 30 June 2012. Note 32. Commitments Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years Consolidated 2013 $’000 2012 $’000 74 256 330 – – – Lease commitments – operating corresponds to a non-cancellable lease for property committed at the reporting date but not recognised as liabilities or payable. Note 33. Related party transactions Parent entity Steadfast Group Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 36. Associates Interests in associates are set out in note 37. Joint ventures Interests in joint ventures are set out in note 38. Key management personnel Disclosures relating to key management personnel are set out in note 28 and the remuneration report in the Directors’ report. 73 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 33. Related party transactions (continued) Transactions with related parties The following transactions occurred with related parties: Sale of goods and services: Marketing and administration fees received from Directors’ and former Directors’ related entities on normal commercial terms Marketing and administration fees received from associates on normal commercial terms Marketing and administration fees received from joint venture on normal commercial terms Payment for goods and services: Consolidated 2013 $ 2012 $ 35,948 41,635 366,351 367,754 3,157,769 2,094,326 Estimated rebate expense to Directors’ and former Directors’ related entities on the same basis with other shareholders 92,495 753,516 Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Current receivables: Trade receivables from associates Trade receivables from joint venture Trade receivables from Directors’ related entities Dividend receivable from associates Current payables: Trade payables to associates Loans to/from related parties The following balances are outstanding at the reporting date in relation to loans with related parties: Non-current receivables: Loan to joint venture Consolidated 2013 $ 2012 $ 82,516 95,089 902,031 660,048 – 140,134 430,943 450,000 587 – Consolidated 2013 $ 2012 $ 3,698,268 – The loan to joint venture, Macquarie Premium Funding Pty Ltd (Macquarie Premium Funding) has a face value of $3,618,750. The loan receivable balance as at 30 June 2013 includes an accrued interest of $79,518. The loan was provided to Macquarie Premium Funding to fund the acquisition of Pacific Premium Funding Pty Limited. Key terms and conditions: > Variable interest rate based on the aggregate of Macquarie Bank Limited (MBL) Reference Rate and a margin of 2% per annum. The MBL Reference Rate refers to the interest rate determined by MBL and published by MBL at any time on its website. The loan is repayable seven years from the date of initial advance, which occurred in March 2013. The loan is secured by all present and future assets of Macquarie Premium Funding. > > 74 Steadfast Group Annual Report 2013 Note 34. Parent entity information Statement of comprehensive income Profit/(loss) after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Retained profits Total equity Parent 2013 $’000 (13,748) (13,748) 2012 $’000 6,856 6,856 Parent 2013 $’000 10,966 62,058 20,960 54,776 317 6,965 7,282 2012 $’000 24,292 28,692 16,665 16,917 317 11,458 11,775 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 2013 and 30 June 2012. Contingent liabilities During the financial year ended 30 June 2013, the parent entity appointed joint lead managers to assist in the listing on the ASX under an Offer Management Agreement. Pursuant to that agreement, fees would be payable only if the listing of the parent entity was completed. The amount of fees payable was contingent on the actual cash raised on initial public retail and institutional offer. Base fees of $9.000 million were paid in August 2013 as a result of successfully raising $333.703 million in the listing. The parent entity also applied its discretion to pay an incentive fee of $1.669 million. These costs will be disclosed as part of the transaction costs deducted from share capital raised in August 2013. There were no contingent liabilities as at 30 June 2012. Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment at as 30 June 2013 and 30 June 2012. Significant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in note 2, except for the following: > Investments in subsidiaries are accounted for at cost, less any impairment. Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. > Investments in associates are accounted for at cost, less any impairment in the parent entity. 75 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 34. Parent entity information (continued) Going concern The parent entity financial statements have been prepared on a going concern basis. As of 30 June 2013 the parent entity’s current liabilities exceed current assets by $9.994 million. This is mainly due to $8.340 million of deferred consideration payable for the acquisition of businesses in the period being shown as a current liability as well as $3.094 million of current bank loans in relation to the acquisition of businesses during the financial year. In August 2013, the parent entity was successfully listed on the ASX, raised $333.703 million capital in cash for settlement of the acquisition of businesses completed during the financial year ended 30 June 2013 as well as businesses acquired upon listing, repayment of debt facilities, payment of due diligence and restructure costs related to the successful listing of the Company and to raise $25.000 million for future acquisitions. The Directors therefore believe the going concern assumption to be appropriate. Note 35. Business combinations A major strategy of the Group is to acquire broking portfolios or interests in insurance intermediary businesses ranging from 25% to 100%. The terms of these acquisitions vary in line with negotiations with individual vendors but are structured to have the principals of the business holding sufficient remaining ownership interests to achieve the Group’s benchmarks or return on investment and/or to take advantage of the rationalisation in the broking industry. Acquisition of subsidiaries During the financial year ended 30 June 2013, the Group acquired the following subsidiaries: > > > Wasal Holdings Pty Ltd and its wholly owned subsidiary, Wagland Salter & Associates Pty Limited (Wagland), an insurance broker in New South Wales; Sports Underwriting Australia Pty Ltd (Sports), an insurance underwriting agency in Victoria; and DMA Unit Trust and DMA Insurance Brokers Pty Ltd (DMA), an insurance broker in New South Wales. General details of the acquisitions Acquisition date Voting shares at 1 July 2012 Voting shares acquired Voting shares at 30 June 2013 Non-controlling interest at 30 June 2013 Consideration transferred Cash Deferred consideration – shares(a) Deferred consideration(b) Total Wagland Sports DMA 30/11/2012 12/12/2012 30/01/2013 –% 100.0% 100.0% –% –% 80.0% 80.0% 20.0% –% 100.0% 100.0% –% Wagland $’000 Sports $’000 4,055 1,352 202 5,609 4,334 5,750 1,036 DMA $’000 9,046 – – 11,120 9,046 (a) On 7 August 2013, 25% and 50% of the purchase price for Wagland and Sports were settled with ordinary shares issued by the Company. The shares are valued at $1.15 per share which is the final share price of the Company determined by the Board under the terms of the initial public offering. As at 30 June 2013, these amounts were classified as current liabilities and disclosed separately in note 15 current liabilities – trade and other payables as the amounts were expected to be settled as cash if the listing of the Company was not successful. (b) The deferred consideration for Sports is subject to adjustment based on the earnings before interest expense, income tax and amortisation expenses (EBITA) for the financial year ended 30 June 2013. The amount recognised has been based on 2013 forecast EBITA. 76 Steadfast Group Annual Report 2013 Note 35. Business combinations (continued) Identifiable assets and liabilities acquired Cash and cash equivalents Trade and other receivables* Property, plant and equipment Deferred tax assets Identifiable intangibles Other assets Trade and other payables Income tax payable Provisions Deferred tax liabilities Other liabilities Total net identifiable assets Wagland $’000 Sports $’000 DMA $’000 1,596 1,398 67 81 972 30 1,925 3,701 48 13 3,000 – 1,489 1,445 143 52 2,538 3 (2,549) (4,700) (2,694) (67) (268) (408) – 852 (164) (34) (1,073) – (174) (820) – (1,360) 2,716 622 * The trade receivables comprise contractual amounts and are expected to be fully recoverable. If new information obtained within one year from the acquisition date about facts and circumstances that existed at the acquisition date identifies adjustments to the above amount of provisions, or any additional provisions that existed at the acquisition date, then the acquisition accounting will be revised. Goodwill on acquisition Total consideration paid Total net identifiable assets acquired Non-controlling interest acquired(a) Goodwill on acquisition(b) Wagland $’000 5,609 (852) – 4,757 Sports $’000 11,120 (2,716) 543 8,947 DMA $’000 9,046 (622) – 8,424 (a) (b) Non-controlling interest acquired are based on the proportionate ownership interest in the total net identifiable assets recognised at the acquisition date. Goodwill represents the excess of the purchase consideration over the fair value of identifiable net assets acquired and non-controlling interest at the acquisition date. The majority of the goodwill relates to benefits from the combination of synergies as well as the acquired subsidiaries ability to generate future profits. None of the goodwill recognised is expected to be deductible for tax purposes. Acquisition of business assets On 28 February 2013, the Group acquired the business assets of Newmarket Insurance Brokers Pty Ltd (Newmarket) for a payment of $6,778,800, with 80% of the purchase price initially payable. The remaining 20% is recognised as deferred consideration and is subject to adjustment based on an earn out based on earnings over the financial years ending 30 June 2013 and 2014. On 10 May 2013, the Group acquired the business assets of an Authorised Representative of Wagland Salter & Associates Pty Limited (Authorised Representative of WSA) for a payment of $456,000, being acquisition of client list and goodwill. The deferred consideration for Authorised Representative of WSA is subject to adjustment based on the fee and commission income for the financial years ending 30 June 2014 and 2015. The amount recognised has been based on forecast fee and commission income. 77 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 35. Business combinations (continued) Consideration transferred Cash Deferred consideration* Total Authorised Representative of WSA $’000 Newmarket $’000 5,406 1,372 6,778 304 152 456 * The deferred consideration is an estimate based on the assumption that the acquirees will meet the forecast earnings target. Identifiable assets and liabilities acquired Property, plant and equipment Deferred tax assets Identifiable intangibles Provisions Deferred tax liabilities Total net identifiable assets Authorised Representative of WSA $’000 Newmarket $’000 15 20 1,545 (84) (464) 1,032 – – 284 – (85) 199 If new information obtained within one year from the acquisition date about facts and circumstances that existed at the acquisition date identifies adjustments to the above amount of provisions, or any additional provisions that existed at the acquisition date, then the acquisition accounting will be revised. Goodwill on acquisition Total consideration paid Total net identifiable assets acquired Goodwill on acquisition* Authorised Representative of WSA $’000 Newmarket $’000 6,778 (1,032) 5,746 456 (199) 257 * Goodwill represents the excess of the purchase consideration over the fair value of identifiable net assets acquired at the acquisition date. The majority of the goodwill relates to benefits from the combination of synergies as well as the acquired subsidiaries ability to generate future profits. None of the goodwill recognised is expected to be deductible for tax purposes. 78 Steadfast Group Annual Report 2013 Note 35. Business combinations (continued) Financial performance of acquired subsidiaries and business assets The contribution by the acquired subsidiaries to the financial performance of the Group was outlined in the table below. Contribution for the period since acquisition Revenue Profit after income tax Wagland * $’000 Sports $’000 DMA Newmarket $’000 $’000 1,371 227 1,988 778 1,633 188 831 (20) * The contribution by the Authorised Representative of WSA is included in the result of Wagland. If the acquisitions of subsidiaries and business assets occurred on 1 July 2012, the Group’s total revenue and loss after income tax attributable to the owners of the Company for the year ended 30 June 2013 would have been $40,664,000 and $12,328,000, respectively. Acquisition-related costs The Group incurred acquisition-related costs related to external legal fees and due diligence costs for businesses acquired during the financial year as well as for businesses acquired upon the successful listing of the Company on the ASX in August 2013. The amount of the external legal fees and due diligence costs for the businesses acquired during the financial year or those in August 2013 could not be separately identified by an individual acquisition as there were concurrent acquisition activities for all businesses acquired throughout the financial periods. The legal fees and due diligence costs have been included in due diligence and restructure costs in the Group’s consolidated statement of comprehensive income. Investment in associates On 1 April 2013, the Group acquired 17.9% ownership interest in Rothbury Group Limited (Rothbury) and contracted to increase its shareholding to 30.1% on the successful listing of the Company, which occurred in August 2013. Rothbury is considered an associate as at 30 June 2013 due to the terms of the shareholder agreement in place, including the request to provide a board member to Rothbury. The Group will deliver a range of services to Rothbury as it establishes the Group’s presence in the New Zealand market. The financial information provided in the table below is for the financial year ended 31 March 2013. These figures represent the financial position and financial performance of Rothbury as a whole and not just the Group’s share. The financial information is translated using exchange rate as at 31 March 2013 (being the year end date of Rothbury). Consideration transferred Total assets Total liabilities Revenue Profit after income tax Rothbury $’000 6,360 64,792 42,729 27,664 4,594 79 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 36. Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: Name of entity Parent entity Steadfast Group Limited Subsidiaries – operating entities Steadfast Convention Pty Ltd Steadfast Insurance Brokers Pty Ltd Steadfast Technologies Pty Ltd (formerly Steadfast Hub Pty Ltd) Steadfast Underwriting Agencies Holdings Pty Ltd (formerly Steadfast Underwriting Agencies Pty Ltd) DMA Insurance Brokers Pty Ltd Newmarket Insurance Brokers Pty Ltd Sports Underwriting Australia Pty Ltd Wagland Salter & Associates Pty Limited Wasal Holdings Pty Ltd Steadfast Share Plan Nominee Pty Ltd(a) Subsidiaries – dormant entities Erato Limited Steadfast Brokers Pty Ltd Steadfast Finance Pty Ltd Steadfast Financial Planners Pty Ltd Steadfast Financial Services Pty Ltd Steadfast Financial Solutions Pty Ltd Steadfast Foundation Pty Ltd(b) Steadfast Hub Pty Ltd Steadfast Insurance Advisors Pty Ltd Steadfast Insurance Consultants Pty Ltd Steadfast Insurance Management Pty Ltd Steadfast Insurance Pty Ltd Steadfast Insurance Services Pty Ltd Steadfast NZ Pty Limited Steadfast Premium Funding Pty Ltd Steadfast Risk Services Pty Ltd Steadfast Underwriting Agencies Pty Ltd Trusted Choice Pty Limited Trusted Choice Pty Ltd (a) A trustee for Steadfast employee share plan. (b) A trustee to Steadfast Foundation. 80 Country of incorporation Equity holding 2013 % 2012 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Australia Australia Australia New Zealand Australia 100.0 100.0 100.0 100.0 100.0 100.0 80.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 – – – – – – 100.0 100.0 100.0 100.0 100.0 100.0 100.0 – 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 – 100.0 100.0 Steadfast Group Annual Report 2013 Note 37. Investments in associates Interests in associates are accounted for using the equity method of accounting. Information relating to associates is set out below: Associate Miramar Underwriting Agency Pty Ltd SME Insurance Survey’s Pty Ltd Rothbury Group Limited Principal activities Insurance underwriting Insurance surveying Insurance broking Consolidated Percentage interest 2013 % 50.0 50.0 17.9 2012 % 50.0 50.0 – Miramar Underwriting Agency Pty Ltd (Miramar) is considered to be an associate as control lies with the Executive Director of Miramar. SME Insurance Survey’s Pty Ltd (SME) is considered to be an associate as control lies with the Executive Director of Miramar. SME commenced deregistration process prior to 30 June 2013, and it was formally deregistered by ASIC on 14 July 2013. The operating result for SME for the financial year ended 30 June 2013 is immaterial for the Group so has not been separately disclosed as a discontinued operation. Rothbury Group Limited (Rothbury) was acquired during the financial year. Refer to note 35 Business combinations for further details. Rothbury is considered an associate as at 30 June 2013 due to the terms of the shareholder agreement in place including the request to provide a board member to Rothbury. The Group will deliver a range of services to Rothbury as it establishes the Group’s presence in the New Zealand market. Further, an additional 12.2% interest in the business was acquired as part of the listing of the Company in August 2013. Reconciliation of movements Balance at the beginning of the financial year Acquisition of associate Write down of investment in associate being deregistered (SME Insurance Survey’s Pty Ltd) Share of EBITA from associates Less: Finance costs Amortisation expense Income tax (expense)/benefit Share of associates’ profit after income tax Dividend received/receivable Net foreign exchange movements Balance at the end of the financial year Consolidated 2013 $’000 1,543 6,360 (24) 824 (17) (29) (232) 546 (430) 224 2012 $’000 1,747 – – 380 – – (134) 246 (450) – 8,219 1,543 81 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 37. Investments in associates (continued) Summarised financial information of associates These disclosures relate to the investment in all associates in aggregate. These figures represent the financial position and performance of the associates as a whole and not just the Group’s share. Total assets Total liabilities Revenue Profit/(loss) after income tax Consolidated 2013 $’000 77,506 54,328 35,743 5,183 2012 $’000 11,186 9,753 7,855 490 Note 38. Interests in joint venture Interests in joint venture are accounted for using the equity method of accounting. Information relating to joint venture is set out below: Joint venture Principal activities Macquarie Premium Funding Pty Ltd Insurance premium funding Reconciliation of movements Balance at the beginning of the financial year Additional investment in joint venture Share of EBITA from joint venture Less: Amortisation expense Income tax (expense)/benefit Share of joint venture’s profit after income tax Dividend received/receivable Balance at the end of the financial year Consolidated Percentage interest 2013 % 50.0 2012 % 50.0 Consolidated 2013 $’000 2,462 1,206 3,648 (206) (1,056) 2,386 (2,461) 3,593 2012 $’000 1 – 3,465 – (1,004) 2,461 – 2,462 Macquarie Bank Limited, the joint venture partner, has also contributed an additional $1,206,000 to maintain an equal equity interest in the joint venture, Macquarie Premium Funding Pty Ltd. 82 Steadfast Group Annual Report 2013 Note 38. Interests in joint ventures (continued) Summarised financial information of joint venture These figures represent the financial position and performance of the joint venture as a whole and not just the Group’s share. Current assets Non-current assets Current liabilities Non-current liabilities Total revenue Total expenses Consolidated 2013 $’000 20,913 11,176 14,502 8,954 37,853 29,673 2012 $’000 13,354 – 7,156 232 26,938 18,892 Note 39. Events after the reporting period As the following events and transactions occurred after reporting date and did not relate to conditions existing at reporting date, no account has been taken of them in the financial statements for the current financial year ended 30 June 2013. Successful listing of the Company In August 2013, the Company successfully listed on the ASX, raised capital of $333.703 million and issued a total 500.873 million ordinary shares resulting from: > > > > 65.588 million re-weighting shares (issued to nominees of preferred capital shareholders); 10.900 million executive shares (funded by the Executive loans provided by the Company to four key management personnel)*; 134.210 million consideration shares (used for settlement of acquisitions completed on 7 August 2013); and 290.175 million ordinary shares to retail and institutional investors. The proceeds are used to: > > > repay $36.623 million bank borrowings outstanding as at 30 June 2013; settle IPO acquisitions (refer to Completion of the IPO acquisitions for further details); and fund future acquisitions. In addition, there are 1,395 preferred capital shares issued to the owners per the Company’s shareholder register as at 30 June 2013, the rights of these shares were substantially diminished as a result of the successful listing on the ASX. * In the financial year ending 30 June 2014, the Executive loans will be recognised at fair value. As the Executive loans are interest free loans, there will be a recognition of share based employment benefits expense, being the difference between the cost and the fair value of the Executive loans. 83 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 39. Events after the reporting period (continued) Completion of the IPO acquisitions In accordance with the Group’s strategy, on 7 August 2013, the Group completed 100% of the acquisition of equity interests in a number of insurance broking businesses (Steadfast Equity Brokers), underwriting agencies, and ancillary services businesses. All of the acquired businesses have in place existing management teams that will continue to be primarily responsible for ongoing day-to-day management of each individual business. For those businesses in which the Group has acquired 100% ownership, the Group has either contracted with existing management to continue to operate the business or will merge the business with another Steadfast Equity Brokers, consistent with the Group’s strategy. The acquisitions of equity interests ranged from 25% to 100% and the consideration paid ranged from $0.661 million to $78.200 million. For all those acquired businesses classified as subsidiaries, the Group has over 50% of the voting right or otherwise deemed to have control. The following disclosures provide the preliminary estimated financial impact to the Group at the acquisition date, 7 August 2013. Only those significant acquisitions with total consideration over $11.500 million are disclosed separately with all the other acquisitions disclosed in aggregate. In addition, the financial information used for all acquired businesses is as at 30 June 2013, not at the acquisition date on 7 August 2013. This will not be the same as the financial impact which will be disclosed in the business combination for the next reporting period when the full financial information will be available. Acquisition of subsidiaries The following tables provided: > > detailed information for five businesses acquired with consideration transferred in excess of $11.500 million, and aggregated information for the 18 acquired businesses (Other acquisitions) where consideration transferred ranged from $1.382 million to $10.293 million. Refer to the List of IPO acquisitions section below for the names of the entities and the ownership holdings. The five acquired businesses separately disclosed are: > > > > > RIB Group Holdings Pty Ltd and its controlled entities (RIB Group), an insurance broker group in Queensland; National Credit Insurance (Brokers) Pty Ltd and its controlled entities (NCIB), an insurance broker group in South Australia; Brecknock Insurance Brokers Pty Ltd (Brecknock), an insurance broker in South Australia; Mega Capital Holdings Pty Ltd and its controlled entities (Mega Capital), an insurance broker group in Victoria; and GWS Pty Ltd (GWS), an insurance broker in Victoria. Consideration transferred RIB Group $’000 NCIB $’000 Brecknock $’000 Mega Capital $’000 Cash Consideration shares(a) Deferred consideration(b) 34,400 36,800 7,000 23,600 14,512 12,580 – – 852 3,813 575 3,270 GWS $’000 6,198 3,364 2,281 Total 78,200 23,600 19,177 16,425 11,843 Other acquisitions $’000 37,646 46,730 12,717 97,093 Total $’000 128,936 88,321 29,081 246,338 (a) (b) Upon the successful listing of the Company on the ASX, Consideration Shares were settled on 7 August 2013 under the terms of the initial public offering. The Consideration Shares were valued at $1.15 per share at settlement. Pursuant to the Share and Unit Purchase Agreements, a portion of the consideration payable was deferred, typically for 60 days. Some of the deferred consideration will be settled based on the actual financial performance for the next financial year ending 30 June 2014. The deferred consideration is estimated based on the forecast information and the variation at time of settlement will be recognised through the statement of comprehensive income. The deferred consideration is an estimate based on the assumption that the acquirees will meet the forecast and/or earnings target. 84 Steadfast Group Annual Report 2013 Note 39. Events after the reporting period (continued) Estimated identifiable assets and liabilities as at 30 June 2013 (not at acquisition date) RIB Group $’000 NCIB $’000 Brecknock $’000 Cash and cash equivalents Trade and other receivables Property, plant and equipment Deferred tax assets Identifiable intangibles Other assets 5,618 15,588 252 146 19,374 44 12,871 3,403 3,499 1,765 1,064 7,791 1,367 2 588 – 4,804 350 Mega Capital $’000 6,739 6,304 118 – 3,973 124 GWS $’000 2,476 4,146 287 – 3,158 4 Other acquisitions $’000 28,880 25,687 2,448 345 23,757 6,154 Total $’000 59,987 55,226 5,458 1,555 62,857 8,043 Trade and other payables (19,027) (10,267) (4,103) (12,316) (5,774) (46,816) (98,303) Income tax payable Provisions Deferred tax liabilities Other liabilities Total net identifiable assets (141) (340) (5,812) (7,632) 8,070 (188) (2,044) (2,337) (15,632) (2,111) 1 (243) (1,441) (203) 3,158 (123) (216) (1,192) (203) (140) (905) (58) (2,373) (553) (3,886) (7,824) (8,572) (1,207) (6,869) (19,511) (34,470) 3,353 676 19,620 32,766 Estimated goodwill on acquisition as at 30 June 2013 (not at acquisition date) RIB Group $’000 NCIB $’000 Brecknock $’000 Mega Capital $’000 GWS $’000 Other acquisitions $’000 Total $’000 Total consideration paid 78,200 23,600 19,177 16,425 11,843 97,093 246,338 Total net identifiable (assets)/liabilities acquired Non-controlling interests acquired(a) Goodwill on acquisition(b) (8,070) 2,111 (3,158) (3,353) (676) (19,620) (32,766) 2,050 72,180 - 868 671 135 1,670 5,394 25,711 16,887 13,743 11,302 79,143 218,966 (a) (b) Non-controlling interests acquired are based on the proportionate ownership interest in the total net identifiable assets recognised at the acquisition date. Goodwill represents the excess of the purchase consideration over the fair value of identifiable net assets acquired and non-controlling interests at the acquisition date. The majority of the goodwill relates to benefits from the combination of synergies as well as the acquired subsidiaries ability to generate future profits. None of the goodwill recognised is expected to be deductible for tax purposes. Investment in associates The table below provides aggregated information on the 41 acquired businesses which are treated as investment in associates. The consideration paid ranged from $0.661 million to $10.146 million. The Company increased its equity interest in Rothbury Group Ltd from 17.9% to 30.1% upon completion of the acquisitions of associates. Total assets and total liabilities are the aggregated balance of all the acquired associates as a whole and not just the Group’s share. These balances are based on the acquired associates’ financial position as at 30 June 2013 not at acquisition date. Total consideration Total assets Total liabilities Total $’000 132,842 307,989 222,976 Financial performance of IPO acquisitions If the acquisitions of subsidiaries and associates occurred in 1 July 2012, the Group’s estimated total revenue and profit after income tax attributable to the owners of the Company for the year ended 30 June 2013 would have been $133.412 million and $9.067 million, respectively. 85 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 39. Events after the reporting period (continued) List of IPO acquisitions The table below outlined all the businesses acquired on 7 August 2013 and are listed in order of materiality based on purchase price considerations. Name of subsidiary acquired Regional Insurance Brokers Pty Ltd AFT Regional Insurance Brokers Unit Trust Table note A National Credit Insurance (Brokers) Pty Ltd Brecknock Insurance Brokers Pty Ltd Mega Capital Holdings Pty Ltd GWS Pty Ltd White Outsourcing Pty Ltd Cyclecover Pty Ltd (formerly Australian Underwriting Group Pty Ltd) Saunders Higgins Insurance Brokers Pty Ltd Sawtell & Salisbury Pty Ltd and Sawtell & Salisbury Unit Trust Altiora Insurance Services Pty Ltd Jakomil Pty Ltd and The Milbar Unit Trust Waveline Investments Pty Ltd Miramar Underwriting Agency Pty Ltd B Masterman Insurance Brokers Pty Ltd and Robert Masterman Insurance Broking Unit Trust PID Holdings Pty Ltd Gallivan, Magee & Associates Pty Ltd Queensland Insurance Brokers Pty Ltd and QIS Financial Services Pty Ltd Logan Group Insurance Brokers Pty Ltd Capital Insurance (Broking) Group Pty Ltd and Capital Insurance Broking Group Unit Trust C Corporate Insurance Brokers Ballina (NSW) Pty Ltd and Corporate Insurance Brokers Pty Ltd Insurance Broking Queensland Pty Ltd Professional Risk Placements Pty Ltd Grand West Pty Ltd RSM Financial Services Pty Ltd Richard Steadfast Pty Ltd Hosie Steadfast Pty Ltd Ownership interest acquired 90.0% 100.0% 72.5% 80.0% 80.0% 87.5% 100.0% 100.0% 100.0% 100.0% 80.0% 100.0% 100.0% 100.0% 100.0% 100.0% 80.0% 85.0% 47.0% 80.0% 100.0% 80.0% 100.0% 100.0% 100.0% 100.0% Table note A The Group’s interest will be in the head company, but there are minority shareholders in subsidiary entities (giving an effective 74% interest in the consolidated group). Under a potential scrip for scrip offer by Regional Insurance Brokers to these minority shareholders in its subsidiaries, the Group’s ownership acquisition may reduce to 74% over time. B C As at 30 June 2013, the Group had a 50% equity interest in Miramar Underwriting Agency Pty Ltd (Miramar) and completed the increase in its shareholding in Miramar to 100% equity interest at 7 August 2013. The additional consideration transferred was $5.500 million. The increase in ownership generated an estimated profit on consolidation for the next financial year ending 30 June 2014 of approximately $4.117 million based on the 30 June 2013 balance sheet of Miramar. The final amount will be reported with the acquisition date information in the half year ending 31 December 2013. Although the Group acquired only 47% of equity interest in Capital Insurance (Broking) Group Pty Ltd and Capital Insurance Broking Group Unit Trust (Capital), the Group effectively has control over Capital as the Group has the right to appoint half of the directors of Capital. Therefore it is classified as subsidiaries acquired. 86 Steadfast Group Annual Report 2013 Note 40. Reconciliation of profit/(loss) after income tax to net cash from operating activities Profit/(loss) after income tax expense/(benefit) for the year Adjustments for: Depreciation and amortisation Share of profits of associates and joint venture Income tax paid Deferred tax on foreign currency translation reserve Share based expense on re-weighting of shares Change in operating assets and liabilities: Change in trade and other receivables Change in deferred tax assets Change in accrued revenue Change in prepayments Change in trade and other payables Change in provision for income tax Change in deferred tax liabilities Change in employee benefits Change in other provisions Net cash from operating activities Note 41. Earnings per share Profit/(loss) after income tax Non-controlling interest Profit/(loss) after income tax attributable to the owners of Steadfast Group Limited Weighted average number of ordinary shares used in calculating basic earnings per share Weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share Diluted earnings per share Consolidated 2013 $’000 (13,267) 2012 $’000 6,174 1,013 264 (2,932) (2,706) (624) (67) 10,478 1,518 734 – (1,137) 15,006 (1,102) (986) 907 (6,595) 2,946 – – – 109 (558) (6,398) (169) 1,006 (8) 1,763 207 2,455 2,139 Consolidated 2013 $’000 (13,267) (170) (13,437) 2012 $’000 6,174 – 6,174 Number Number 1,395 1,395 1,383 1,383 $ $ (9,632.258) 4,464.208 (9,632.258) 4,464.208 The basic and diluted earnings per share were calculated based on 1,395 ordinary shares on issue before the listing of the Company on the ASX in August 2013. Upon ASX listing, 500.873 million ordinary shares were issued and a number of businesses were acquired. As explained in note 23 Equity – issue capital, there are significant changes to the structure and also the number of shares on issue post 30 June 2013. The basic and diluted earnings per share at 30 June 2013 would not be meaningful information to the users of this report and cannot be used as an indicator of future earnings per share. 87 Steadfast Group Annual Report 2013 Notes to the financial statements (continued) For the year ended 30 June 2013 Note 42. Share based payments Share based payments – employees related Share based remuneration encourages employee share ownership, links employee reward to the performance of the Group and assists with retention of key personnel. The obligations under share based payment arrangements will be settled by the on market purchase of the Company’s ordinary shares which will be held in trust. The shares will be purchased on or near grant date at the prevailing market price. Trading in the Company’s ordinary shares that are awarded under the share based remuneration arrangements is covered by the same restrictions that apply to all forms of share ownership by employees. These restrictions limit an employee trading in the Company’s ordinary shares when they are in a position to be aware, or are aware, of price sensitive information. In the current financial year, only conditional rights were allocated. In following financial years, share based remuneration will be provided through a range of short term and long term incentive plans each of which have different purposes and different rules. The share based remuneration expense amounts are included in the employee expenses line in the statement of comprehensive income. Conditional rights During the financial year, the Remuneration & Succession Planning Committee approved the allocation of conditional rights to selected employees who have contribution to the listing of the Company. The key terms of the conditional rights allocated include: > > being free of costs to the employees; and conversion to 1 ordinary share per right at the end of August 2014 subject to the continuing employment at that time and the performance of the employee meeting the minimum criteria as agreed by management. The table below provides the details of the conditional rights allocated. 2013 Conditional rights Fair value recognised at 30 June 2013 $ Rights allocated during Rights held at the year 30 June 2013 Number Number 0.98 736,500 736,500 No conditional rights are vested and exercisable as at 30 June 2013. The fair value of the conditional rights is calculated using the following assumptions. The value of the conditional rights is not discounted as the effect of time value of the money is not material. 2013 Share price ($)(a) Expected dividend foregone Expected life of rights Significant factors and assumptions 1.00 40% of annual dividend at mid-range of the dividend payout ratio(b) 15 months (a) As the Company’s shares were not listed as at 30 June 2013, the closest price for valuation of the conditional rights would be the minimum share price required for the Company to proceed with the listing on the ASX. (b) The Company intends to target a dividend payout ratio in the range of 65% to 85% of net profit after tax attributable to shareholders of the Company. Share based payments on re-weighting share with non employees Refer to note 23 Equity – issued capital for details. 88 Steadfast Group Annual Report 2013 Directors’ declaration In the opinion of the Directors of Steadfast Group Limited (the Company): > The consolidated financial statements and notes 1 to 42, including all the remuneration disclosures that are contained in the Remuneration Report of the Directors’ report, are in accordance with the Corporations Act 2001, including: – – giving a true and fair view of the financial position of the consolidated entity as at 30 June 2013 and of its performance for the year ended on that date; and complying with Australian Accounting Standards (including Australian Interpretations) and the Corporations Regulations 2001; and > > the financial report also complies with International Financial Reporting Standards as disclosed in note 2; 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 declaration required by section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2013. Signed at Sydney this 30th day of August 2013 in accordance with a resolution of the Directors. Frank O’Halloran AM Chairman Robert Kelly Director 89 Steadfast Group Annual Report 2013 Independent auditor’s report To the owners of Steadfast Group Limited Report on the financial report We have audited the accompanying financial report of Steadfast Group Limited (the Company), which comprises the consolidated statement of financial position as at 30 June 2013, and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, notes 1 to 42 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 2, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the 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. 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 performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2013 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 90 Steadfast Group Annual Report 2013 Report on the remuneration report We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2013. The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the Remuneration Report of Steadfast Group Limited for the year ended 30 June 2013, complies with Section 300A of the Corporations Act 2001. KPMG Andrew Dickinson Partner Sydney 30 August 2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 91 Steadfast Group Annual Report 2013 Shareholders’ Information As at 26 August 2013 Ordinary share capital There were 500,873,408 fully paid ordinary shares held by 3,185 shareholders. All the shares carry one vote per share and carry the rights to dividends. Distribution of shareholders The number of shareholders by size of holding are as follows: Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total No. of holders No. of shares % of issued capital 466 1,534 372 628 185 3,185 444,050,413 51,577,529 3,006,880 2,094,745 143,841 500,873,408 88.65 10.30 0.60 0.42 0.03 100.00 There were 11 shareholders holding less than a marketable parcel ($500) based on a market price of $1.42 at the close of trading on 26 August 2013. Substantial shareholders Steadfast Group Limited1 Mackay Insurance Services Pty Ltd No. of shares % of issued capital 183,355,928 32,000,000 36.61 6.39 1 These shares are subject to voluntary escrow until 31 August 2014 and consist of Re-weighting Shares, Consideration Shares and Executive Shares. Twenty largest shareholders Name J P Morgan Nominees Australia Limited National Nominees Limited Mackay Insurance Services Pty Ltd Citicorp Nominees Australia Limited HSBC Custody Nominees (Australia) Limited UBS Nominees Pty Limited JP Morgan Nominees Australia Limited RBC Investor Services Australia Nominees Pty Limited BNP Paribas Nominees Pty Limited Citicorp Nominees Pty Limited Robert Bernard Kelly CS Fourth Nominees Pty Limited Cameron Scott McCullagh Yabby Investments Pty Limited RC & IP Gilbert Pty Limited Condell Holdings Pty Limited David Wayne Higgins HSBC Custody Nominees (Australia) Limited David Ingram Samepham Pty Limited Total No. of shares % of issued capital 40,299,292 36,116,853 32,000,000 26,012,010 22,992,696 21,900,110 17,201,456 16,176,880 15,389,880 7,060,762 5,000,000 4,996,875 4,000,000 4,000,000 4,000,000 3,453,636 3,091,006 3,000,912 2,815,821 2,804,689 8.05 7.21 6.39 5.19 4.59 4.37 3.43 3.23 3.07 1.41 1.00 1.00 0.80 0.80 0.80 0.69 0.62 0.60 0.56 0.56 272,312,878 54.37 Dividends There is no dividend declared in respect of the 2013 financial year. The next dividend is planned to be in respect of earnings for the half year ending 31 December 2013, expected to be paid in April 2014. 92 Steadfast Group Annual Report 2013 Corporate Directory Directors Frank O’Halloran, AM (Chairman) Robert Kelly (Managing Director & CEO) David Liddy Anne O’Driscoll Philip Purcell Greg Rynenberg Jonathan Upton Company Secretary Linda Ellis Peter Roberts Notice of AGM The annual general meeting of The Steadfast Group Limited will be held on Monday 28 October 2013 at 10.00 am at The Hilton Hotel, 488 George Street, Sydney NSW 2000. Corporate Office Steadfast Group Limited Level 3 99 Bathurst Street Sydney NSW 2000 Postal Address PO Box A980 Sydney South NSW 1235 phone: 02 9495 6500 email: investor @ steadfast .com .au website: steadfast .com .au Share Registry Link Market Services Level 12 680 George Street Sydney NSW 2000 Postal Address Locked Bag A14 Sydney South NSW 1235 phone: 1800 645 237 email: registrars @linkmarketservices .com .au Stock Listing The Steadfast Group Limited shares are quoted on the Australian Stock Exchange (ASX code: SDF). d t L y t P t c e r i d S y b d e c u d o r p d n a d e n g i s e D Steadfast Group Annual Report 2013 Steadfast Group Limited ABN 98 073 659 677 steadfast .com .au