Simonds Group Limited Annual Report 2017

Plain-text annual report

ANNUAL REPORT 2017 SIMONDS GROUP ANNUAL REPORT 2017 2 Contents Founder’s Message New Chairman’s Message Board of Directors Financial Summary Diversified Earnings Strategy FY17 Financial Report Shareholder Information 5 6 8 10 12 15 88 3 SIMONDS GROUPANNUAL REPORT 20174 SIMONDS GROUPANNUAL REPORT 2017FOUNDER’S MESSAGE Dear Shareholder, We started Simonds 67 years ago, from small and humble beginnings. With the support of many people we have built over 35,000 houses and helped families achieve their dream. It is a great thrill to me to be part of this experience for families to move into their own home. It gives me a great sense of pride and satisfaction in what we do in this volume building industry. After over sixty years with Simonds, the last three years as Chairman of the ASX listed company, I made the decision to retire from this role and look forward to being Senior Advisor to the Board. Iain Kirkwood is the new Independent Chair. He brings experience as a corporate Chairman with considerable practical and operational expertise gained from a successful business career spanning 38 years across a range of industries. My grandson Rhett has been appointed Interim CEO and will remain on the Board. Delphine Cassidy and Neil Kearney join the Board as Independent Non-Executive Directors, along with Piers O’Brien and Scott Mahony as Non-Executive Directors. My son, Mark, comes onto the Board and will Chair the Development Committee to identify key growth opportunities. It has been my pleasure to have grown this business from humble beginnings in 1949 to see what it has become today. Yours sincerely, Gary Simonds Simonds Founder and Senior Advisor “ It is a great thrill to me to be part of the experience for families to move into their own home.” Gary Simonds Simonds Founder and Senior Advisor 5 SIMONDS GROUPANNUAL REPORT 2017 NEW CHAIRMAN’S MESSAGE “ To be asked to Chair the Simonds Group is a privilege and honour as is to be working with the new Board. Its collective expertise will be engaged to drive strong growth, performance and safety.” Iain Kirkwood Chairman Dear Shareholder, I am very honoured to have been asked to Chair the Simonds Group by $11.4 million. Statutory earnings EBITDA was $10.1m, also an and look forward to working with the new Board comprising an improvement on last year. excellent blend of experienced, independent directors and strong, hands-on industry knowledge and expertise. Simonds Homes Australia (SHA) remained the key driver of Simonds Group’s results for the year. With housing affordability high on the Simonds has been an industry leader in volume home building and government’s agenda, and demand for quality homes in each of the pleasingly has had an excellent record of safety as a company. regions where Simonds Homes has a presence, the market fundamentals Plans going forward include a focus on growth, operational efficiencies in the residential homes sector remain strong. In FY17 the Homes and to maintain the strong emphasis on safety within our company. business recorded 2,391 site starts, slightly down on last year, which I would like to personally pay tribute to Gary Simonds who established the business in 1949 and served as the Chairman of the Board since were impacted by continued delays experienced in the release of titled land, trade availability, wet weather and infrastructure delays. listing the Company in 2014. We are very fortunate in having him For Builders Academy Australia (BAA), course enrolments and the number remain involved with the company as Senior Advisor to the new Board. of graduated students were down on the last financial year as course Gary’s legacy is substantial having built tens of thousands of homes durations were extended to improve course quality and the overall student for Australian families over his 67-year career. He has dedicated his experience. The Education business has continued to build a sustainable career to Simonds and its growth into one of Australia’s leading business platform, investing in the quality of course delivery materials. home builders. Increased audit and compliance costs were incurred by the business During 2017 Simonds Group continued work towards resetting the due to the pressures felt across the sector. All calendar 2016 audit business to become a sustainable business focused on profit rather activity has been concluded and all outstanding matters have been than revenue. Halfway through a two-year journey of transformation we are progressing well, having laid the foundations for success. satisfactorily resolved with no adverse findings. The Directors have determined that no dividend will be paid in relation Revenues were down in 2017 to $587.4 million. An overall net profit to the 2017 financial year. after tax of $2.1 million (for continuing operations) is a noteworthy improvement on last year and was achieved by reducing overheads 6 SIMONDS GROUPANNUAL REPORT 2017Continuing to reset the business for profitable growth The business has undertaken a significant turnaround during the 2017 financial year, with strong cash flows and reduced debt exposure and both the Homes and Education businesses have solid pipelines for the 2018 financial year and beyond. During FY17 we’ve laid the foundations to transform Simonds Group into a sustainable, profitable business. We’ve redefined our core purpose and reset our strategy to shift the focus from volume growth to profitable growth that is sustainable, all supported by the right structure. We’ve built on our strong base by developing new product in the Homes business, focusing on further improving our operating margins, core business processes and consolidating our building locations. There is an inherent long lead time to reap the benefits of our reset, and we have some remaining legacy contracts still to work through the system. For SHA, our focus remains on executing against our new business rules and reducing changes to standard house designs which will drive improved margins in future periods. Due to the long lead times in the homes business, legacy contracts will continue to impact margins in the short to medium term. All of the planks of our strategy and new operating model that we have put in place will lead to sustained, profitable growth once our new products and business rules work through the product pipeline. Investment will be made in marketing, displays homes and IT Safety The Simonds Group has an excellent safety record as a result of continued focus on safety systems. We have made good progress in further strengthening safety in the business since the last reporting year. The main objective in Simonds’ safety program is to ensure that safety is a core value that results in a positive safety culture, as well as a healthy, engaged workforce. This can only be achieved by the business continually reviewing its safety management system to ensure that it remains highly visible in company and continues to meet and reflect current legislation. We remain committed to safety in the home building sector, and we have a voice in industry through our involvement in the Volume Builders Safety Alliances in each state, and our participation in industry programs around the country with the regulators. We recognise our moral obligations to safety in the community and we believe that our system reflects ‘best practice’ and legal compliance. We aim to make our people leaders in safety and strive to become role models for safety behaviour. We want to effectively target hazards and remove them so as to eliminate preventable injuries. We do this by initiating the following programs in our company: • Risk assessment in our designs • Systems management training programs • Company Safety Standards developed in consultation with our trade partners infrastructure to support our longer-term strategy. • Continuous improvement in our reporting Challenges remain in maintaining and growing market share in our core regions in the homes business and the operating environment for vocational education continues to evolve. Our clear business strategy and focus on improving operating margins will deliver a more robust and sustainable business model. The future prospects of Simonds Group are bright under a renewed Board which will lead a reinvigoration of the business, drive performance, growth and safety. Iain Kirkwood Chairman 7 SIMONDS GROUPANNUAL REPORT 2017 BOARD OF DIRECTORS Iain Kirkwood Iain was appointed Non-Executive Chairman of the Simonds Group on 20 September 2017. Iain is an experienced corporate Chairman and has worked as a senior executive and Non-Executive Director across a range of industries, including auditing, resources, manufacturing and latterly healthcare in Australia, the USA and Britain. Iain is Chairman of Bluechiip Ltd and Novita Healthcare Limited and has held Non-Executive Director roles with Medical Developments International Ltd and Vision Eye Institute Ltd. Mark Simonds Rhett Simonds Mark was appointed an Executive Director on 20 September 2017 and brings 40 years of executive management experience with Simonds Homes, prior to listing. Mark has been focussed on Simonds Consolidated with a focus on venture capital and private equity, building and construction, real estate and the vocational education sector. Rhett was appointed Interim CEO on 6 October 2017 by the Board. Rhett has been a Simonds Group Board member since 2016 and was a member of the Remuneration and Nominations Committee. Prior to accepting the Interim CEO role, Rhett was CEO of Simonds Consolidated since 2005 focussed on technology, vocational education, real estate and construction ventures. Neil Kearney Scott Mahony Scott was appointed a Non-Executive Director on 20 September 2017 and is a member of the Audit and Risk Committee. As a Chartered Accountant, Scott has held Chief Financial Officer roles at two of Australia’s largest volume builders in a career spanning more than 25 years. Scott has had various accounting roles with Telstra, P. Sartori & Co Chartered Accountants and Australian Unity. Neil was appointed Non-Executive Director on 20 September 2017 and will Chair the Audit & Risk Committee, and brings significant leadership experience to the Simonds Group Limited Board. Neil has been in senior executive roles in Australian and international companies, including Goodman Fielder Limited and National Foods Limited (including as Chief Financial Officer and Chief Strategy Officer). He is currently Chairman of Huon Aquaculture Group Ltd, Chairman at Felton, Grimwade & Bosisto’s Pty Ltd and Non-Executive Director at Brainwave Australia. Previous directorships include Warrnambool Cheese and Butter Factory Company Holdings Limited and National Foods Limited. 8 SIMONDS GROUPANNUAL REPORT 2017Delphine Cassidy Piers O’Brien Delphine was appointed a Non-Executive Director on 20 September 2017 and will Chair the Remuneration and Nomination Committee. Delphine is an investor relations expert as a senior executive for ASX 200 companies. Piers was appointed a Non-Executive Director on 20 September 2017 and is a member of the Remuneration and Nominations Committee. Piers is a qualified lawyer with over 18 years’ professional experience at firms including K&L Gates Lawyers specialising in mergers & An accountant by profession, she spent over 15 years in financial, acquisitions, corporate transactions and board advisory work. Piers accounting and treasury roles. Delphine is currently the Vice has spent the last 10 years working in in-house legal roles as both President of Investor Relations at Orica. Delphine has been a General Manager Legal and General Counsel. During this time, he member of the Australasian Investor Relations Association (AIRA) managed the legal function at ASX200 company Skilled Group Limited Issues Committee and the ASX Issuer Services Working Group. for approximately 8 years. Delphine is a Non-Executive Director of CreateCare Global. Piers is a Non-Executive Director of Dylan Alcott Foundation Limited. 9 SIMONDS GROUPANNUAL REPORT 2017Financial Summary FINANCIAL SUMMARY Pro forma EBITDA ($m) Pro forma revenue ($m) 37.9 576.9 628.5 587.4 499.2 477.1 18.1 16.1 15.1 13.8 FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Note: Pro forma revenue and EBITDA for the period FY13 – FY16 have been adjusted to exclude The Madisson business, which has been presented as discontinued operations in the FY2017 accounts. Pro forma Historical $M Revenue Gross Profit EBITDA EPS (cents) DPS (cents) Div Payout Ratio FY13 499.2 104.8 21.0% 16.1 FY14 477.1 109.6 23.0% 18.1 Statutory reconciliation ($m) Pro forma Result Impairment of non-core development land and other current assets Transaction costs associated with the proposed Scheme of Arrangement Management restructure costs Statutory Result 10 FY15 576.9 138.2 24.0% 37.9 15.64 5.3 65% FY16 628.5 131.7 21.0% 15.1 3.52 Nil Nil FY17 587.4 125.9 21.4% 13.8 3.22 Nil Nil EBITDA NPAT 13.8 (1.4) (1.8) (0.5) 10.1 4.6 (1.0) (1.2) (0.3) 2.1 SIMONDS GROUPANNUAL REPORT 2017 Pro forma Results Proforma results reflect adjustment for transaction costs associated with the proposed Scheme of Arrangement, impairment of non-core development land and other current assets and management restructure costs. • EBITDA results of $13.8m • NPAT results of $4.6m Balance sheet The key balance sheet movements during FY17 were significant reductions in Trade Receivables as well as Trade and Other Payables. Receivables were $10.9 million lower and benefited from an increased focus on customer billing and collections. Trade and Other Payables reduced by $14.4 million. The Group’s net assets at 30 June 2017 were negative $3.1 million, an improvement on the position at 31 December 2016 and marginally better than 30 June 2016. Cash flow Cash flow from operations were $8.8 million (excluding transaction costs incurred as a result of the proposed Scheme of Arrangement) and Cash / Cash Equivalents at 30 June 2017 were $10.2 million – a $7.0 million improvement on 30 June 2016. The Group’s net debt decreased by $3.1 million as a result of improved cash management activities and the release of display homes previously held on the balance sheet. At 30 June 2017, the Group had drawn debt under its corporate finance facility arrangements with Commonwealth Bank of Australia of $8.3 million, with facility headroom available of $22.4 million. As at 24 August 2017 the unused facilities were $22.9 million. Dividend The Directors of Simonds Group have determined that no final dividend will be paid in relation to the year ended June 2017. Corporate Governance A copy of our corporate governance statement can be found on our website at simondsgroup.com.au/corporateGovernance Financial Summary 11 SIMONDS GROUPANNUAL REPORT 2017Financial Summary Diversified Earnings Strategy SHA BAA Land development • FY17 pro forma EBITDA of $12m • FY17 pro forma EBITDA of $1.3m • FY17 pro forma EBITDA of $0.5m • 2391 site starts • 2,586 course enrolments • 3 current projects • Operations in Victoria, New South Wales • 1,973 graduated enrolments • 74 total lots to be delivered in 2018. & Queensland • Operations in Victoria, New South Wales & Queensland With strong underlying market fundamentals in the residential homes offered a Victorian 2017 Standard VET Funding Contract that allows sector, demand for quality homes remain strong. for students to access government subsidised training under the new The Victorian and South Australian operations of Simonds Homes Australia Victorian 'Skills First' Scheme. (SHA) continue to perform well, the Queensland business has increased The Group expects to realise the benefits from the organisational site starts achieved during the 2017 financial year, while challenges management and operational restructure completed in 2016, which has remain with the New South Wales business. Federal Government delivered a reduction of $11.4m in overheads and significant items, and initiatives in the second half of FY17 to assist first home owners caused enabled a more flexible overhead base that is better able to respond to a number of customers to delay contracting with us until FY18. changes in our key markets. We expect to improve our market penetration, sales and ultimately site The Group has undertaken a significant turnaround during the 2017 starts in the future with greater focus on building strategic relationships financial year, with strong cash flows and reduced debt exposure and in partnership with land developers, the location of display homes in both the Homes and Education businesses have solid pipelines for key growth zones, consolidation of our existing product range and the FY18 and beyond. release of new product. The Group remains focussed on continuing to build a business that Builders Academy Australia (BAA) continues to focus on delivering delivers improved operating margins and sustainable profits. With our high quality trade qualifications that meet the needs of the Australian business review, strategy reset and organisational restructure now workforce. Through diversifying funding sources, delivery modes and completed, the business transformation is underway. However, the market segments including expanded delivery in states other than Victoria, BAA and City-Wide Building and Training Services (CWTBS) inherent long lead time in seeing the benefits, and some remaining legacy contracts still to work through the system, we still have work continue to prepare graduates to realise sustainable career outcomes. to do to realise all of the benefits. Additional investment in marketing, The business remains focused on meeting the increased demands displays homes and IT infrastructure is required to support our longer placed on it from the ever-changing regulatory environment in this term strategy. sector, and that continues to be a major risk and opportunity for the Group. In December 2016, BAA received confirmation that it had been 12 SIMONDS GROUPANNUAL REPORT 201713 SIMONDS GROUPANNUAL REPORT 201714 SIMONDS GROUPANNUAL REPORT 2017FY17 FINANCIAL REPORT FOR YEAR ENDING 30 JUNE 2017 Contents Directors’ Report Auditor’s Independence Declaration Independent Auditor’s Report Directors’ Declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements 17 42 43 47 48 49 50 51 52 15 SIMONDS GROUPANNUAL REPORT 201716 SIMONDS GROUPANNUAL REPORT 2017The directors of Simonds Group Limited (“the Company”) submit herewith the annual financial report of the consolidated entity consisting of the Company and the entities it controlled (the “Group”) for the financial year ended 30 June 2017. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows: Information about the directors The names and particulars of the directors of the Company during or since the end of the financial year are: Name Date Appointed Current Position Vallence Gary Simonds 24 May 2010 Susan Oliver 6 October 2014 Chairman Deputy Chair Matthew Chun 25 September 2014 Managing Director & Chief Executive Officer Leon Gorr (1) Rhett Simonds Michael Humphris 25 September 2014 Non-Executive Director 20 April 2016 29 March 2017 Non-Executive Director Non-Executive Director 1. Leon Gorr resigned as Non-Executive Director on 29 March 2017. The particulars of the directors are as follows: Name Experience and Directorships Vallence Gary Simonds • Gary has dedicated his career to Simonds and its growth into one of Australia’s leading home builders. • Gary established Simonds in 1949 and has had a career spanning more than 65 years within the Australian homebuilding industry. • Gary holds directorships for a number of private Australian companies. Susan Oliver (FAICD) Matthew Chun • Susan is a director of CNPR Ltd, an independent member of the Investment Committee for Industry Funds Management (IFM) and founding Chair of Scale Investors Ltd. Susan's previous directorships include Coffey International, Transurban Group, Programmed Group, The Just Group, MBF Australia and the restructure Board of Centro Properties Group. Susan was also chair of Fusion Retail Brands, a privately owned retail group comprising Colorado, Jag, Diana Ferrari, Williams and Mathers brands. • Susan has contributed significantly to the innovation, IT and arts policy agendas in Australia. • Susan was awarded the Prime Minister’s Centenary Medal 2003 and was one of Australian Financial Review’s top 100 women of influence in 2013. • In 2017 Susan was a Judge in the EY Southern Region Entrepreneur of Year. • Susan holds a Bachelor of Property and Construction from the University of Melbourne and a Certificate in Financial Management AIM. • Matthew was appointed Managing Director and Chief Executive Officer of the Simonds Group on 1 April 2016. Prior to that, he was a non-executive director of Simonds Group Limited. • Matthew has over 25 years’ senior management and corporate advisory experience and ran a private property development and advisory business based in Melbourne prior to his appointment as CEO of Simonds Group. • Matthew was previously an Executive Director and CEO of ASX listed Becton Property Group. • Prior to Becton Property Group Matthew held positions at Cbus Super Fund and Coles Myer. • Matthew holds a Bachelor of Economics from La Trobe University, a Graduate Diploma in Property, Graduate Diploma in Applied Investment and Finance and is a licenced Estate Agent. 17 SIMONDS GROUPDirectors’ Report ANNUAL REPORT 2017The particulars of the directors (Cont’d) Name Experience and Directorships Rhett Simonds Michael Humphris • Rhett is a member of the Simonds family and has been involved with the business since joining the Simonds Group of Companies in 2005. • Rhett has a strong focus on technology-based education and training platforms with job placement outcomes. • Appointed to the Simonds board as a non-executive director as part of the board succession plan for Mr. Vallence Gary Simonds. • Michael is a Chartered Accountant with over 35 years’ experience through former roles as Partner in both Arthur Andersen and Ernst & Young, Director of Duesbury’s, and BDO Kendalls. • Michael has extensive board experience across a range of large and complex businesses. • Michael is currently Chairman of VicForests’ Board and Chair of the Executive Remuneration Committee, a Director (former Chair) of Tox Free Solutions Ltd, and the Chairman of CNPR Ltd. • Michael is a Senior Associate of the Financial Services Institute of Australasia, a Member of the Australian Institute of Company Directors, and a Fellow of the Chartered Accountants Australia and New Zealand. Directors’ Shareholding The following table sets out each of the directors’ relevant interest in shares, debentures and rights or options on shares or debentures of the Company or related body corporate as at the date of this report: Directors V.G Simonds Susan Oliver Rhett Simonds Matthew Chun Fully Paid Ordinary shares (Number) Share options (Number) 56,138,895 44,000 14,044 - - - - 4,000,000 18 SIMONDS GROUPDirectors’ Report ANNUAL REPORT 2017Remuneration of key management personnel Operating and Financial Review Information about the remuneration of key management personnel is set out in the remuneration report section of this directors’ report. Business Overview The term ‘key management personnel’ refers to those persons having authority and responsibility for planning, directing, and controlling the activities of the Group, directly or indirectly, including any director (whether executive or otherwise) of the Group. Company Secretary Simonds Group Limited is an ASX listed integrated homebuilder (Simonds Homes), Registered Training Organisation (Builders Academy Australia) and niche land developer. With continual operations since 1949, Simonds Homes operate a number of display homes across the Australian eastern seaboard and South Australia, and remains one of Australia’s largest home builders Ms Elizabeth Hourigan was appointed as Company Secretary of with 2,391 homes constructed during the 2017 financial year. The core the Company on 20 April 2016. Elizabeth was previously Company product of Simonds Homes is single storey detached homes, with a Secretary and Senior Counsel at Federation Centres, and prior to target market being first and second home families in the outer- that Centro Properties. Elizabeth holds a Bachelor of Laws from the metropolitan areas of capital and large regional cities. University of Melbourne and is a fellow of the Governance Institute of Australia and a graduate of the Australian Institute of Company Directors. Principal activities The Group’s principal activities in the course of the financial year were the design and construction of residential dwellings, the development of residential land and providing registered training courses. Builders Academy Australia (BAA) is a Registered Training Organisation with a focus on offering nationally accredited qualifications in building and construction. Embedded within one of Australia’s leading home builders, BAA is ‘builders training builders’. Completion of courses offered enables successful students to increase their career and employment opportunities; as well as provide a well-trained network of employees, suppliers and contractors for Simonds Homes. The Group maintains a small development land portfolio via direct land ownership, and participation in other development land projects via indirect holdings. The Group also provides project management services via Hub Property Group. On 31 August 2016, the Group announced a Scheme Implementation Agreement with SR Residential Pty Ltd (SR Residential) (which is jointly owned by entities associated with Roche Holdings Pty Ltd and Simonds Family Office Pty Ltd (SFO) under which it was proposed that SR Residential would acquire all shares in the Company not already owned by associates of the Consortium by way of the Scheme. On 28 November 2016, the Group announced that the Scheme Implementation Agreement had been terminated by mutual agreement of the Group and SR Residential. The Group incurred transaction costs of $1.817m, which have been disclosed as a significant item for year ended 30 June 2017. 19 SIMONDS GROUPDirectors’ Report ANNUAL REPORT 2017Reconciliation of statutory financial statements to pro forma results Pro forma EBITDA is reported to give information to shareholders that provides a greater understanding of the underlying performance of Simonds Group Limited’s operations. In accordance with ASIC Regulatory Guidance 230, a reconciliation of the 2017 statutory to pro forma results is provided below as follows: Year ended 30 June 2017 Sales $m EBITDA1 $m EBIT2 $m NPAT $m FY2017 Statutory results from continuing operations 587.4 Transaction costs associated with proposed Scheme of Arrangement Impairment of non-core development land and other current assets Management restructure costs FY2017 pro forma results - - - 587.4 10.1 1.8 1.4 0.5 13.8 5.1 1.8 1.4 0.5 8.8 2.1 1.2 1.0 0.3 4.6 1. Pro forma EBITDA is net profit after tax from continuing operations $2.1m before financing items ($1.7m), tax expenses ($1.3m), depreciation and amortisation ($5.0m), and other significant items ($3.7m). 2. Pro forma EBIT is net profit after tax from continuing operations $2.1m before financing items ($1.7m), tax expenses ($1.3m) and other significant items ($3.7m). Earnings per share The directors have elected to present results and Earnings per Share (EPS) on both a statutory and pro forma basis. The calculation of “Statutory EPS” is presented in Note 13. The calculation of “Pro forma EPS” is presented below. Statutory EPS has been calculated in accordance with the requirements of Accounting Standards based on: • profit after tax attributable to shareholders (Statutory profit); and • the weighted average number of ordinary shares outstanding during the period ended 30 June 2017. Pro forma EPS is a non-International Financial Reporting Standards (IFRS) measure which has been calculated on the 2017 financial year based on: • statutory profit after tax adjusted on a pro forma basis for: − the impacts arising from a number of non-recurring items impacting the 2017 financial result, being: > Transaction costs associated with the proposed Scheme of Arrangement; > Impairment of non-core development land and other current assets; > Management restructure costs; and − the related income tax effect of the above adjustments • the weighted average number of ordinary shares outstanding during the period ended 30 June 2017: − Basic: 143,841,655 The directors believe that the presentation of Pro forma EPS provides users with a better understanding of the underlying financial performance of the ongoing business and allows for a more relevant comparison of financial performance between financial periods. Note 13 30 June 2017 30 June 2016 cents per share cents per share 1.44 (1.53) 30 June 2017 30 June 2016 Note cents per share cents per share 3.22 3.52 Statutory EPS from continuing operations Basic Pro forma EPS from continuing operations Basic 20 SIMONDS GROUPDirectors’ Report ANNUAL REPORT 2017 Balance sheet Outlook During the 2017 financial year, whilst the Group continued to encounter The Victorian and South Australian operations of Simonds Homes some of the challenges that adversely impacted the performance of its Australia (SHA) continue to perform well, the Queensland business Residential and Education segments in 2016, strategies to improve the has increased site starts achieved during the 2017 financial year, Group’s liquidity have improved working capital as measured by current while challenges remain with the New South Wales business. With assets less current liabilities by $5.8m, resulting in a positive working greater focus on building strategic relationships in partnership with capital balance of $5.1m at 30 June 2017. land developers, the location of display homes in key growth zones, As announced on 21 January 2016, the Madisson business is a discontinued operation and has been disclosed as such for the year ended 30 June 2017. This business has been disclosed as a consolidation of our existing product range and the release of new product, we expect to improve our market penetration, sales and ultimately site starts in the future. discontinued operation with additional provision recognised for Builders Academy Australia continues to focus on delivering high maintenance and warranty obligations of $2.7m during the financial year. quality trade qualifications that meet the needs of the Australian Operating cash flows The operating cash flows of the Group have decreased from the prior year, which benefited by the accelerated sale of display homes, non-core development speculative land and construction holdings from inventory required in the second half of the 2016 financial year. workforce. Through diversifying funding sources, delivery modes and market segments including expanded delivery in states other than Victoria, Builders Academy Australia and City-Wide Building and Training Services continue to prepare graduates to realise sustainable career outcomes. The business remains focused on meeting the increased demands placed on it from the ever-changing regulatory environment in this sector, and that continues to be a major risk and The Group has significantly reduced cash outflows from its investing opportunity for the Group. In December 2016, BAA received activities having ceased a number of IT projects as well as not investing confirmation that it had been offered a Victorian 2017 Standard VET in business acquisitions or investment funds which occurred during the Funding Contract that allows for students to access government 2016 financial year. subsidised training under the new Victorian “Skills First” Scheme. Cash inflows from financing activities during the 2017 financial year The Group expects to realise the benefits from the organisational of $2.558m predominantly related to funding through the Group’s banking facilities. management and operational restructure completed in 2016, which has delivered a reduction of $11.4m in overheads and significant items, and enabled a more flexible overhead base that is better able to respond to changes in our key markets. 21 SIMONDS GROUPDirectors’ Report ANNUAL REPORT 2017Summary of key business risks The Board remains optimistic about the Group’s future trading performance but acknowledges there are certain factors that may pose a risk to the achievement of the Group’s business strategies and future performance. Departure of key personnel leading to loss of industry or corporate knowledge and expertise: The Group may from time to time be impacted by the departure of key personnel, which may affect adversely the operations of the business until suitable replacements are recruited. Every business faces risks with the potential to impair its ability to The Group endeavours to ensure that it remains competitive in terms execute its strategy or achieve its objectives. There are a number of key of remuneration and other incentives, and reviews employee incentive risks, both specific to the Group’s home building, provision of training arrangements from time to time with a view to aligning management's courses, and land and project management services, and external risks, and employees' interests with those of the Group and its shareholders. for example the economic environment, over which the Group has no control. The Group’s risk management approach is to identify, evaluate, Information Technology (“IT”) security and data security breaches: and mitigate or manage its financial, operational and business risks. Our The potential failure of IT security measures may result in the loss, risk assessment approach includes an estimation of the likelihood of risk inability to access information, destruction or theft of customer, supplier, occurrence and potential impact on the financial results. Risks are and financial or other commercially-sensitive information including assessed across the business and reported to the Audit and Risk intellectual property. This has the potential to adversely affect our Committee and to the Board where required under our risk operating results and potentially damage the reputation of the Simonds management framework. or Builders Academy Australia brands, and/or create other liabilities for Set out below are the key risks which may materially impact the execution the Group. and achievement of the Group’s business strategies and prospects for There are a number of key controls either planned or already in place the Group in future financial years. These key risks should not be taken aligned to improving the security posture; the implementation, to be a complete or exhaustive list of risks faced by the Group. maintenance and supervision of operational policies intended to preserve the integrity of the IT systems and supporting infrastructure; Deterioration in economic conditions resulting in a fall in demand: regular independent audit and review of IT security; and the ongoing The Group’s revenue and growth is susceptible to a deterioration in the review, practice and updating of a disaster/crisis management plan states and regions it operates. There are a number of general economic relating to IT systems. conditions, such as interest rate movements, overall levels of demand for housing, economic and political stability, and government fiscal and Regulatory actions affecting Registered Training regulatory policies that can impact the level of consumer confidence Organisations (RTO): and demand, thereby affecting revenue from sales to customers and/or Wholly owned subsidiaries, House of Learning Pty Ltd (trading as fees received from students. While general economic conditions are outside the Group's control, the Group seeks to reduce its exposure to these risks by monitoring closely both internal and external sources of information that provide insights to Builders Academy Australia, or BAA) and City-Wide Building Training Services Pty Ltd (CWBTS), are nationally accredited RTO’s under the Australian Skills Quality Authority (ASQA) and hold funding contracts across multiple states. changes in demand within the markets and regions in which it operates. Both CWBTS and BAA continue to focus on embedding a quality framework across operations recognising that providers in this sector Competition resulting in a loss of market share in the regions continue to face major risk due to an ever changing regulatory and markets in which we operate: environment and adaptions to state and federal funding models. The Group is susceptible to competition for the provision of homes and course offerings in the markets in which we operate. As part of the ongoing accreditation process and approval process for RTO’s and for approved delivery under state and federal funding This risk is mitigated by a large geographically diversified customer and regimes, RTO’s are reasonably expected to be regularly subject to student base reducing the impact of pricing strategies and demands compliance monitoring activity and audits. from any one customer or student group. Economic downturn in the property sector leading to softening in property asset values: With a significant property portfolio, comprising display homes, speculative land and development land holdings the Group is exposed to potential reductions in property values within the residential property sector. The Group’s policy is to adopt a selective and prudent acquisition and development strategy, which focusses on maintaining the appropriate number of high-quality displays in each market region to minimise our exposure in any one particular segment. 22 It is recognised that any adverse findings from National or State regulators and/or funding bodies have the potential to have a material adverse impact on the Group’s RTO operations, financial performance and financial position. Both CWBTS and BAA have experienced compliance audits and reviews over the 2016 and 2017 financial years from both funding bodies and ASQA, which have not resulted in any material adverse findings. SIMONDS GROUPDirectors’ Report ANNUAL REPORT 2017Summary of key business risks (Cont’d) Subsequent events Loss of Funding Arrangements: BAA and CWBTS hold various funding contracts in Victoria, New South Wales, Queensland and the Australian Capital Territory. BAA has also been successful in being granted a VET Student Loans contract with the Federal Department of Education and Training. There have been no events that have occurred subsequent to the reporting date that have significantly affected or may significantly affect the Group’s operations, results or state of affairs in future years. Dividends These funding contracts which allow students to access subsidised As announced on 24 August 2017, the directors have declared $nil training or take out government supported loans to pay for their training dividend in relation to the 2017 financial year. are the primary source of revenue for both BAA and CWBTS. Both entities have been successful in being granted approval for all contracts for which they have applied during the 2017 financial year. It is recognised that if either entity was to lose these contracts for Indemnification of officers and auditors During the financial year, the Company paid a premium in respect of a contract insuring the directors of the Company, the Company secretary, material breaches or non-compliance, or not be granted future approval and all executive officers of the Company and of any related body when applications are required for extensions of these contracts, the corporate against a liability incurred as such a director, secretary or funding currently received would no longer be available. This could executive officer to the extent permitted by the Corporations Act 2001. have a material adverse impact on BAA and/or CWBTS and the The contract of insurance prohibits disclosure of the nature of the liability Group’s operations, financial performance and financial position. and the amount of the premium. Non-IFRS financial information The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to The financial measures included in the Directors’ Report have been indemnify an officer or auditor of the Company or of any related body calculated to exclude the impact of various costs and adjustments corporate against a liability incurred as such an officer or auditor. associated with the Company’s listing on the stock exchange during the previous financial year as well as adjustments made for the current financial year relating to the Madisson business and non-recurring impairments and management restructure costs. The directors believe the presentation of non-IFRS financial measures is useful for the users of this financial report as they reflect the underlying financial performance of the business. 23 SIMONDS GROUPDirectors’ Report ANNUAL REPORT 2017Directors meetings The following table sets out the number of directors’ meetings (including meetings of committees of directors) held during the financial year and the number of meetings attended by each director (while they were a director or committee member). During the financial year, sixteen Board meetings, seven Nomination and Remuneration Committee meetings and seven Audit and Risk Management Committee meetings were held. Directors Vallence Gary Simonds Susan Oliver Matthew Chun Leon Gorr Rhett Simonds Michael Humphris Board of Directors Nomination and Remuneration Committee Audit and Risk Management Committee Held* Attended Held* Attended Held* Attended 16 16 16 14 16 2 14 16 16 14 16 2 - 7 - 6 7 1 - 7 - 6 7 1 7 7 - 6 - 1 6 7 - 6 - 1 *Meetings held has been adjusted to reflect the number of meetings since the date of appointment for each director. Susan Oliver was appointed to the Chair of Nomination and Remuneration Committee on 29 March 2017 and also held the position of the Chair of Audit and Risk Management Committee from 1 April 2016 to 28 March 2017. Michael Humphris was appointed to the Chair of Audit and Risk Management Committee on 29 March 2017. Non-audit services Details of amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in note 33 to the financial statements. The directors are satisfied that the provision of non–audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed on note 33 to the financial statements do not compromise the external auditors’ independence, based on advice received from the Audit and Risk Management Committee, for the following reasons: • All non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • None of the services undermine the general principles relating to auditor independence as set out in APES 110 ‘Code of Ethics for Professional Accountants’ issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditors own work, acting in a management or decision making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. 24 SIMONDS GROUPDirectors’ Report ANNUAL REPORT 2017 Introduction This remuneration report, which forms part of the directors’ report, sets out information about the remuneration of key management personnel (KMP) for the year ended 30 June 2017. The KMP disclosed in this report are listed in the table below: Current Non-Executive Directors (NED) Name Vallence Gary Simonds Position Chairman Appointment Date 1 25 September 2014 Susan Oliver Deputy Chair, Non-executive Director 6 October 2014 Rhett Simonds Michael Humphris Non-Executive Director Non-Executive Director 20 April 2016 29 March 2017 Former 2 Non-Executive Directors Name Position Appointment Date 1 Resignation date Leon Gorr Non-Executive Director 25 September 2014 29 March 2017 Current Senior Executives Name Matthew Chun Mick Myers John Thorburn Position Appointment Date 1 Group Chief Executive Officer (CEO) & Managing Director 1 April 2016 Chief Financial Officer (CFO) 30 May 2016 Group General Manager, Simonds Homes Australia 5 December 2016 1. Appointment date is the date commenced in the position. 2. Former Non-executive Directors and Senior Executives resigned from their position during the year ended 30 June 2017. 25 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Remuneration Policy Summary The Simonds Group Limited remuneration policy has been designed to Remuneration Governance in Year Ended 30 June 2017 ensure its remuneration practices attract, motivate and retain top talent The Board reviews its remuneration policy and practices on a regular from a diverse range of backgrounds with the experience, knowledge, basis. The objectives of the Board’s remuneration policy are to: skills and judgment to drive the Group’s performance and appropriately reward their contribution towards shareholder wealth creation. • create a consistent and sustainable system of determining the appropriate level of remuneration of all levels of the Group, The key principles that support the remuneration policy are as follows: including KMP; • employees are rewarded fairly and competitively according to job • encourage KMP to perform to their highest level; and level, market trends and individual skills, experience and • align the remuneration of KMP with the performance of the business. performance; The policy details the types of remuneration to be offered by the • the reward strategy is in line with the overall business strategy in Group and factors to be considered by the Board, Nomination and relation to acquisition, growth and retention of talent; Remuneration Committee (the Committee) and executives in • the reward strategy encompasses elements of salary, benefits, recognition and incentives to support talent management for business and shareholder outcomes; • it is simple, flexible, consistent and scalable across the business allowing for sustainable business growth; • it supports the business strategy whilst reinforcing our culture and values; and • it is regularly reviewed for relevance and reliability. Executive Remuneration Principles and Strategy A key principle of the Group’s approach to executive remuneration is that it should demonstrate strong links with Group performance and shareholder returns. Remuneration is aligned with Group performance by requiring a significant portion of remuneration to vary with short- term and long-term performance. The remuneration of KMP is structured taking into account the following factors: • the principles highlighted above; • the level and structure of remuneration paid to executives of other comparable publicly listed Australian companies of a similar size; • the position and responsibilities of each executive; and • other appropriate benchmarks and targets to reward senior executives for the Group and individual performance. determining the appropriate remuneration strategy. The Board’s Role in Remuneration The Board approved the Nomination and Remuneration Committee Charter on 17 November 2014. The decisions of the Committee are subject to approval by the Board. The Board also has the authority to directly seek independent, professional and other advisers as required for the Board to carry out its responsibilities. The Board appoints, removes and/or replaces members of the Committee at its discretion. The Nomination and Remuneration Committee (the Committee) The role of the Committee is to assist the Board by providing advice in relation to the remuneration packages for KMP, which includes non-executive directors. It also oversees management succession planning, performance targets and the remuneration of employees generally. The Committee also reviews and makes recommendations to the Board on the Group’s overall remuneration strategy, policies and practices, and monitors the effectiveness of the Group’s overall remuneration framework in achieving the Group’s remuneration strategy. The Committee reviews the remuneration strategy and policy at least once a year and has the authority to engage external professional advisers with the approval of the Board. Any remuneration recommendations have been made free from undue influence by members of the Group’s KMP. The Committee met seven times during the year. The CEO, CFO and any remaining directors are also regularly invited to attend meetings. No individuals are present during any discussions related to their own remuneration arrangements. During the year ended 30 June 2017, the Committee was at all times comprised of two non-executive directors. Further details of the Committee’s responsibilities are outlined in the Corporate Governance Statement, available from the Group’s website at www.simondsgroup.com.au. 26 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Non-Executive Director Remuneration Executive Remuneration Components Non-executive directors are remunerated by way of fixed fees in the form of cash and superannuation in accordance with Recommendation 8.3 of the ASX Corporate Governance Council’s Principles and Recommendations. During the year ended 30 June 2017, fees paid to non-executive directors totalled $521,152 (exclusive of superannuation and cash salary and fees). Shareholdings of non-executive directors are set out on page 18 of the directors’ report. The Company and each of the non-executive directors have agreed terms of appointment (as permitted under the ASX Listing Rules). Non-executive directors are not appointed for a specific term and their appointment may be terminated by notice from the individual director or otherwise pursuant to section 203B or 203D of the Corporations Act 2001. The maximum annual aggregate directors’ fee pool limit is $750,000 and was approved at the Annual General Meeting of Simonds Group Limited held on 2 October 2014. Remuneration tables for non-executive directors for the year ended 30 June 2017 are set out commencing on page 33 of this remuneration report. KMP Remuneration Framework The KMP remuneration framework comprises three principal elements: • a total employment cost (TEC) comprising a fixed component, consisting of a base salary, superannuation contributions and other related allowances; • a performance based, variable ‘at risk’ component, comprising cash and/or equity settled short-term incentives (STI); and • a performance and service based, variable ‘at risk’ component, comprising of options and/or performance rights and/or cash equivalents referred to as long-term incentives (LTI). The Group’s mix of fixed and at risk components for each of the KMP disclosed in this report, as a percentage of total target annual remuneration for financial year 2017, is as follows: TEC overview TEC is benchmarked against the market median, also known as the 50th percentile, referencing market practice and comparable and similar sized organisations. While comparative levels of remuneration are monitored on a periodic basis, there is no contractual requirement or expectation that any adjustments will be made. STI overview The Group STI Plan ensures that a proportion of remuneration is tied to Group performance measured annually in line with the financial year. Executives can only realise their STI at-risk component if challenging pre-determined objectives are achieved. The achievement of budgeted Group EBITDA is an initial gateway to realise a STI amount. All STI’s are subject to the achievement of relevant key performance measures which are determined with reference to the Balanced Scorecard approach. The Balance Scorecard Approach encompasses the following areas of focus: Financial, Operational, Customer and People, safety & values. This aligns executive interests with shareholder interests and focuses executive performance on those areas aligned to the achievement of the Group’s operational strategy. The STI payment is made in cash or in shares at the Board’s discretion as part of the annual remuneration review after finalisation of the Group’s audited results. LTI overview The Group’s LTI Plan ensures that a proportion of remuneration is tied to Group performance over the long term and measured annually in line with the financial year. Executives can only realise their LTI at-risk component if challenging pre-determined objectives are achieved. This aligns executive interests with shareholder interests and focuses executive performance on sound business decisions resulting in sustainable shareholder wealth. LTI consists of the granting of Performance Rights and/or options and/or cash equivalents that vest after a defined period, subject to Group and individual financial and non-financial performance hurdles. Vesting conditions may be waived at the absolute discretion of the Board. 27 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Long term Incentive Key Features Award Structure FY2017 Performance Rights Consideration for the Performance Rights The Performance Rights will be granted for nil consideration Vesting Period Each tranche has a vesting period of approximately three years. Performance Measure Vesting of Performance Rights is dependent on two discrete performance measures (hurdles): Grant Date Tranche 1 Total Share Holder Return (TSR) representing 50% of the Performance Rights Granted Tranche 2 (CAGR EPS) representing 50% of the Performance Rights Granted 31 January 2017 Up to 50% of the Performance Rights granted will vest if the Group’s (TSR) achieves a percentile ranking against the constituent companies within the S&P ASX Small Ordinaries Index (ASX Code XSI), excluding resource companies, over the Measurement Period. Percentile Ranking and percentage vesting rights are outlined below. The Measurement Period for the Compound Annual Growth Rate (CAGR) EPS Hurdle is across the three financial years across the period 1 July 2016 to 30 June 2019 Simonds Group Limited Percentile Ranking Percentage of Performance Rights to vest Less than the 50th percentile None Between the 50th and 75th percentile 50% (straight-line interpolation between the 50th and 75th percentile) At or above the 75th percentile 100% TSR Vesting Schedule (Tranche 1) CAGR EPS Vesting Schedule (Tranche 2) & CEO Options CAGR in EPS Percentage of Performance Rights to vest: Less than 7.5% per annum None Between 7.5% and 10% per annum Straight line interpolation applies At or above 10.0% per annum 100% Service Vesting Condition The Service Vesting Condition is continuous employment with the Company from Grant date to 30 September 2019. 28 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Award Structure FY2017 CEO Options Considerations for Options Options carry an exercise price of $0.40 Vesting Period Vesting period of approximately three years. Grant Date: 31 January 2017 Performance Measure Vesting of options is dependent on one discrete performance measure (hurdle): CAGR in EPS Percentage of Options to vest: Less than 7.5% per annum None Between 7.5% and 10% per annum Straight line interpolation applies At or above 10.0% per annum 100% Service Vesting Condition The Service Vesting Condition is continuous employment with the Company from Grant date to 30 September 2019. The FY2017 Performance Rights and CEO Options have been issued to the Current Senior Executives defined as KMP in this report. 29 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Long term Incentive Key Features (Cont’d) Award Structure FY2016 Performance Rights Consideration for the Performance Rights The Performance Rights will be granted for nil consideration Vesting Period Each tranche has a vesting period of approximately three years. Performance Measure Vesting of Performance Rights is dependent on two discrete performance measures (hurdles): Grant Date Tranche 1 Total Share Holder Return (TSR) representing 50% of the Performance Rights Granted Tranche 2 (CAGR EPS) representing 50% of the Performance Rights Granted 30 November 2015 Up to 50% of the Performance Rights granted will vest if the Group’s (TSR) achieves a percentile ranking against the constituent companies within the S&P ASX Small Ordinaries Index (ASX Code XSI), excluding resource companies, over the Measurement Period. Percentile Ranking and percentage vesting rights are outlined below. The Measurement Period for the Compound Annual Growth Rate (CAGR) EPS Hurdle is across the three financial years across the period 1 July 2015 to 30 June 2018 TSR Vesting Schedule (Tranche 1) Simonds Group Limited Percentile Ranking Percentage of Performance Rights to vest Less than the 50th percentile None Between the 50th and 75th percentile 50% (straight-line interpolation between the 50th and 75th percentile) At or above the 75th percentile 100% CAGR EPS Vesting Schedule (Tranche 2) CAGR in EPS Percentage of Performance Rights to vest: Less than 7.5% per annum None Between 7.5% and 10% per annum Straight line interpolation applies At or above 10.0% per annum 100% Service Vesting Condition The Service Vesting Condition is continuous employment with the Company from Grant date to 31 August 2018. The FY2016 Performance Rights have been issued to the Senior Executives previously defined as KMP in this report. 30 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Award Structure FY2015 Performance Rights Consideration for the Performance Rights The Performance Rights will be granted for nil consideration Vesting Period Each tranche has a vesting period of three years Performance Measure Vesting of Performance Rights is dependent on three discrete performance measures (hurdles): Grant Date Tranche 1 Total Share Holder Return (TSR) representing 1/3 of the Performance Rights Granted. Tranche 2 (CAGR EPS) representing 1/3 of the Performance Rights Granted. Tranche 3 Prospectus Forecast Earnings representing 1/3 of Performance Rights Granted. 17 November 2014 Up to 1/3 of the Performance Rights granted will vest if the Group’s (TSR) achieves the following percentile ranking against the constituent companies within the S&P/ASX Small Ordinaries Index (ASX Code XSI), excluding resources, over the Measurement Period The Measurement Period for the CAGR EPS Hurdle shall be the three financial years 2015, 2016 and 2017. EPS CAGR will be calculated based on the pro-forma NPAT for the year ended 2015 and not the statutory profit or reported EPS for that year. The specific EPS methodology will be determined by the Board. 1/3 of the Performance Rights granted will vest if the Group achieves the Prospectus forecast in earnings for the year ended 30 June 2015. TSR Vesting Schedule (Tranche 1) Simonds Group Limited Percentile Ranking Percentage of Performance Rights to vest Less than the 50th percentile None At or above the 50th percentile 50% (straight-line interpolation between the 50th and 75th percentile) At or above the 75th percentile 100% CAGR EPS Vesting Schedule CAGR in EPS Percentage of Performance Rights to vest: (Tranche 2) Less than 26.3% per annum None At or above 26.3% per annum 50% (straight-line interpolation between 26.3% and 29% per annum) At or above 29.0% per annum 100% Prospectus Forecast Earnings Vesting Condition (Tranche 3) 1/3 of the Performance Rights granted will vest in three years if Simonds Group Limited achieves the Prospectus forecast earnings for the year ended 30 June 2015 The FY2015 Performance Rights have been issued to the Senior Executives previously defined as KMP in this report. 31 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Remuneration Structure and Performance/Shareholder Wealth Creation The Group’s annual financial performance and indicators of shareholder wealth for the current financial period are summarised below. As the Group listed on 17 November 2014, the corresponding performance measures for the financial periods prior to this date have not been included. The Board believes it misleading to provide historical information from prior to listing on the ASX, with the exception of 2015 pro forma financial information as described in the Prospectus and the 2014 statutory actual results due to changes in the Company Remuneration Policy, structure and ownership. The Board believes a comparison to the Prospectus pro forma forecasts and prior year (during which the KMP commenced managing the business) is more meaningful for assessing the performance of KMP and their remuneration relative to Group performance. Financial Performance Revenue EBITDA1 NPAT2 Share Price at beginning of period Share Price at end of period Dividends (cents per share) EPS (cents per share) FY2017 FY2016 FY2015 FY2014 Pro Forma Actual $m Statutory Actual (Continuing Operations) $m Pro Forma Actual $m Statutory Actual (Continuing Operations) $m Prospectus Pro Forma Forecast $m Pro Forma Actual $m Statutory Actual $m 587.4 587.4 628.5 628.5 638.2 634.4 543.8 13.8 4.6 0.28 0.31 - 3.22 10.1 2.1 0.28 0.31 - 1.44 15.1 5.3 1.40 0.28 - 4.4 (2.2) 1.40 0.28 - 34.0 20.4 - 1.40 5.3 34.8 21.1 - 1.40 5.3 3.52 (1.53) 13.47 15.64 15.7 7.5 - - - - 1. Statutory EBITDA is net profit after tax from continuing operations $2.1m before financing items ($1.7m), tax expenses ($1.3m), and depreciation and amortisation ($5.0m). 2. Statuary NPAT is net profit after tax from continuing operations $2.1m. 32 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Remuneration Tables – Details of KMP Remuneration Details of the remuneration of the KMP, including Directors (as defined in AASB 124 Related Party Disclosures) of the Group are set out in the following tables. Comparative information is also included below. FY2017 Short Term Employee Benefits Termination Benefits Post- employment Benefits Long–term Benefits Share–based Payments (SBP) Name Directors Fees $ Cash Salary and Fees $ Short Term Incentive $ Non– monetary Benefits $ Termination Payments V G Simonds 182,648 - S Oliver 186,638 30,0001 L Gorr2 75,516 R Simonds 44,977 M Humphris 31,373 - - - Total NED 521,152 30,000 Senior Executive (Current and Former) M Chun M Myers J Thorburn3 Total Senior Executive TOTAL KMP - - - - 595,385 300,000 194,630 1,090,015 521,152 1,120,015 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Super $ 17,352 17,730 7,174 4,273 2,980 49,509 Annual Leave $ Long Service Leave $ Performance Rights $ - - - - - - - - - - - - - - - - - - Total $ 200,000 234,368 82,690 49,250 34,353 600,661 19,616 10,567 1,325 88,192 715,085 19,616 16,626 12,503 8,209 582 169 14,091 350,915 14,091 229,602 51,735 35,402 2,076 116,374 1,295,602 101,244 35,402 2,076 116,374 1,896,263 1. Fees paid to S Oliver as Chair of the Independent Board Committee as part of the proposed Scheme of Arrangement. 2. L Gorr resigned as Non-Executive Director on 29 March 2017. 3. J Thorburn was appointed as Group General Manager, Simonds Homes Australia on 5 December 2016. 33 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Remuneration Tables – Details of KMP Remuneration (Cont’d) FY2016 Short Term Employee Benefits Termination Benefits Post- employment Benefits Long–term Benefits Share–based Payments (SBP) Name Directors Fees $ Cash Salary and Fees $ Short Term Incentive $ Non– monetary Benefits $ Termination Payments V.G Simonds 182,648 S Oliver 160,221 L Gorr 86,291 R Simonds1 - - - - - M Chun2 90,000 105,2283 R Colless4 102,389 - Total NED 621,549 105,228 Senior Executive (Current and Former) M Chun M Myers5 A Shea6 P McMahon7 - - - - 148,923 27,308 19,700 306,988 - - - - - - - - - - - - - - - - - - - - 1,989 19,092 - - - - - - - - - - - Annual Leave $ Long Service Leave $ Performance Rights $ Total $ Super $ 17,352 22,422 8,198 - 8,550 9,727 66,249 - - - - - - - - - - - - - - 4,827 13,143 126 2,594 2,410 1,708 1,739 23 17 13,049 40,639 5,870 (86,002) 299,636 - - - - - - - - - - 200,000 182,643 94,489 - 203,778 112,116 793,026 167,019 32,335 25,153 1. Fees for the financial year ended 30 June 2016 are nil. 2. Prior to M Chun’s appointment to the role of Group CEO and Managing Director, he was an Independent Non-executive Director of the Board and Independent Chair of the Audit and Risk Committee. M Chun resigned as Independent Non-executive Director and Chair of the Audit and Risk Committee on 31 March 2016 prior to his appointment as Group CEO and Managing Director. 3. Amounts paid to M Chun, excluding directors’ fees, relate to advisory services provided as part of the normal course of business. 4. R Colless resigned as Independent Non-executive Director on 20 April 2016. 5. M Myers was appointed as CFO on 30 May 2016. 6. A Shea was appointed as Acting CEO of Builders Academy Australia on 26 May 2016. 7. P McMahon ceased to be Group CEO and Managing Director on 22 January 2016. 34 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Remuneration Tables – Details of KMP Remuneration (Cont’d) FY2016 Short Term Employee Benefits Termination Benefits Post- employment Benefits Long–term Benefits Share–based Payments (SBP) Directors Fees $ Cash Salary and Fees $ Short Term Incentive $ Non– monetary Benefits $ Termination Payments Super $ Annual Leave $ Long Service Leave $ Performance Rights $ Total $ Name R Stubbs1 M Gerolemou 2 C Troman3 G Healy4 - - - - 379,475 247,162 390,933 277,975 Total Senior Executive - 1,798,464 TOTAL KMP 621,549 1,903,692 - - - - - - 20,000 199,738 19,308 33,490 (7,285) 293,341 938,067 20,000 133,581 19,308 21,813 4,726 195,562 642,152 18,205 259,312 19,308 34,501 (5,277) 405,852 1,122,834 23,205 - 19,308 24,532 (4,793) (34,401) 305,826 102,491 592,631 99,410 172,267 (6,593) 774,352 3,533,022 102,491 592,631 165,659 172,267 (6,593) 774,352 4,326,048 1. R Stubbs ceased to be CFO on 30 June 2016. Please refer to page 36 of the directors’ report for details in relation to vested performance rights. 2. M Gerolemou ceased to be CHRO on 30 June 2016. Please refer to page 36 of the directors’ report for details in relation to vested performance rights. 3. C Troman ceased to be CEO of Simonds Homes Australia on 27 May 2016. Please refer to page 36 of the directors’ report for details in relation to vested performance rights. 4. G Healy ceased to be CEO of Builders Academy Australia on 3 June 2016. Key terms of the Executive Services Agreement Group Chief Executive Officer (CEO) & Managing Director The material terms of the Executive Services Agreement between Matthew Chun and the Company for the role of Group Chief Executive Officer (CEO) & Managing Director are as follows: Term: No fixed term. Ongoing until terminated by either party in accordance with the Agreement Total Employment Cost (TEC): $615,000 per annum including superannuation, reviewed annually Short Term Incentive (STI) for FY16/17: Long Term Incentive (LTI) for FY16/17: Maximum opportunity of $600,000 per annum, subject to performance Options and Performance Rights issued under the Simonds Group Employee Share Plan 12 months by either party Notice Period / Termination Entitlements: Employment may be ended immediately in certain circumstances including misconduct, incapacity, and mutual agreement or in the event of a fundamental change in the CEO’s role or responsibilities. The Company may elect to make a payment in lieu of any unserved notice period. Post-Employment Restraint: A 6 month post-employment restraint provision applies 35 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017STI Payments to KMP There were no STI payments made to KMP during the financial year ended 30 June 2017 (2016: Nil). The achievement of budgeted Group EBITDA is an initial gateway to realise a STI amount. All STI’s are subject to the achievement of relevant key performance measures which are determined with reference to the Balanced Scorecard approach. The Balance Scorecard Approach encompasses the following areas of focus: Financial, Operational, Customer and People, safety & values. KMP LTI The following tables provide the details of performance rights allocated to the KMP pursuant to the LTI Plan. Number of equity instruments granted, vested and expired/forfeited – performance rights FY2017 Name M Chun M Myers J Thorburn TOTAL FY2016 Name M Chun M Myers A Shea P McMahon R Stubbs M Gerolemou C Troman G Healy TOTAL Performance Rights 1 July 2016 Performance Rights Granted Performance Rights Vested Performance Rights Expired / Forfeited Balance 30 June 2017 - - - - 453,401 314,861 314,861 1,083,123 - - - - - - - - 453,401 314,861 314,861 1,083,123 Performance Rights 1 July 2015 Performance Rights Granted Performance Rights Vested Performance Rights Expired / Forfeited Balance 30 June 2016 - - - 280,899 168,539 112,360 168,539 112,360 - - - - 212,284 141,523 424,568 247,665 - - - - (380,823) (253,883) (593,107) - - - (280,899) - - - - (360,025) 842,697 1,026,040 (1,227,813) (640,924) - - - - - - - - - Number of equity instruments granted, vested and expired/forfeited – options Options 1 July 2016 Options Granted Options Vested Options Expired / Forfeited Balance 30 June 2017 - 4,000,000 - - 4,000,000 FY2017 Name M Chun 36 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Value of performance rights granted, exercised and expired/forfeited – performance rights FY2017 Name Rights issue Tranche Fair value at grant date $ per share No. of Performance Rights Accounting Fair Value at grant date $ Exercised / Vested $ Expired / Forfeited $ M Chun FY2017 M Myers FY2017 J Thorburn FY2017 FY2016 TSR EPS TSR EPS TSR EPS 0.23 0.35 0.23 0.35 0.23 0.35 226,701 226,700 157,431 157,430 157,431 157,430 52,141 79,345 36,209 55,100 36,209 55,100 - - - - - - - - - - - - Name Rights issue Tranche Fair value at grant date $ per share No. of Performance Rights Accounting Fair Value at grant date $ Exercised / Vested $ Expired / Forfeited $ M Chun M Myers A Shea P McMahon R Stubbs M Gerolemou C Troman G Healy - - - FY2016 FY2015 FY2016 FY2015 FY2016 FY2015 FY2016 FY2015 FY2016 FY2015 - - - TSR EPS TSR EPS Prospectus TSR EPS TSR EPS Prospectus TSR EPS TSR EPS Prospectus TSR EPS TSR EPS Prospectus TSR EPS TSR EPS Prospectus - - - - - 1.0349 1.5512 1.5512 0.31 0.75 1.0349 1.5512 1.5512 0.31 0.75 1.0349 1.5512 1.5512 0.31 0.75 1.0349 1.5512 1.5512 0.31 0.75 1.0349 1.5512 1.5512 - - - - - 93,633 93,633 93,633 106,142 106,142 56,180 56,180 56,179 70,762 70,761 37,453 37,453 37,454 212,284 212,284 56,180 56,180 56,179 123,833 123,832 37,453 37,453 37,454 - - - - - 96,901 145,244 145,244 32,904 79,607 58,141 87,146 87,145 21,936 53,071 38,760 58,097 58,099 65,808 159,213 58,141 87,146 87,145 38,388 92,874 38,760 58,097 58,099 - - - - - - - - - - - - - 96,901 145,244 145,244 32,904 79,607 58,141 87,146 87,145 21,936 53,071 38,760 58,097 58,099 65,808 159,213 58,141 87,146 87,145 - - - - - - - - - - - - - - - - - - - - 38,388 92,874 38,760 58,097 58,099 Accounting Fair Value at year end 30 June 17 $ 52,141 79,345 36,209 55,100 36,209 55,100 Accounting Fair Value at year end 30 June 16 $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - 37 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Value of performance options granted, exercised and expired/forfeited – performance options FY2017 Name Options issue Tranche Fair value at grant date $ per share No. of Performance Rights Accounting Fair Value at grant date $ Exercised / Vested $ Expired / Forfeited $ Accounting Fair Value at year end 30 June 17 $ M Chun FY2017 EPS (Options) 0.11 4,000,000 440,000 - - 440,000 Non–Executive Directors and KMP Shareholdings Shareholdings of non–executive directors and KMP are set out below: FY2017 Name Opening balance Acquired Other 1 Closing balance Number of shares Non–executive Directors (Current and Former) V.G Simonds 56,138,895 S Oliver L Gorr R Simonds M Humphris Total NED Senior Executive M Chun M Myers J Thorburn Total Senior Executive 44,000 461,180 14,044 - 56,658,119 - - - - TOTAL KMP 56,658,119 1. Other relates to when KMP ceased their position with the Company. - - - - - - - - - - - - - (461,180) - - 56,138,895 44,000 - 14,044 - (461,180) 56,196,939 - - - - - - - - (461,180) 56,196,939 38 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017FY2016 Name Opening balance Acquired Other 1 Closing balance Number of shares Non–executive Directors (Current and Former) V.G Simonds 56,138,895 S Oliver L Gorr R Simonds M Chun R Colless Total NED Senior Executive M Chun Non–executive Directors (Current and Former) M Myers A Shea P McMahon R Stubbs M Gerolemou C Troman G Healy 17,000 56,180 14,044 - - - - - 4,040,561 375,561 - - - Total Senior Executive TOTAL KMP 4,416,122 60,642,241 Executive Service Agreements 56,226,119 432,000 - 27,000 405,000 - - - - - - - - - - - - 432,000 - - - - - - - - - - (4,040,561) (375,561) - - - (4,416,122) (4,416,122) 56,138,895 44,000 461,180 14,044 - - 56,658,119 - - - - - - - - - 56,658,119 Name M Chun M Myers J Thorburn Minimum Notice Period Contract Length Termination by Executive Termination by Company No fixed term No fixed term No fixed term 12 months 6 months 3 months 12 months 6 months 3 months 1. Other relates to when KMP ceased their position with the Company. 39 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Loans to Director The Group has not provided any loans to directors or their related parties during the year ended 30 June 2017 (2016: Nil). Other KMP Transactions During the financial year, the Group entered into a number of transactions with related parties of KMP. This part of the Remuneration Report is to be read in conjunction with note 30 Related Parties included on page 78 of the financial statements for the year ended 30 June 2017. Profit for the year includes the following items of revenue and expense that resulted from transactions, other than compensation, loans or equity holdings, with KMP or their related entities: Consolidated revenue includes the following amounts arising from transactions with KMP of the Group or their related parties: Revenue – Sales Consolidated profit includes the following expenses arising from transactions with KMP of the Group or their related parties: Leasing and rental costs Purchase of goods Total assets arising from transactions with KMP of the Group or their related parties: Current Non-Current Total liabilities arising from transactions with KMP of the Group or their related parties: Current Non-Current 2017 $ 2016 $ 683,400 683,400 1,231,463 1,231,463 674,735 465,963 529,087 1,161,912 1,140,698 1,690,999 – – – – – – – – – 36,000 – 36,000 40 Director’s Report: Remuneration ReportSIMONDS GROUPANNUAL REPORT 2017Director’s Report Auditor’s independence declaration The auditor’s independence declaration is included after this report on page 42. Rounding of Amounts The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financial/Director’s Reports) instrument 2016/191, dated 24 March 2016, and in accordance with that ASIC Corporations Instrument amounts in the Director’s Reports and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. This directors’ report is signed in accordance with a resolution of directors made to pursuant to s.298 (2) of the Corporations Act 2001. On behalf of the directors Vallence Gary Simonds Director Melbourne, 24 August 2017 41 SIMONDS GROUPANNUAL REPORT 2017SIMONDS GROUP The Board of Directors Simonds Group Limited Level 4, 570 St Kilda Road Melbourne VIC 3000 24 August 2017 Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78B Melbourne VIC 3001 Australia Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au Simonds Group Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Simonds Group Limited. As lead audit partner for the audit of the consolidated financial report of Simonds Group Limited for the financial year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely, DELOITTE TOUCHE TOHMATSU Genevra Cavallo Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 42 31 ANNUAL REPORT 2017 SIMONDS GROUP Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78B Melbourne VIC 3001 Australia Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of Simonds Group Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Simonds Group Limited (the “Company”) and its subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information, and the directors’ declaration. In our opinion, the accompanying 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 2017 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 32 43 ANNUAL REPORT 2017 SIMONDS GROUP Key Audit Matters Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78B Melbourne VIC 3001 Australia Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The Board of Directors Simonds Group Limited Level 4, 570 St Kilda Road Melbourne VIC 3000 Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au Key Audit Matter How the scope of our audit responded to the Key Audit Matter Recognition of revenue and work 24 August 2017 progress on construction contracts in Simonds Group Limited For the year ended 30 June 2017, the Group’s revenue from residential construction contracts In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Simonds Group Limited. totalled $569.864m. Revenue from construction contracts is recognised with reference to the As lead audit partner for the audit of the consolidated financial report of Simonds Group stage of completion of the contract activity at Limited for the financial year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: the end of the reporting period, measured based on the proportion of contract costs incurred for work performed the to date estimated total contract costs as disclosed in Note 3.7.1. (i) the auditor independence requirements of the Corporations Act 2001 in relation relative (ii) any applicable code of professional conduct in relation to the audit. to the audit; and to  Our audit procedures included, but were not limited to:  Obtaining an understanding of the process undertaken by management to account for the recognition of revenue and work in progress; Testing key controls in respect of the revenue process,  Assessing management’s determination of the percentage of completion allocated to each stage of the build process against historical cost profiles; Testing a sample of inputs into the model used to establish management’s percentage of completion allocated to each stage;   Assessing management’s estimation of costs to complete, including comparing historical actual performance against forecast;  Recalculating, on a sample basis, revenue recognised based on the stage of completion of selected jobs;  Challenging contracts which exhibited heightened risk characteristics; and  Agreeing, on a sample basis, job data back to customer source contracts, approved variations and job costs. documentation, including We also assessed the disclosures in notes 3.7.1 and 4 to the financial statements. the appropriateness of Our audit procedures included, but were not limited to:  Assessing the process undertaken by management to develop the budget and cash flow forecasts and confirming they had been approved by the Board; 31  Assessing forecasted key assumptions including site starts, start value, number of displays and student numbers, with reference to those achieved for the 2016 financial year:  Assessing forecasted debt repayments against repayment schedules;  Assessing the level of available bank facilities   during the forecast period; Testing compliance with covenant requirements at year end and reviewing management’s forecast covenant compliance calculations for the forecast period; Performing sensitivity analysis on the financial forecasts; and  Evaluating performance in the period since year end to audit report date against the forecast. the appropriateness of We also assessed disclosures in note 3.3 to the financial statements. the 33 is required Yours sincerely, As disclosed in Note 4, significant management estimation the following: - Estimation of total contract revenue and costs; and DELOITTE TOUCHE TOHMATSU - Determination of stage of completion. in assessing Genevra Cavallo Partner Chartered Accountants Compliance with Bank Covenants As disclosed in Note 3.3 the appropriateness of Liability limited by a scheme approved under Professional Standards Legislation. the going concern assumption was assessed Member of Deloitte Touche Tohmatsu Limited with reference to detailed financial forecasts which demonstrate that the Group will be able to operate within its bank covenants for the 12 months following the date of the financial report, and therefore have access to its banking facilities for that period. Management estimation is inherent in the preparation of the financial forecasts. 44 ANNUAL REPORT 2017 SIMONDS GROUP Other Information Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78B Melbourne VIC 3001 Australia The directors are responsible for the other information. The other information comprises the Directors’ Report, ASX announcement and full year results presentation which we obtained prior to the date of the auditor’s report, and also includes the following information which will be included in the Group’s annual report (but does not include the financial report and our auditor’s report The Board of Directors thereon): the Chairman’s Welcome Letter, Letter from the Group CEO and Managing Director, Simonds Group Limited Level 4, 570 St Kilda Road Financial Highlights and additional securities exchange information, which is expected to be made Melbourne VIC 3000 available to us after that date. Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au 24 August 2017 Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon. Simonds Group Limited In connection with our audit of the financial report, our responsibility is to read the other In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the information identified above and, in doing so, consider whether the other information is materially following declaration of independence to the directors of Simonds Group Limited. inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears As lead audit partner for the audit of the consolidated financial report of Simonds Group to be materially misstated. If, based on the work we have performed on the other information that Limited for the financial year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. When we read the Chairman’s Welcome Letter, Letter from the Group CEO and Managing Director and Financial Highlights, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgment to Yours sincerely, determine the appropriate action. Responsibilities of the Directors for the Financial Report DELOITTE TOUCHE TOHMATSU The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material Genevra Cavallo Partner misstatement, whether due to fraud or error. Chartered Accountants In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is Liability limited by a scheme approved under Professional Standards Legislation. free from material misstatement, whether due to fraud or error, and to issue an auditor’s report Member of Deloitte Touche Tohmatsu Limited that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. 31 As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. 45 34 ANNUAL REPORT 2017 SIMONDS GROUP • Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 Conclude on the appropriateness of the directors’ use of the going concern basis of 550 Bourke Street accounting and, based on the audit evidence obtained, whether a material uncertainty Melbourne VIC 3000 GPO Box 78B exists related to events or conditions that may cast significant doubt on the Group’s ability Melbourne VIC 3001 Australia to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au The Board of Directors Simonds Group Limited Level 4, 570 St Kilda Road Melbourne VIC 3000 • 24 August 2017 Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Simonds Group Limited • In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Simonds Group Limited. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. As lead audit partner for the audit of the consolidated financial report of Simonds Group Limited for the financial year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. (i) the auditor independence requirements of the Corporations Act 2001 in relation (ii) any applicable code of professional conduct in relation to the audit. to the audit; and We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other Yours sincerely, matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most DELOITTE TOUCHE TOHMATSU significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would Genevra Cavallo Partner reasonably be expected to outweigh the public interest benefits of such communication. Chartered Accountants Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 25 to 40 of the Directors’ Report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Simonds Group Limited, for the year ended 30 June Liability limited by a scheme approved under Professional Standards Legislation. 2017, complies with section 300A of the Corporations Act 2001. Member of Deloitte Touche Tohmatsu Limited Responsibilities 31 The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU Genevra Cavallo Partner Chartered Accountants Melbourne, 24 August 2017 46 35 ANNUAL REPORT 2017 SIMONDS GROUP Directors’ Declaration The directors declare that: Directors’ Declaration a) in the directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; b) in the directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standards, as stated in note 3.1 to the financial statements; and c) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity d) the directors have been given the declarations required by s.295A of the Corporations Act 2001. At the date of this declaration, the Company is within the class of companies affected by ASIC Class Order 98/1418. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the directors’ opinion, there are reasonable grounds to believe that the Company and the companies to which the ASIC Class Order applies, as detailed in note 16 to the financial statements will, as a group, be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. Signed in accordance with a resolution of the directors made pursuant to s.295 (5) of the Corporations Act 2001. On behalf of the Directors Vallence Gary Simonds Director Melbourne, 24 August 2017 47 ANNUAL REPORT 2017Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2017 Continuing Revenue Cost of sales Gross profit Expenses Profit before significant items, financing items, depreciation and amortisation Significant items Notes 5 11 12 Profit before financing items, depreciation and amortisation Depreciation and amortisation charges 17,18 Profit / (Loss) before financing items and tax Financing items Interest income Interest expense Net financing cost Profit / (Loss) before tax Income tax benefit / (expense) Profit / (Loss) from continuing operations Discontinued operations Loss from discontinued operations after tax Profit / (Loss) after tax for the year Other comprehensive income, net of income tax Total Comprehensive Income for the year Earnings per share From continuing operations Basic (cents per share) Diluted (cents per share) From continuing and discontinuing operations Basic (cents per share) Diluted (cents per share) The accompanying notes form part of these financial statements. 48 7 8 9 10 13 13 13 13 Year ended 30/06/17 $’000 587,369 (461,436) 125,933 (112,096) 13,837 (3,703) 10,134 (5,020) 5,114 1 (1,728) (1,727) 3,387 (1,309) 2,078 (1,873) 205 - 205 1.44 1.44 0.14 0.14 Year ended 30/06/16 $’000 628,508 (496,795) 131,713 (116,622) 15,091 (10,643) 4,448 (5,594) (1,146) 112 (2,212) (2,100) (3,246) 1,005 (2,241) (12,650) (14,891) - (14,891) (1.53) (1.53) (10.14) (10.14) SIMONDS GROUPANNUAL REPORT 2017Consolidated Statement of Financial Position Consolidated statement of financial position as at 30 June 2017 Notes Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 Assets Current Assets Cash and bank balances Trade and other receivables Inventories Other financial assets Tax receivable Other assets Total current assets Non–Current Assets Property, plant and equipment Intangible assets Other financial assets Deferred tax assets Total non-current assets Total assets Liabilities Current Liabilities Trade and other payables Borrowings Provisions Deposits and income in advance Total current liabilities Non–Current Liabilities Borrowings Provisions Deferred tax liabilities Total Non–Current Liabilities Total liabilities Net assets / (liabilities) Equity Issued capital Share buy–back reserve Share based payments reserve Accumulated losses Total equity / (deficit) 34 14 15 20 9 19 17 18 20 9 21 22 23 24 22 23 9 25 25 31 26 10,204 32,690 48,185 1,260 1,441 3,174 96,954 7,878 5,676 - 5,839 19,393 116,347 61,168 3,875 12,989 13,774 91,806 11,349 7,878 8,439 27,666 119,472 (3,125) 12,911 (7,204) 30,243 (39,075) (3,125) 3,176 43,630 49,610 - 4,109 3,382 103,907 9,800 4,798 1,260 3,946 19,804 123,711 75,630 1,790 14,658 12,484 104,562 9,500 6,877 6,097 22,474 127,036 (3,325) 12,911 (7,204) 30,248 (39,280) (3,325) The accompanying notes form part of these financial statements. 49 SIMONDS GROUPANNUAL REPORT 2017 SIMONDS GROUP Consolidated Statement of Changes in Equity Consolidated statement of changes in equity for the year ended 30 June 2017 Notes 31 31 Balance at 1 July 2015 Share buy-back Employee share plan Performance rights vested Dividend paid Loss for the year Issued capital $’000 Share based payments reserve $’000 Share buy–back reserve $’000 Accumulated losses $’000 13,590 29,424 - (16,359) (679) - (7,204) - - - - 1,332 (508) - - - - - - Total $’000 26,655 (7,883) 1,332 (508) - - - (8,030) (8,030) (14,891) (14,891) Balance at 30 June 2016 12,911 30,248 (7,204) (39,280) (3,325) Balance at 1 July 2016 Share buy-back Employee share plan expense Performance and service rights vested / forfeited Dividend paid Profit for the year 31 31 12,911 30,248 (7,204) (39,280) (3,325) - - - - - - 229 (234) - - - - - - - - - - - 205 - 229 (234) - 205 Balance at 30 June 2017 12,911 30,243 (7,204) (39,075) (3,125) The accompanying notes form part of these financial statements. 50 ANNUAL REPORT 2017SIMONDS GROUP Consolidated Statement of Cash Flows Consolidated statement of cash flows for the year ended 30 June 2017 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Cash generated from operations Transaction costs associated with proposed Scheme of Arrangement Finance costs Income taxes refund / (paid) Net cash generated / (used in) from operating activities Cash flows from / (used in) investing activities Interest received Payment to acquire subsidiary and its working capital, net of cash acquired Proceeds from disposal of property, plant and equipment Notes 8 34 7 36 Investment in land fund Payments for property, plant and equipment Payments for intangibles assets Net cash used in investing activities Cash flows from / (used in) financing activities Proceeds from borrowings Payment for finance leases Amounts advanced from related parties Share buy-back Dividends paid to shareholders Net cash generated from / (used in) financing activities Net increase / (decrease) in cash and cash equivalents The accompanying notes form part of these financial statements Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 34 The accompanying notes form part of these financial statements. Year ended 30/06/17 $’000 604,503 (596,599) 7,904 (1,757) (1,728) 2,649 7,068 1 - 355 - (554) (2,400) (2,598) 4,726 (2,168) - - - 2,558 7,028 3,176 10,204 Year ended 30/06/16 $’000 664,047 (637,699) 26,348 - (2,212) (9,192) 14,944 112 (1,647) 478 (1,260) (3,129) (1,891) (7,337) 7,000 (1,152) 157 (7,883) (8,030) (9,908) (2,301) 5,477 3,176 51 ANNUAL REPORT 2017SIMONDS GROUP Notes to the Financial Statements 1. General information The Company is incorporated in Australia and is a for-profit entity. The Company’s registered office and principal place of business is as follows: Level 1, 570 St Kilda Road MELBOURNE VIC 3004 These financial statements comprise the consolidated financial statements of the Company and the entities it controls (the “Group”). The entities controlled by the Company are detailed in note 16 to the financial report. The principal activities of the Group are the design and construction of residential dwellings, the development of residential land and providing registered training courses. 2. Application of new and revised accounting standards 2.1 Amendments to AASBs and the new interpretation that are mandatorily effective for the current year The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the current year. The application of these amendments does not have any material impact on the disclosures or the amounts recognised in the Group’s consolidated financial statements. 2.2 Standards and interpretations in issue not yet adopted At the date of authorisation of the financial statements, the Directors have reviewed all Standards and Interpretations on issue but not yet effective and with the exception of the following standards, do not expect these Standards and Interpretations to have a material effect on the financial statements of the Group. Standard / Interpretation Effective for annual reporting periods beginning on or after (i) AASB 15 ‘Revenue from Contracts with Customers’, and the relevant amending standards 1 January 2018 AASB 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. AASB 15 will supersede the current revenue recognition guidance including AASB 118 ‘Revenue’, AASB 111 ‘Construction Contracts’ and the related Interpretations which it becomes effective. (ii) AASB 16 ‘Leases’ 1 January 2019 AASB 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. AASB 16 will supersede the current lease guidance including AASB 117 ‘Leases’ and the related interpretations. AASB 16 eliminates the distinction between operating and finance leases for lessees and will result in lessees bringing most lease onto their statements of financial position. The Directors are in the process of completing their assessment of the potential impacts of these standards. 52 ANNUAL REPORT 2017 3. Significant accounting policies 3.3 Going concern 3.1 Statement of compliance These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the Group. Accounting Standards include Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the Company and the Group comply with International Financial Reporting Standards (‘IFRS’). The financial statements were authorised for issue by the directors on 24 August 2017. 3.2 Basis of preparation The financial report has been prepared on the going concern basis, which assumes continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The Group incurred a net profit after tax (NPAT) for the year ended 30 June 2017 of $0.205m (2016: loss $14,891m). The results include transaction costs of $1.817m (2016: $Nil); impairment of non-core development land and other current assets of $1.413m (2016: $1.700m); and management restructure costs of $0.473m (2016: $2.587m) (refer to note 12 for significant items). The Group has a deficit net asset position of $3.125m as at 30 June 2017. As a result of these indicators, along with the need to comply with bank covenants, the Group has assessed the appropriateness of the going The consolidated financial statements have been prepared on the concern basis as follows: basis of historical cost, except for certain financial instruments that • Management has prepared detailed financial forecasts for the are measured at revalued amounts or fair values at the end of each 12 months following the date of this report. These forecasts reporting period, as explained in the accounting policies below. indicate that the Group will have sufficient funds to continue to Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. All amounts are presented in Australian dollars, unless otherwise noted. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on pay its debts as and when they become due and payable. • The Group has complied with all bank covenants in its banking arrangements during the year and based on the forecasts noted above, expects to operate within its bank covenants for the 12 months following the date of this report and therefore continue to have access to its banking facilities. • As described in note 22 the Group has $23.035m in unused facilities (excluding finance leases) available at 30 June 2017. Based on all available information to management and the Directors at the date of signing, the Directors are of the opinion that the Group is a going concern and accordingly the Directors have deemed it appropriate for the financial report to be prepared on a going such a basis, except for share-based payment transactions that are concern basis. within the scope of AASB 2, leasing transactions that are within the scope of AASB 117, and measurements that have some similarities 3.4 Basis of consolidation to fair value but are not fair value, such as net realisable value in Consolidation of a subsidiary begins when the Company obtains control AASB 102 or value in use in AASB 136. Rounding of amounts The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company 24 March 2016, and in accordance with that Class Order amounts in the ceases to control the subsidiary. financial report are rounded off to the nearest thousand dollars, unless otherwise indicated. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. 5353 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 2017Notes to the Financial Statements 3.5 Business combinations 3.7 Revenue recognition Acquisitions of businesses are accounted for using the acquisition Revenue is measured at the fair value of the consideration received or method. The consideration transferred in a business combination is receivable. Revenue is reduced for rebates and other similar allowances. measured at fair value which is calculated as the sum of the acquisition- date fair values of assets transferred by the Group, liabilities incurred by 3.7.1 Construction Contracts the Group to the former owners of the acquiree and the equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that: • deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with AASB 112 ‘Income Taxes’ and AASB 119 ‘Employee Benefits’ respectively; When the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the end of the reporting period, measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that the amount can be measured reliably and its receipt is considered probable. • liabilities or equity instruments related to share-based payment When the outcome of a construction contract cannot be estimated arrangements of the acquiree or share-based payment reliably, contract revenue is recognised to the extent of contract costs arrangements of the Group entered into to replace share-based incurred and that it is probable that it will be recovered. Contract costs payment arrangements of the acquiree are measured in accordance are recognised as expenses in the period in which they are incurred. with AASB 2 ‘Share-based Payment’ at the acquisition date; and When it is probable that total contract costs will exceed total contract • assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ are measured in accordance with that Standard. revenue, the expected loss is recognised as an expense immediately. When contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is shown as amounts due from customers for contract work. Amounts received Goodwill is measured as the excess of the sum of the consideration before the related work is performed are included in the consolidated transferred, the amount of any non-controlling interests in the statement of financial position as a liability, as income in advance. acquiree, and the fair value of the acquirer's previously held equity Amounts billed for work performed but not yet paid by the customer are interest in the acquiree (if any) over the net of the acquisition-date included in the consolidated statement of financial position under trade amounts of the identifiable assets acquired and the liabilities assumed. and other receivables. 3.6 Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of the acquisition of the business less accumulated impairment losses, if any. 3.7.2 Sale of Speculative Homes, Display Homes and Land Revenue from the sale of speculative homes, display homes and land is recognised when the goods are delivered and titles have passed at which time all the following conditions are satisfied: For the purposes of impairment testing, goodwill is allocated to each of the Group's cash generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. • the Group has transferred to the buyer the significant risks and rewards of ownership of the goods; • the Group retains neither continuing managerial involvement to the A cash-generating unit to which goodwill has been allocated is tested degree usually associated with ownership nor effective control over for impairment annually, or more frequently when there is an indication the goods sold; that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. • the amount of revenue can be measured reliably; • it is probable that the economic benefits associated with the transaction will flow to the Group; and • the costs incurred or to be incurred in respect of the transaction can be measured reliably. 3.7.3 Rendering of registered training services On disposal of the relevant cash-generating unit, the attributable Revenue from registered training services is recognised over the amount of goodwill is included in the determination of the profit or loss duration of the course by reference to the percentage of services on disposal. 54 provided and when the Group is entitled to claim the funding from the government. SIMONDS GROUPANNUAL REPORT 20173.7.4 Interest income 3.9.2 Superannuation contributions Interest income from a financial asset is recognised when it is probable Contributions to defined contribution superannuation plans are that the economic benefits will flow to the Group and the amount of expensed when employees have rendered services entitling them revenue can be measured reliably. Interest income is accrued on a time to the contributions. basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts 3.9.3 Termination benefit estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition. A liability for a termination benefit is recognised at the earlier of when the entity can no longer withdraw the offer of the termination benefit and when the entity recognises any related restructuring costs. 3.8 Leasing Leases are classified as finance leases whenever the terms of the lease 3.9.4 Bonus entitlements transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. A liability is recognised for bonus entitlements where contractually obliged or where there is a past practice that has created a constructive Assets held under finance leases are initially recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding obligation. 3.10 Taxation liability to the lessor is included in the statement of financial position as Income tax expense represents the sum of the tax currently payable and a finance lease obligation. Lease payments are apportioned between deferred tax. finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. 3.10.1 Current tax Finance expenses are recognised immediately in profit or loss, unless The tax currently receivable is based on the financial result for the year. they are directly attributable to qualifying assets, in which case they Taxable profit differs from profit as reported in the statement of profit or are capitalised in accordance with the Group’s general policy on loss and other comprehensive income because of items of income or borrowing costs. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis. 3.9 Employee benefits expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Adjustments are made for transactions and events occurring within the tax-consolidated group that do not give rise to a tax consequence for the Group or that have a different tax consequence at the level of the Group. 3.9.1 Short-term and Long-term employee benefits 3.10.2 Deferred tax Short term employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave, and sick leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of short- term employee benefits, are measured at their nominal values using the Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Adjustments are made for transactions and events occurring within the tax-consolidated group that do not give rise to a tax consequence for the Group or that have a different tax consequence at remuneration rate expected to apply at the time of settlement. the level of the Group. Other long term employee benefits Liabilities for annual leave and long service leave that are not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service, are recognised in the provision for employee entitlements and are measured at the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. Consideration is given to expected future wage and salary levels, departures and periods of service. These employee benefit entitlements are presented as current liabilities in the balance sheet if the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. 55 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20173.10.3 Current and deferred tax for the year The following estimated useful lives are used in the calculation of depreciation: Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively. 3.10.4 Tax consolidation The entities, except the trusts within the Group have formed a tax- Leasehold improvements 5 years or the period of the lease Computer equipment 3 years Office furniture and fittings 5 years Display home furniture, fixtures and fittings consolidated group with effect from 1 July 2010 and are therefore taxed Motor vehicles as a single entity from that date. The head entity within the tax- consolidated group is Simonds Group Limited. Current tax expense/ (income), deferred tax liabilities and deferred tax assets arising from Plant and equipment temporary differences of the members of the tax-consolidated group 3.12 Intangible assets are recognised in those entities using the ‘separate taxpayer within 5 years 5 years 5 years group’ approach by reference to the carrying amounts of assets and 3.12.1 Intangible assets acquired separately liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation. The head entity, in conjunction with other members of the tax- Intangible assets with finite lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their consolidated group, has entered into a tax funding arrangement which estimated useful lives. The estimated useful life and amortisation method sets out the funding obligations of members of the tax-consolidated are reviewed at the end of each reporting period, with the effect of any group in respect of tax amounts. The tax funding arrangements require payments to/(from) the head entity equal to the current tax liability/(asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable/ (payable) equal in amount to the tax liability/(asset) assumed. The inter-entity receivable/(payable) are at call. Contributions to fund the tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. The useful life in relation to the licence is the time at which the licence is due for renewal. 3.12.2 Internally-generated intangible assets – research and development expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following The head entity in conjunction with other members of the tax- have been demonstrated: consolidated group has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing • the technical feasibility of completing the intangible asset so that it will be available for use or sale; • the intention to complete the intangible asset and use or sell it; • the ability to use or sell the intangible asset; • how the intangible asset will generate probable future economic agreement is considered remote. benefits; 3.11 Property, plant and equipment • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; The carrying amount of property, plant and equipment which is valued on and the cost basis, is subject to impairment testing and is reviewed to determine • The ability to measure reliably the expenditure attributable to the whether they are in excess of their recoverable amount at balance date. intangible asset during its development. If the carrying amount of a property, plant and equipment exceeds its recoverable amount, the asset is written down to the lower amount. The write-down is expensed in the reporting period in which it occurs. Depreciation is calculated on a straight line basis so as to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period. The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally- generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. 56 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20173.13 Impairment of tangible and intangible assets other When some or all of the economic benefits required to settle a provision than goodwill At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. 3.15.1 Maintenance and warranty estimated in order to determine the extent of the impairment loss (if any). Provisions for the cost of maintenance and warranty is the directors’ Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. best estimate of the expenditure required to settle the Group’s obligations are under legislative requirements. 3.15.2 Make good Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows Provisions based on the directors’ best estimates of the costs required to reinstate the display homes under legislation; or requirement to be at are discounted to their present value using a pre-tax discount rate that a saleable standard. reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows 3.16 Financial instruments have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, 3.16.1 Financial assets the carrying amount of the asset (or cash-generating unit) is reduced to Investments in subsidiaries are recognised and derecognised on trade its recoverable amount. An impairment loss is recognised immediately in date where purchase or sale of an investment is under a contract whose profit or loss. 3.14 Inventories terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs. Subsequent to initial recognition, investments are Inventories are stated at the lower of cost and net realisable value. Costs measured at cost. of inventories are determined on a first-in-first-out basis. Net realisable value represents the estimated selling price for inventories less all 3.16.2 Loans and receivables estimated costs of completion and costs necessary to make the sale. Trade receivables, loans and other receivables are recorded at amortised cost using the effective interest method less impairment. Construction contracts Construction work-in-progress is stated at the aggregate of contract 3.16.3 Investment in land fund costs incurred to date plus recognised profits less recognised losses The Group has investments which are units held in a land fund that are and progress billings. Contract costs include all costs directly related to stated at fair value because the directors consider that fair value can be specific contracts, and costs that are specifically chargeable to the reliably measured. customer under the terms of the contract. The stage of completion is measured using the percentage of completion method. Land at cost: Cost includes the costs of acquisition, development, borrowings and all other costs directly related to specific projects. Speculative Homes and Displays Cost includes the costs of building the speculative and display homes. 3.15 Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group 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 end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material). Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments revaluation reserve with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets which are recognised in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserves is reclassified to profit or loss. 3.17 Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: a) where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or b) for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. 57 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20173.17 Goods and services tax (Cont’d) Provision for impairment losses on land development Cash flows are included in the cash flow statement on a gross basis. The Group holds land stock for development, which is recorded as The GST component of cash flows arising from investing and financing inventory in the financial statements. At 30 June 2017, the directors activities which is recoverable from, or payable to, the taxation authority assessed the value of the land stock inventory, referencing contracts, is classified within operating cash flows. other documentary evidence and comparative sales data to determine 3.18 Share-based payment transactions Equity-settled share-based payments to employees are measured at Impairment of goodwill valuations of certain land titles. the fair value of the equity instruments at the grant date. The expected The recoverable amount of a cash-generating unit (CGU) is determined life used in the model has been adjusted, based on management's based on value-in-use calculations which require the use of assumptions. best estimate, for the effects of non-transferability, exercise restrictions The calculations use cash flow projections covering a five-year period and behavioural considerations. The fair value determined at the grant based on financial budgets approved by management for the subsequent date of the equity-settled share-based payments is expensed on a financial year. These growth rates do not exceed the long-term average straight-line basis over the vesting period, based on the Group's estimate growth rates for the industry in which each CGU operates. of shares that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve. Cash flow projections for CGUs are based on budgeted EBITDA during the projection period, increasing by underlying cash flow growth rates of 2.0% per annum. The cash flows beyond the five-year projection period have been extrapolated using a steady growth rate of 2.0%. The underlying growth rates have been determined by management based on most recent financial budgets and forecasts and expected industry growth rates. 4. Critical accounting judgements and key sources of In performing the value-in-use calculations for each CGU, the Group has applied post-tax discount rate to discount the forecast future attributable post-tax cash flows. The equivalent pre-tax discount rate applied is 17.0%. estimation uncertainty In the application of the Company’s accounting policies, which are described in note 3, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. Percentage of completion on the construction contracts Estimate of construction contracts on a percentage completion basis, in particular with regard to accounting for variations, the timing of profit recognition and the amount of profit recognised can often result in an adjustment to the reported revenues and expenses and/or the carrying amount of assets and liabilities. Provision for maintenance and warranties At each year end the Group considers its legal and constructive obligations for warranties and maintenance on properties constructed. Typically, the Group makes provision for warranties for a period of up to seven years following the completion of a construction contract. The directors take into account the annual build program, history of defects relating to materials used or in services provided and the historical liabilities the Group has assumed in respect of warranties in estimating the provision for warranties. The directors use a present value methodology to recognise the best estimate of the expenditure required to settle the Group’s obligation. In April 2017, KPMG Actuarial Pty Ltd was engaged by Simonds Group Ltd to analyse historical maintenance and warranty spend and provide an estimate for the maintenance and warranty provision as at 30 June 2017. The Group has adopted the key assumptions provided by KPMG while retaining the model used historically for calculating the maintenance and warranty provision. 58 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20175. Revenue The following is an analysis of the Group’s operations revenue for the year (excluding interest income – note 7). Continuing operations Revenue from residential construction contracts Revenue from rendering of registered training services Revenue from developments Discontinued operations 6. Segment information Year ended 30/06/17 $’000 569,864 13,434 4,071 587,369 6,194 593,563 Year ended 30/06/16 $’000 600,746 19,097 8,665 628,508 34,372 662,880 6.1 Products and services from which reportable segments derive their revenue Information on segment performance focusing on the types of products and services the Group provides. No operating segments have been aggregated in arriving at the reportable segments of the Group. Specifically, the Group’s reportable segments under AASB 8 Operating Segments are as follows: • Residential construction - this includes activities relating to contracts for residential home construction, speculative home building and the building of display home inventory. • Registered training - this includes activities relating to registered training provided by House of Learning Pty Ltd trading as Building Academy Australia and City-Wide Building and Training Services Pty Ltd. • Development - this includes activities relating to land development and sales, and project management services. Madisson Homes Pty Ltd (Madisson Homes) is a subsidiary of the Group and in the prior years formed part of the residential construction segment. Madisson Homes operated in the medium density market, building apartments and townhouses for commercial developers using the concepts, designs and specifications provided by the developers. For the year ended and as at 30 June 2017 this business has been presented as discontinued operations in note 10 with prior year comparatives restated. 6.2 Segment revenues and results The following is an analysis of the Group’s revenue and results by reportable segment. Segment Segment revenue Segment profit / (loss)1 Residential construction Registered training Land development Discontinued operations Income tax benefit / (expense) Year ended 30/06/17 $’000 569,864 13,434 4,071 587,369 6,194 - Year ended 30/06/16 $’000 600,746 19,097 8,665 628,508 34,372 - Total 593,563 662,880 Year ended 30/06/17 $’000 3,085 433 (131) 3,387 (2,714) (468) 205 Year ended 30/06/16 $’000 (4,023) 2,811 (2,034) (3,246) (18,067) 6,422 (14,891) 1. Segment profit/(loss) represents the profit/(loss) before tax generated by each segment. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. 59 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20176. Segment information (Cont’d) 6.3 Segment assets and liabilities Segment assets Residential construction Registered training Land development Discontinued operations Total segment assets Segment liabilities Residential construction Registered training Land development Discontinued operations Total segment liabilities Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 105,857 110,434 4,520 4,968 115,345 1,002 116,347 5,416 5,624 121,474 2,237 123,711 115,524 118,006 1,097 12 116,633 2,839 119,472 1,235 16 119,257 7,779 127,036 For the purposes of monitoring segment performance and allocating resources between segments, all assets and liabilities are allocated to reportable segments. 60 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20176. Segment information (Cont’d) 6.4 Other segment information Residential construction Registered training Land development Discontinued Operations Total Residential construction Registered training Land development Interest expense Depreciation and amortisation Year ended 30/06/17 $’000 1,728 - - 1,728 - 1,728 Year ended 30/06/16 $’000 Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 1,991 141 80 2,212 - 2,212 4,150 870 - 5,020 - 5,020 4,157 1,423 14 5,594 168 5,762 Additions to non-current assets Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 3,446 879 10 4,335 8,050 1,342 - 9,392 In addition to the interest expense, depreciation and amortisation reported above, impairment losses of $1.413m (2016: $4.391m) were recognised in respect of land stock held on hand and other current assets as at 30 June 2017. These impairment losses were attributable to the following reporting segments: Residential construction Registered training Land development Total impairment Impairment losses Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 768 - 645 1,413 6,356 - 1,700 8,056 6.5 Revenue by Geographical region The Group operates in one geographical area – Australia. The Group’s revenue and profits are all generated from this region. 6.6 Information about major customers No single customer contributed 10% or more to the Group’s revenue for the year ended 30 June 2017 and the year ended 30 June 2016. 61 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20177. Interest income Interest income: Bank deposits 8. Finance costs Interest on bank overdrafts, finance leases and loans 9. Income taxes 9.1 Income tax recognised Current tax Benefit in respect of the current year Benefit in respect of prior years Deferred tax (Benefit) / expense in respect of the current year (Benefit) / expense in respect of prior years Consolidated income tax expense/(benefit) recognised in the current year Income tax expense / (benefit) from continuing operations Income tax expense / (benefit) from discontinued operations Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 1 1 Year ended 30/06/17 $’000 1,728 1,728 112 112 Year ended 30/06/16 $’000 2,212 2,212 Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 - (55) (55) 299 224 523 468 1,309 (841) 468 (23) (735) (758) (6,230) 566 (5,664) (6,422) (1,005) (5,417) (6,422) 62 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20179.1 Income tax recognised (Cont’d) The income tax expense can be reconciled to the accounting profit as follows: Profit / (Loss) before tax from continuing operations Profit / (Loss) before tax from discontinued operations Profit / (Loss) before tax Income tax benefit calculated at 30% (2016: 30%) Effect of Executive Share Based Payments non-deductible Effect of expenses that are not deductible in determining taxable profit Adjustments recognised in the current year in relation to the current tax of prior years Income tax expense / (benefit) recognised in profit or loss Income tax expense / (benefit) from continuing operations Income tax expense / (benefit) from discontinued operations Year ended 30/06/17 $’000 3,387 (2,714) 673 202 37 60 299 169 468 1,309 (841) 468 Year ended 30/06/16 $’000 (3,246) (18,067) (21,313) (6,393) - 140 (6,253) (169) (6,422) (1,005) (5,417) (6,422) The tax rate used for the 2017 and 2016 reconciliations above is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. 9.2 Current tax assets and liabilities Current tax asset Income tax refundable 9.3 Deferred tax balances Deferred tax assets Deferred tax liabilities Net deferred tax Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 1,441 1,441 Year ended 30/06/17 $’000 5,839 (8,439) (2,600) 4,109 4,109 Year ended 30/06/16 $’000 3,946 (6,097) (2,151) 63 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 20179.3 Deferred tax balances (Cont’d) 2017 Opening balance $’000 Under / over $’000 Recognised in profit or loss $’000 Other $’000 Closing balance $’000 Construction Contracts income (5,844) (319) (1,647) (253) 444 1,256 1,364 882 - 25 2 - 24 44 10 (2,151) (214) (402) 399 (61) (80) 144 1,346 (301) - - - - - 12 54 66 (7,810) (630) 845 1,195 1,308 1,082 1,410 (2,600) Opening balance $’000 Under / over $’000 Recognised in profit or loss $’000 Other $’000 Closing balance $’000 (10,946) (138) 571 417 1,492 1,162 - (25) (541) - - - 5,102 (90) 787 839 (128) (280) - - (373) - - - (5,844) (253) 444 1,256 1,364 882 (7,442) (566) 6,230 (373) (2,151) Capitalised Courses and Product Design Property, Plant, Equipment & Intangibles Provision for warranty and contract maintenance Employee Entitlements Other DTA on Losses & Carry Forward Non-Refundable R&D offset 2016 Construction Contracts income Capitalised Courses and Product Design Property, Plant, Equipment & Intangibles Maintenance Liability Employee Entitlements Other 64 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201710. Discontinued Operations Following a comprehensive review instigated by the Directors on 16 November 2015, the Group announced a plan for the orderly closure of the Madisson business unit of the Group on 21 January 2016 upon completion of the remaining projects. All projects have been completed as at 30 June 2017. The tables presented below show the loss incurred, inclusive of all costs associated with contractual obligations, impairments, and loss making projects relating to the Madisson business for the year ended 30 June 2017: Loss for the year from the Madisson business Revenue Expenses Loss before tax Attributable income tax benefit Loss for the year Statement of Cash Flows from the Madisson business Cash flows from operating activities Cash flows from / (used in) investing activities Cash flows from financing activities Net (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 11. Expenses for the year Loss on disposal of property, plant and equipment Marketing and selling expenses Corporate and administrative expenses Employee benefits expense Total expenses Year ended 30/06/17 $’000 6,194 (8,908) (2,714) 841 (1,873) Year ended 30/06/17 $’000 (2,870) - 2,875 5 1 6 Year ended 30/06/17 $’000 (48) (19,480) (29,608) (62,960) Year ended 30/06/16 $’000 34,372 (52,439) (18,067) 5,417 (12,650) Year ended 30/06/16 $’000 (6,102) - 6,708 606 (605) 1 Year ended 30/06/16 $’000 (198) (20,022) (31,088) (65,314) (112,096) (116,622) 65 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201712. Significant items for the year Transaction costs associated with proposed Scheme of Arrangement(i) Impairment of IT project costs Impairment of non-core development land and other current assets Impairment of display homes, non-core speculative land inventories associated with operation review and restructure Costs associated with organisational review and management restructure including settlement of share based payments Total significant items Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 (1,817) - (1,413) - (473) - (3,665) (1,700) (2,691) (2,587) (3,703) (10,643) (i) On 31 August 2016, the Group announced a Scheme Implementation Agreement with SR Residential Pty Ltd (SR Residential) (which is jointly owned by entities associated with Roche Holdings Pty Ltd and Simonds Family Office Pty Ltd (SFO)) under which it was proposed that SR Residential would acquire all shares in the Company not already owned by associates of the Consortium by way of the Scheme. On 28 November 2016, the Group announced that the Scheme Implementation Agreement has been terminated by mutual agreement of the Group and SR Residential. During this process, the Group has incurred transaction costs of $1.817m for year ending 30 June 2017. 13. Earnings per share From continuing operations Total basic profit/loss per share Total diluted profit/loss per share From continuing and discontinued operations Total basic profit/loss per share Total diluted profit/loss per share 13.1 Basic earnings per share Year ended 30/06/17 Cents per share Year ended 30/06/16 Cents per share 1.44 1.44 0.14 0.14 (1.53) (1.53) (10.14) (10.14) The earnings and weighted average number of ordinary shares used in the calculation of basic earnings are as follows: From continuing operations Profit / (Loss) for the year attributable to owners of the Company 2,078 (2,241) Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 From continuing and discontinued operations Profit / (Loss) for the year attributable to owners of the Company 205 Shares (14,891) Shares Weighted average number of ordinary shares for the purposes of the basic earnings per share 143,841,655 146,834,376 66 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201713.2 Diluted earnings per share From continuing operations Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 Profit / (Loss) for the year attributable to owners of the Company 2,078 (2,241) From continuing and discontinued operations Profit / (Loss) for the year attributable to owners of the Company 205 Shares (14,891) Shares Weighted average number of ordinary shares for the purposes of the basic earnings per share 143,841,655 146,834,376 Shares deemed to be issued for no consideration in respect of: Service Rights 31,204 - Weighted average number of ordinary shares for the purposes of the diluted earnings per share 143,872,859 146,834,376 The following potential ordinary shares are anti-dilutive and are therefore excluded from the weighted average number of ordinary shares for the purpose of diluted earnings per share. Options Performance Rights Year ended 30/06/17 Shares 4,000,000 3,660,683 Year ended 30/06/16 Shares - - These shares have been excluded from the diluted earnings per share (EPS) calculation on the basis that the exercise price of the options is higher than the average share price or the performance conditions are yet to be met at the end of the reporting period. Diluted loss per share is the same as basic loss per share for the year ended 30 June 2016. Potential ordinary shares are anti-dilutive as their conversion to ordinary shares will result in a decrease of loss per share. The calculation of diluted loss per share does not assume, conversion, exercise or other issue of potential ordinary shares that would have an anti-dilutive effect on loss per share. 14. Trade and other receivables Current Trade receivables (i) Other receivables (i) The amounts pertaining to related party receivables are disclosed in note 30. Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 32,191 32,191 499 32,690 43,333 43,333 297 43,630 67 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 2017 14. Trade and other receivables (Cont’d) 14.1 Trade receivables The average settlement terms for progress invoices in relation to residential contracts are between 7 and 45 days. The Group has provided fully or written off all receivables that are known to be uncollectable or there is objective evidence that the Group will not be able to collect the outstanding amount. Prior to accepting a new customer for the construction of a dwelling, the Group ensures that appropriate contractual terms are in place with the customer and that the customer has secured financing in advance of the commencement of construction. In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the date the credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated and dwellings constructed for customers serving as a security against the receivable. 14.1.1 Age of receivables from continuing operations that are past due but not impaired 46 – 60 days 61 – 90 days 91 – 120 days Over 120 days Total Average age (days) Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 1,459 624 396 2,053 4,532 110 1,430 1,122 586 2,619 5,757 113 Average credit terms for customers are 7 to 45 days. Receivables past due but not impaired primarily relate to final settlement payments upon completion of construction and supplier rebates, where terms vary. 15. Inventories Work in progress on residential construction contracts Speculative and display homes, land stock Provision for impairment of inventories Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 28,226 21,319 49,545 (1,360) 48,185 23,391 27,484 50,875 (1,265) 49,610 68 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201716. Subsidiaries Details of the Group’s subsidiaries at the end of the reporting period are as follows: Name Principle activity Simonds Homes Victoria Pty Ltd Residential – Victoria Simonds Homes NSW Pty Ltd Residential – NSW Place of incorporation and operation Australia Australia Simonds Queensland Constructions Pty Ltd Residential – Queensland Australia Simonds SA Pty Ltd Simonds WA Pty Ltd Residential – South Australia Australia Residential – Western Australia Australia Madisson Homes Australia Pty Ltd Residential – Victoria Simonds Personnel Pty Ltd Simonds Assets Pty Ltd Payroll service entity Asset service entity Australia Australia Australia Simonds IP Pty Ltd Intellectual property service entity Australia Simonds Corporate Pty Ltd Asset service entity Australia House of Learning Pty Ltd Registered training organisation Australia City Wide Building and Training Services Pty Ltd Registered training organisation Australia Jackass Flats Developments Pty Ltd Land development and sales Australia Simonds Land Development Pty Ltd Land development and sales Australia Bridgeman Downs Land Project Pty Ltd Land development and sales Australia Discover Developments Pty Ltd Land development and sales Australia Discover Gisborne Pty Ltd Land development and sales Australia Proportion of ownership interest and voting power held by the Group 2017 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2016 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Hub Property Advisory Pty Ltd ATF Hub Property Advisory Unit Trust Land development and sales Australia 100% 100% • Simonds Group Limited is the head entity within the tax consolidated group. • All Group subsidiaries are members of the tax consolidated group. • Simonds Group Limited and its subsidiaries have entered into a deed of cross guarantee with Simonds Group Limited pursuant to ASIC Class Order 98/1418 and are relieved from the requirement to prepare and lodge an audited financial report. • No subsidiaries have been acquired or incorporated in the year ended 30 June 2017. The above companies represent a “Closed Group” for the Class Order. The closed Group’s Statement of Profit or loss and Other Comprehensive Income for the year and closed group’s Financial Position as at 30 June 2017 are the same as Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year and Consolidated Statement of Financial Position as at 30 June 2017 disclosed on page Pages 48 and 49 respectively. 69 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 2017 17. Property, plant and equipment Leasehold improvements $’000 Computer equipment $’000 Office Furniture and Fittings $’000 Display Home Furniture, Fixtures & Fittings $’000 Motor Vehicles $’000 Plant and Equipment $’000 Total $’000 Cost Balance at 1 July 2015 3,438 2,287 2,547 469 6,368 1,293 16,402 Additions Disposals 1,353 1,178 (1,686) (1,535) 657 (677) Balance at 30 June 2016 3,105 1,930 2,527 Cost Balance at 1 July 2016 Additions Disposals 3,105 563 (120) Balance at 30 June 2017 3,548 2,188 Accumulated depreciation 1,930 2,527 258 - 78 (706) 1,899 705 (391) 783 783 39 (134) 688 1,868 (1,571) 6,665 6,665 975 (1,383) 6,257 26 5,787 (1,160) (7,020) 159 15,169 159 22 - 181 15,169 1,935 (2,343) 14,761 Balance at 1 July 2015 (1,539) (1,841) (1,138) (275) (2,935) (1,241) (8,969) Depreciation expense Disposals / transfers Balance at 30 June 2016 Accumulated depreciation Balance at 1 July 2016 Depreciation expense Disposals / transfers (658) 1,677 (520) (520) (775) 102 (489) 1,535 (795) (795) (603) - (467) 637 (968) (968) (457) 616 (280) 377 (178) (178) (445) 111 (1,269) 1,418 (2,786) (2,786) (1,208) 1,155 (37) (3,200) 1,156 (122) 6,800 (5,369) (122) (5,369) (10) - (3,498) 1,984 Balance at 30 June 2017 (1,193) (1,398) (809) (512) (2,839) (132) (6,883) Net book value As at 30 June 2016 As at 30 June 2017 2,585 2,355 1,135 790 1,559 1,090 605 176 3,879 3,418 37 49 9,800 7,878 70 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201718. Intangible assets Cost Balance at 1 July 2015 Additions Impairment of IT project costs Disposals Balance at 30 June 2016 Cost Balance at 1 July 2016 Additions Impairment of IT project costs Disposals Computer Software $’000 Capitalised courses $’000 Goodwill from acquisitions $’000 RTO Licence $’000 Capitalised Product Designs $’000 8,332 2,333 (3,665) (752) 6,248 6,248 366 - - 399 649 - - - - 2,976 1,245 - - - - 1,048 2,976 1,245 1,048 842 - - 2,976 1,245 - - - - - - 1,192 - - - - - - - - Total $’000 8,731 7,203 (3,665) (752) 11,517 11,517 2,400 - - Balance at 30 June 2017 6,614 1,890 2,976 1,245 1,192 13,917 Accumulated amortisation Balance at 1 July 2015 Amortisation Expense Disposal/Transfers/Impairment Balance 30 June 2016 Accumulated amortisation Balance at 1 July 2016 Amortisation Expense Disposal/Transfers/Impairment (4,597) (1,167) 494 (5,270) (5,270) (627) - (54) (326) - (380) (380) (694) - Balance 30 June 2017 (5,897) (1,074) - - - - - - - - Net Book Value As at 30 June 2016 As at 30 June 2017 978 717 668 816 2,976 2,976 - (1,069) - (1,069) (1,069) (176) - (1,245) 176 - - - - - - (25) - (25) - 1,167 (4,651) (2,562) 494 (6,719) (6,719) (1,522) - (8,241) 4,798 5,676 71 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 2017 19. Other assets Prepayments Other assets 20. Other financial assets Current Units held in land fund Non - current Units held in land fund 21. Trade and other payables Trade payables Construction accruals Goods and services tax payable Other payables and accruals 22. Borrowings Current Insurance Finance Commercial bills Finance lease liability Non - current Commercial bills Finance lease liability Display fund facility 72 Year ended 30/06/17 $’000 2,977 197 3,174 Year ended 30/06/16 $’000 3,255 127 3,382 Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 1,260 1,260 - - - - 1,260 1,260 Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 41,716 12,553 2,212 4,687 61,168 50,497 14,380 750 10,003 75,630 Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 401 1,995 1,479 3,875 4,330 2,019 5,000 11,349 - - 1,790 1,790 2,000 2,500 5,000 9,500 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201722.1 Summary of borrowing arrangements The Group has a debt facility with Commonwealth Bank of Australia (CBA), which has been extended to 7 November 2018 during the year ended 30 June 2017. Details of the facility are as follows: Facility Utilised $’000 Unutilised $’000 Interest Charge Description Maturity Date Market Rate Loan 6,325 Nil Business Corporate Credit Card Facility 500 Nil Bank Guarantees 1,465 635 Multi Option Facility Nil 22,400 Variable Market Rate Corporate Charge Card Facility Interest Rate Fixed Market Rate Variable Market Rate The group’s facilities are secured by all Simonds Group Limited corporate entities. Simonds have extended the existing corporate finance facility arrangements in place with Commonwealth Bank Australia to 7 November 2018. 7 Nov ‘18 Finance Lease 3,191 809 Fixed Market Asset under finance leases are secured by the assets leased Rate with repayments periods not exceeding 5 years. Total 11,481 23,844 In addition to the debt facility outlined above, the Group has additional facilities as below: Facility Utilised $’000 Unutilised $’000 Interest Charge Description Maturity Date Repayment periods are not exceeding 5 years. Finance Lease 307 Nil Display Funds 5,000 Nil Fixed Market Rate Fixed Interest Rate Asset under finance leases are secured by the assets leased. These facilities are held with Westpac Banking Corporation and Global Rental & Leasing Pty Ltd. The Group entered in to a mortgage facility with Simonds Homes Display Fund with an initial expiry of 15 September 30 Nov ‘18 2016. The facility has been extended to 30 November 2018. Insurance Premium Funding 401 Nil Fixed Interest Rate The Group entered in to a premium funding contract with Attvest Finance Pty Ltd, which covers various corporate 30 Sep ‘17 insurances for period from 30 Apr ‘17 to 30 Apr ‘18. Total 5,708 Nil 73 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201723. Provisions Provision for employee benefits (i) Provision for warranty and contract maintenance (ii) Provision for make good Current Non – current Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 6,278 13,648 941 20,867 12,989 7,878 20,867 6,387 14,209 939 21,535 14,658 6,877 21,535 (i) The provision for employee benefits represents annual leave and long service leave entitlements accrued and compensation claims made by employees. The measurement and recognition criteria for employee benefits have been included in note 3 of the financial statements. (ii) The provision for warranty claims represents the present value of the directors’ best estimate of the future outflow of economic benefits that will be required under the Group’s obligations for warranties related to residential construction. The estimate has been made on the basis of historical warranty trends and may vary as a result of the annual build program, the history of defects relating to materials used or in the nature of services provided. (iii) Provisions based on the directors’ best estimates of the costs required to reinstate the display homes under legislation; or requirement to be at a saleable standard. The current portion for this provision includes the total amount accrued for annual leave entitlements and the amounts accrued for long service leave entitlements that have vested due to employees having completed the required period of service. Based on past experience, the consolidated entity does not expect the full amount of annual leave classified as current liabilities to be settled wholly within the next 12 months. However, these amounts must be classified as current liabilities since the consolidated entity does not have an unconditional right to defer the settlement of these amounts in the event employees wish to use their leave entitlement. The non-current portion for this provision includes amounts accrued for long service leave entitlements that have not yet vested in relation to those employees who have not yet completed the required period of service. The following amounts reflect annual leave that is not expected to be taken or paid within the next 12 months which is currently: Year ended 30/06/17 $’000 1,124 Year ended 30/06/17 $’000 13,774 Year ended 30/06/17 $’000 12,911 12,911 Year ended 30/06/16 $’000 1,423 Year ended 30/06/16 $’000 12,484 Year ended 30/06/16 $’000 12,911 12,911 Leave obligations expected to be settled after 12 months 24. Deposits and income in advance Arising from construction contracts 25. Issued capital 143,841,655 fully paid ordinary shares 74 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201725. Issued capital (Cont'd) Changes to the then Corporations Law abolished the authorised capital and par value concept in relation to share capital from 1 July 1998. Therefore, the Company does not have a limited amount of authorised capital and issued shares do not have a par value. Number of shares Share capital ($’000) Year ended 30/06/17 Year ended 30/06/16 Balance at beginning of the period 143,841,655 151,412,268 Cancelled Shares (i) - (7,570,613) Balance at end of the period 143,841,655 143,841,655 Share buy - back reserve Share buy – back (i) Share buy – back cancellation (i) Balance at the end of the year Year ended 30/06/17 12,911 - 12,911 Year ended 30/06/17 $’000 (7,204) - - (7,204) Year ended 30/06/16 13,590 (679) 12,911 Year ended 30/06/16 $’000 - (7,883) 679 (7,204) (i) On 20 August 2015, the Group announced its intention to undertake an on-market share buy-back (“buy-back”) to enable the Group to acquire up to a maximum of 7.570m shares within a 12-month period. The buy-back was part of the Group’s ongoing capital management strategy, and determined by the Directors to be an appropriate use of Group capital resources given current market conditions at the time. The Group bought back 7,570,613 of its issued shares for a total amount of $7.883m. As a result, a reduction in capital of $0.679m has been recognised based on an implied value per share of 8.97c and the remaining balance was recorded in the share buy-back reserve. 26. Accumulated losses Balance at the beginning of the year Profits/(Losses) attributable to owners of the Group (net of tax) Payment of dividends (refer to note 27) Balance at the end of the year 27. Dividends paid or payable During the year, Simonds Group Limited made the following dividend payments: Year ended 30/06/17 $’000 (39,280) 205 - Year ended 30/06/16 $’000 (16,359) (14,891) (8,030) (39,075) (39,280) Final dividend Year ended 30 June 2017 Year ended 30 June 2016 Cents per share Total $’000 Cents per share Total $’000 - - - - 5.3 5.3 8,030 8,030 The company’s adjusted franking account balance as at 30 June 2017 is $8.061m (2016: $10.704m). 75 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201728. Financial instruments 28.1 Capital risk management Directors review the capital structure on an ongoing basis. As a part of this review the directors consider the cost of capital and the risks associated with each class of capital. The Group will balance its overall capital structure through the payment of dividends, new share issues, and the issue or repayment of debt. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 22, cash, and equity attributable to equity holders of the parent, comprising issued capital, accumulated losses and dividends, as disclosed in notes 25, 26 and 27. 28.2 Categories of financial instruments At the reporting date there are no significant concentrations of credit risk relating to loans and receivables at fair value through profit or loss. The carrying amount reflected in the statement of financial position represents the Group’s maximum exposure to credit risk for such loans and receivables. Financial assets Cash and cash equivalents Trade and other receivables Other financial asset Financial liabilities Trade and other payables Borrowings Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 10,204 32,690 1,260 61,168 15,224 3,176 43,630 1,260 75,630 11,290 28.3 Financial risk management objectives The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The use of financial instruments is governed by the Group’s policies which are approved by the directors. The Chief Financial Officer is responsible for managing the Group’s treasury requirements in accordance with this policy. 28.4 Interest rate risk management The Group is exposed to interest rate risk as the entities in the Group borrow funds at both fixed and variable interest rates. As at 30 June 2017, there were borrowings from CBA of $6.325m (2016: $2.000m), Simonds Homes Display Fund from Australian Executor Trustees Limited of $5.000m (2016: $5.000m), and other finance leases of $3.498m (2016: $4.290m). The bill rates are benchmarked against the BBSY bid rate (Australian Bank Bill Swap Reference Rate – Average Bid Rate) on a quarterly basis. The overdraft rate is fixed at 7.75% p.a. charged on a monthly basis and the Simonds Homes Display Fund rate is fixed at 7.2% p.a. charged on a quarterly basis. 28.4.1 Interest rate sensitivity analysis The sensitivity analysis below has been determined based on the exposure to interest rates at the end of the reporting period. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s profit for the year ended 30 June 2017 would decrease/increase by $31,625 (2016: $41,050). This is mainly attributable to the Group’s exposure to interest rates on its variable rate borrowings. The Group’s sensitivity to interest rates has increased during the current year mainly due to the increase in overdraft limit. 76 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201728.5 Credit risk management Credit risk arises from financial assets which comprise cash and cash equivalents, trade and other receivables and the granting of financial guarantees. Exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount of the financial assets as well as in relation to financial guarantees granted. Construction contracts require the customer to obtain finance prior to starting the build. Contracts for Speculative Housing, Displays and Land require payment in full prior to passing of title to customers. The Group has no significant concentrations of credit risk and does not hold any credit derivatives to offset its credit exposure. Registered training is delivered under the terms provided by the Department of Education and Early Childhood Development (the Department) in accordance with the Victorian Training Guarantee Program. 28.6 Liquidity risk management The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Year ended 30 June 2017 Financial Liabilities Finance lease liability Borrowings Overdraft Simonds Homes Display Fund Insurance premium funding Year ended 30 June 2016 Financial Liabilities Finance lease liability Borrowings Overdraft Simonds Homes Display Fund 28.7 Fair value risk Weighted average effective interest rate % < 6 months $’000 6 – 12 months $’000 >1 – 5 years $’000 Total $’000 5.94 3.96 7.75 7.2 2.15 809 985 - 90 401 670 1,010 - - - 2,019 4,330 - 5,000 - 3,498 6,325 - 5,090 401 2,285 1,680 11,349 15,314 Weighted average effective interest rate % < 6 months $’000 6 – 12 months $’000 >1 – 5 years $’000 Total $’000 6.76 4.64 7.75 7.2 1,022 3 4,167 91 5,283 768 - - - 768 2,500 2,000 - 5,000 9,500 4,290 2,003 4,167 5,091 15,551 The Group’s investment in the land fund is measured at fair value at the end of each reporting period. The fair value risk arises as changes in one or more of the unobservable assumption inputs would significantly change the fair value determined. The Group is exposed to fair value risk as the holding units of the land fund are not traded in active market. This financial asset has been classified as a level 3 investment. Fair value is calculated as the present value of expected future economic benefits derived from the ownership of the holding units. 77 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201729. Key management personnel compensation The aggregate compensation made to directors and other members of key management personnel of the Company and the Group is set out below: Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments 30. Related party transactions 30.1 Trading transactions Year ended 30/06/17 $ 1,641,167 101,244 37,478 - 116,374 Year ended 30/06/16 $ 2,627,732 165,659 165,674 592,631 774,352 1,896,263 4,326,048 During the year group entities entered into the following transactions with related parties which are not members of the Group. Sale of goods Leases and services rendered Business combinations Year ended 30/06/17 $ Year ended 30/06/16 $ Year ended 30/06/17 $ Year ended 30/06/16 $ Year ended 30/06/17 $ Year ended 30/06/16 $ Vallence Gary Simonds and related entities: One display home constructed at the group’s usual list prices and in line with relevant internal discount policies Sub-lease agreement with SFO Consulting Pty Ltd Properties leased on an arms-length basis Services received from OZSoft Solutions Pty Ltd (VETrack) and RTOMS Pty Ltd Remuneration for employee services Consulting expenses incurred during the year Leon Gorr and related entities: Legal services provided by HWL Ebsworth Lawyers Rhett Simonds and related entities: Construction of a residential home provided at cost - - - - - - - - - - - 735,615 1,703 - - - - - - - - 522,485 450,398 286,198 688,767 96,480 91,542 - 20,000 737,318 905,163 1,250,707 - - 83,285 256,603 83,285 256,603 34,118 34,118 - - - - - - - - - - - - - - - - - - - - - - - - - - 78 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201730.1 Trading transactions (Cont’d) Sale of goods Leases and services rendered Business combinations Year ended 30/06/17 $ Year ended 30/06/16 $ Year ended 30/06/17 $ Year ended 30/06/16 $ Year ended 30/06/17 $ Year ended 30/06/16 $ Matthew Chun and related entities: Construction of a residential home provided on an arms-length basis Property development advisory fee Acquisition of Hub Property Group (formerly Chun Property Advisory) Michael Gerolemou and related entities: Construction of a personal home as part of the normal course of business and abides by the Simonds Group Staff Discount Policy Paul McMahon and related entities: Two display homes leased on an arms-length basis John Thorburn and related entities: Display home leased on an arms-length basis 683,400 - - 683,400 - - - - - - - - - - 460,027 460,027 - - - - - - - - - - - - - 105,000 - 105,000 - - 78,689 78,689 152,250 152,250 - - Total 683,400 1,231,463 1,140,698 1,690,999 The following balances were outstanding at the end of the reporting period: - - - - - - - - - - - - - 555,000 555,000 - - - - - - 555,000 Vallence Gary Simonds and related entities - - - 36,000 Amounts owed by related parties Amounts owed to related parties Year ended 30/06/17 $ Year ended 30/06/16 $ Year ended 30/06/17 $ Year ended 30/06/16 $ 79 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 2017 30.2 Loans to related parties During the year ended 30 June 2017 there were no loans to related parties (2016: Nil). 30.3 Other related party transactions Other related party transactions include the salaries and other benefits paid to directors and other key management personnel. These are in the ordinary course of business. On 31 August 2016, The Group announced the Scheme Implementation Agreement with SR Residential Pty Ltd (SR Residential) (which is jointly owned by entities associated with Roche Holdings Pty Ltd and Simonds Family Office Pty Ltd (SFO)) under which it was proposed that SR Residential would acquire all shares in the Company not already owned by associates of the Consortium by way of the Scheme. On 28 November 2016, the Group announced that the Scheme Implementation Agreement has been terminated by mutual agreement of the Group and SR Residential. During this process, the Group has incurred transaction costs of $1.817m (refer to note 12) disclosed as a significant item in the expenses for the year ended 30 June 2017. 31. Share based payments 31.1 Share based payments Employee share plan A range of different employee share scheme (ESS) interests were created as part of the Simonds Group Employee Share Plan. The Share plan has been created to promote employee share ownership amongst staff members and to encourage retention and appropriate reward for executives and employees. Share based payments made to the management team during the year were $0.229m (2016: $1.332m). 3,406,800 performance rights (2016: 1,592,132 performance rights) were granted to 10 senior executives (2016: 8 senior executives) and the CEO was granted 4,000,000 options during the period. As at 30 June 2017, the following performance rights remaining on issue are: FY17: 3,406,800, FY16: 141,523 and FY15: 112,360. Incentives Financial Year Tranche Grant Date Fair Value at Grant Date Vesting Date Other Vesting Condition FY17 FY17 FY16 FY16 FY15 FY15 FY15 FY17 Tranche 1 31 Jan’17 Tranche 2 31 Jan’17 Tranche 1 30 Nov’ 15 Tranche 2 30 Nov’ 15 Tranche 1 17 Nov’ 14 Tranche 2 17 Nov’ 14 Tranche 3 17 Nov’ 14 Options 31 Jan’17 $0.23 $0.35 $0.31 $0.75 $1.03 $1.55 $1.55 $0.11 30 Sep’ 19 Market 30 Sep’ 19 Non market 31 Aug’ 18 Market 31 Aug’ 18 Non market 31 Aug’ 17 Market 31 Aug’ 17 Non market 31 Aug’ 17 Non market 30 Sep’ 19 Non market vesting only FY15 Tranche 2 17 Nov’ 14 $1.61 24 Nov’ 16 Non market vesting only (1), (4) (1), (5) (2), (4) (2), (5) (3), (4) (3), (5) (6) (5) (7) Performance rights Options Service rights (1) Gateway Hurdle Condition exists whereby FY17 Performance Rights may not vest unless the individual remains employed up to and including 30 September 2019. (2) Gateway Hurdle Condition exists whereby FY16 Performance Rights may not vest unless the individual remains employed up to and including 31 August 2018. (3) Gateway Hurdle Condition exists whereby FY15 Performance Rights may not vest unless the individual remains employed up to and including 31 August 2017. (4) V esting condition linked to the Group's Total Shareholder Return (TSR) and the percentile ranking against the constituent companies within the S&P / ASX Small Ordinaries Index. (5) Vesting condition linked to compound annual growth rate in Earnings Per Share (EPS) where EPS is calculated based on Net Profit Before Tax for the relevant period with the specific EPS methodology to be determined by the board. (6) Vesting condition linked to achievement of Prospectus forecast earnings for the period ended 30 June 2015. (7) There are no service rights remaining as at 30 June 2017. The 67,409 service rights vested during FY17 amounting to $0.019m and remaining 16,852 were forfeited. 80 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201731.1 Share based payments (Cont’d) The following table outlines the share based payments made under the management incentive and employee share plan for the period ended 30 June 2017: Employee share plan Share based payments Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 229 229 1,332 1,332 31.2 Fair value of performance rights, service rights and options granted in the year For performance rights subject to non-market vesting conditions the FY17 and FY16 performance rights (Tranche 2) used the Black Scholes Pricing Model, while FY15 (Tranche 2 and Tranche 3) the model used was a Binominal Approximation Option Valuation Model. FY17 EPS Options has been valued using the Black Scholes Model. Expected volatility is estimated using the daily rolling three-year standard deviation of a relevant Peer Group. The risk free rate is derived from the average of the 3 and 4-year Commonwealth Treasury Bond Rate. This yield was converted to a continuously- compounded rate for the purposes of the rights valuation. Fair value model inputs and assumptions Fair value at grant date Exercise Price Expected life of instruments (days) Expected volatility Expected dividend yield Risk - free rate $0.23 $0.35 $0.00 $0.00 972 972 50% 50% 5.5% 5.5% 1.91% 1.91% $0.11 $0.40 972 50% 5.5% 2.06% $0.31 $0.75 $1.03 $1.55 $1.55 $0.00 $0.00 $0.00 $0.00 $0.00 1,004 1,004 1,018 1,018 1,018 45% 45% 40% 40% 40% 6.0% 6.0% 4.92% 4.92% 4.92% 2.11% 2.11% 2.57% 2.57% 2.57% FY17 Performance rights: Tranche 1 Tranche 2 CEO Options: EPS FY16 Performance rights: Tranche 1 Tranche 2 FY15 Performance rights: Tranche 1 Tranche 2 Tranche 3 FY15 Service rights: Tranche 2 $1.61 $0.00 738 40% 4.92% 2.71% 81 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201731 Share based payments (Cont’d) 31.3 Movements in performance rights, service rights and options during the year The following reconciles the performance and service rights outstanding at the beginning and end of the year: 2017 Financial Year Issued Performance Rights Tranche 1 FY2017 Tranche 2 FY2017 Opening balance Granted during the year Vested during the year Forfeited during the year Closing balance Number of rights Number of rights Weighted average fair value Number of rights Weighted average fair value Number of rights Weighted average fair value Total number of rights - - 1,703,403 $0.23 1,703,397 $0.35 - - - - - - - - 1,703,403 1,703,397 Tranche 1 FY2016 283,048 Tranche 2 FY2016 283,044 Tranche 1 FY2015 112,359 Tranche 2 FY2015 112,359 Tranche 3 FY2015 112,363 Service Rights Tranche 2 FY2015 84,261 CEO Options - - - - - - - - - - - - 141,524 $0.31 70,762 $0.31 70,762 141,522 $0.75 70,761 $0.75 70,761 37,453 $1.03 37,453 $1.03 37,453 37,453 $1.55 37,453 $1.55 37,453 37,454 $1.55 37,454 $1.55 37,455 67,409 $1.61 16,852 $1.61 - EPS FY2017 - 4,000,000 $0.11 - - - - 4,000,000 TOTAL 987,434 7,406,800 $0.19 462,815 $0.89 270,735 $0.95 7,660,684 The performance rights outstanding at the end of the year had an exercise price of $0.00 (2016: $0.00) and a weighted average contractual life of 973 days (2016: 1,009 days). 31.4 Performance and service rights vested during the year Performance rights of 395,406 vested during the year ended 30 June 2017 as a result of the organisational review and management restructure. Tranche 1 service rights of 67,409 vested on 24 November 2016. 31.5 Performance and service rights forfeited during the year There were 16,852 (2016: nil) service rights and nil (2016: 640,924) performance rights forfeited during the year. 82 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201731.6 Share based payments reserve Balance at the beginning of the year Amounts expensed Settlement of share based payments (non-cash) arising from organisation review and management restructure Performance rights vested Performance rights forfeited Service rights vested Service rights forfeited Year ended 30/06/17 $’000 30,248 Year ended 30/06/16 $’000 29,424 229 - (110) (80) (19) (25) 404 928 (508) - - - Balance at the end of the year 30,243 30,248 32. Commitments for expenditure Lease commitments Non – cancellable operating lease payments No longer than 1 year Longer than 1 year and not longer than 5 years Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 9,543 10,904 20,447 9,746 12,344 22,090 The Group has no capital expenditure commitments. Lease commitments relate primarily to office leases, display home leases and information technology leases. The operating lease expense for the year ended 30 June 2017 is $8.315m (2016: $7.543m). 33. Auditors remuneration Audit or review of financial statements Non – audit services – corporate advisory services Tax services The Group’s auditors are Deloitte Touche Tohmatsu. Year ended 30/06/17 $ 345,600 113,874 249,647 709,121 Year ended 30/06/16 $ 328,500 254,200 285,600 868,300 83 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201734. Cash and cash equivalents For the purposes of the consolidated statement of cash flows, cash and cash equivalents include cash on hand and in banks, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the reporting period as shown in the consolidated statement of cash flows can be reconciled to the related items in the consolidated statement of financial position as follows: Cash and bank balances 34.1 Reconciliation of profit for the year to net cash flows from operating activities Cash flows from operating activities Profit/Loss for the year Income tax expense recognised in profit or loss Finance costs recognised in profit or loss Interest received Significant one-off items: Impairment of IT project costs Impairment of non-core development land and other current assets Impairment of display homes, non-core speculative land inventories associated with operation review and restructure Management incentive and share based payments Depreciation and amortisation of non-current assets Movements in working capital Decrease in trade and other receivables Decrease in inventories (Increase) / decrease in other assets Increase / (decrease) in trade and other payables Increase / (decrease) in provisions Increase / (decrease) in other liabilities Cash generated by operating activities Interest paid Income taxes refunded / (paid) Net cash generated from operating activities 84 Year ended 30/06/17 $’000 10,204 10,204 Year ended 30/06/16 $’000 3,176 3,176 Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 205 468 1,728 (1) - 645 - (5) 5,020 8,060 10,941 780 208 (13,172) (669) - 6,148 (1,728) 2,648 7,068 (14,891) (6,422) 2,212 (112) 3,665 1,700 2,691 824 5,762 (4,571) 1,167 17,685 (238) 8,939 3,366 - 26,348 (2,212) (9,192) 14,944 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201734.2. Non-cash transactions During the current year, the Group entered into non-cash investing and financing activities which are not reflected in the consolidated statement of cash flows. The Group acquired $2.168m of equipment under a finance lease in 2017 (2016: $2.458m). 35. Parent entity information The parent entity is Simonds Group Limited. The accounting policies of the parent entity, which have been applied in determining the financial information shown below, are the same as those applied in the consolidated financial statements. Year ended 30/06/17 $’000 Year ended 30/06/16 $’000 Statement of financial position Other financial assets Intercompany loan receivables Other receivables Total assets Intercompany loan payables Trade and other payables Total liabilities Net assets / (liabilities) Issued capital Share buy-back reserve Share based payments reserve Retained earnings Total equity / (deficit) Income statement Dividend income Operating expense PROFIT / (LOSS) FOR THE YEAR Other comprehensive income, net of income tax Items that will not be reclassified subsequently to profit or loss: Items that may be reclassified subsequently to profit or loss: 840 41,116 - 41,956 43,838 575 44,413 (2,457) 12,911 (7,204) 1,327 (9,491) (2,457) - (2,452) (2,452) - - 892 41,105 1,527 43,524 43,524 - 43,524 - 12,911 (7,204) 1,332 (7,039) - - (13,193) (13,193) - - Total comprehensive loss for the year (2,452) (13,193) 85 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201736. Business combinations The Group has made no acquisitions during the financial year ended 2017. During financial year ended 2016, the Group acquired City-Wide Building and Training Services Pty Ltd (CWBTS) and Hub Property Group (HUB) (formerly Chun Property Advisory Pty Ltd). 36.1 Subsidiaries acquired Principal activity Date of acquisition Proportion of shares acquired % CWBTS HUB Provision of registered training services 01/07/2015 Development and consulting services 08/04/2016 36.2 Consideration transferred Cash CWBTS HUB Total 100 100 Year ended 30/06/16 $’000 4,543 555 5,098 36.3 Assets and liabilities assumed at the date of acquisition The accounting for the acquisition of CWBTS and HUB has been determined at financial year ended 30 June 2016. There are no other intangible assets identified other than the RTO license and the assets acquired and liabilities assumed are as follow: Cash Trade receivables Plant and Equipment Inventory RTO Licence Total assets Trade payables and provisions Deferred tax liability Total liabilities Net assets Cash paid Net assets acquired Goodwill(i) Year ended 30/06/16 $’000 451 837 26 26 1,245 2,585 89 374 463 2,122 5,098 (2,122) 2,976 (i) The total goodwill is comprised of $2.603m from the acquisition of City-Wide Building and Training Services Pty Ltd (CWBTS) and $0.373m from the acquisition of Hub Property Group (formerly Chun Property Advisory Pty Ltd). 86 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 201736.4 Net cash outflow on acquisition of subsidiaries Consideration paid – Deposit pending regulatory approval(i) – Final payment on completion Cash balance assumed at acquisition (i) Cash outflow of $0.500m relates to a retention amount which was payable in accordance with the share purchase agreement pursuant to conditions being met. 37. Contingent liabilities and contingent assets Other guarantees(i) Year ended 30/06/17 $’000 1,465 Year ended 30/06/16 $’000 (500) (1,598) 451 (1,647) Year ended 30/06/16 $’000 2,126 (i) Represents guarantees for property rentals, project contracts, crossing deposits and merchant facility. The Group has in place a guarantee with a Significant Investor Fund for the acquisition and leaseback of displays. Litigation There are a small number of legal matters relating to the construction of residential dwellings and personal injury claims from employees, contractors or the public that are the subject of litigation or potential litigation. A provision is raised in respect of claims where an estimate may be reliably established and legal or other advice indicates that it is probable that the Group will incur costs either in progressing its investigation of the claim or ultimately in settlement. 38. Subsequent events There have been no events that have occurred subsequent to the reporting date that have significantly affected or may significantly affect the Group’s operations, results or state of affairs in future years. 87 Notes to the Financial StatementsSIMONDS GROUPANNUAL REPORT 2017In accordance with ASX Listing Rule 4.10, the Company provides the Listing Rule 4.10.3, the Corporate Governance Statement will be available following information to shareholders not elsewhere disclosed in this on Simonds website www.simondsgroup.com.au, and will be lodged Annual Report. The information provided is current as at 30 September with ASX at the same time that this Annual Report is lodged with ASX. 2017 (Reporting Date). 1. Corporate governance statement The distribution and number of holders of equity securities on issue in The Company has prepared a Corporate Governance Statement which the Company as at the Reporting Date, and the number of holders sets out the corporate governance practices that were in operation holding less than a marketable parcel of the Company’s ordinary shares, throughout the financial year for the Company. In accordance with ASX based on the closing market price as at the Reporting Date, is as follows: 2. Distribution of equity securities Holding Ordinary shares Performance rights Performance options Holders No. of shares Holders No. of performance rights Holders No. of performance rights Class of equity security 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 189 96 107 245 67,962 304,850 818,167 8,260,142 100,001 and over 68 134,390,534 Total 705 143,841,655 There were 197 holders of less than a marketable parcel of ordinary shares ($500). 3. Twenty largest quoted equity security holders - - - - 10 10 - - - - 3,660,684 3,660,684 - - - - 1 1 - - - - 4,000,000 4,000,000 The Company only has one class of quoted securities, being ordinary the number of ordinary shares and the percentage of capital held by shares. The names of the twenty largest holders of ordinary shares, each holder is as follows: Name Simonds Custodians Pty Ltd McDonald Jones Homes Simonds Constructions Pty Ltd FJP Pty Ltd ABN Amro Henry Morgan Limited Citicorp Nominees Pty Limited J P Morgan Nominees Australia Madisson Constructions Pty Ltd National Nominees Limited Poal Pty Ltd 88 Number held Percentage of issued shares 32,800,020 22,910,975 21,485,018 15,270,660 8,314,975 8,105,272 4,612,714 2,408,043 1,572,678 1,380,699 1,000,000 22.80% 15.93% 14.94% 10.62% 5.78% 5.63% 3.21% 1.67% 1.09% 0.96% 0.70% Shareholder InformationSIMONDS GROUPANNUAL REPORT 2017 3. Twenty largest quoted equity security holders (Cont'd) Name Banjo Superannuation Fund Pty Mr Mark Vujovich Aust Executor Trustees Ltd Moat Investments Pty Ltd Mr Hoang Huy Huynh Mast Financial Pty Ltd Intergrala Pty Ltd Robert Stubbs Jet Invest Pty Ltd Other shareholders Total shareholders 4. Substantial Shareholders Number held Percentage of issued shares 1,000,000 880,000 844,310 700,000 600,000 500,000 425,000 381,384 380,545 125,572,293 18,269,362 143,841,655 0.70% 0.61% 0.59% 0.49% 0.42% 0.35% 0.30% 0.27% 0.26% 87.30% 12.70% 100.00% As at the Reporting Date, the names of the substantial holders of holders and their associates have a relevant interest, as disclosed in Simonds and the number of equity securities in which those substantial substantial holding notices given to Simonds, are as follows: Name Vallence Gary Simonds F.J.P. Pty Ltd McDonald Jones Homes Total 5. Voting Rights Number held Percentage of issued shares 56,138,895 15,070,660 22,910,875 94,120,430 39.03% 10.48% 15.93% 65.44% 6. Unquoted equity securities The voting rights attaching to each class of equity security are set 3,660,684 unlisted performance rights have been granted to out as follows: 5.1 Ordinary Shares 10 people and 4,000,000 unlisted performance options have been granted to 1 person. There are no people who hold 20% or more of performance rights that were not issued or acquired under an At a general meeting of Simonds, every holder of ordinary shares present in person or by proxy, attorney or representative has one vote on a show of hands and on a poll, one vote for each ordinary employee incentive scheme. 7. On-market buy-back share held. The Company is not currently conducting an on-market buy-back. 5.2 Performance Rights Performance rights do not carry any voting rights. 89 Shareholder InformationSIMONDS GROUPANNUAL REPORT 2017 SIMONDS GROUP 90 ANNUAL REPORT 2017SIMONDS GROUP ANNUAL REPORT 2017 Disclaimer While every effort is made to provide accurate and complete information, Simonds Group does not warrant or represent that the information in this presentation is free from errors or omissions or is suitable for your intended use. The information provided in this presentation may not be suitable for your specific situation or needs and should not be relied upon by you in substitution of you obtaining independent advice. Subject to any terms implied by law and which cannot be excluded, Simonds Group accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omission or misrepresentation in information in this presentation. All information in this presentation is subject to change without notice. The material contained in this presentation is for information purposes only and does not constitute financial product advice. The information contained in this presentation has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Before making any investment decision, you should consider, with or without the assistance of a financial advisor, whether an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Nothing in this presentation is a promise or a representation as to the future. Statements or assumptions in this presentation as to future matters may prove to be incorrect and the differences may be material. 91 SIMONDS GROUP LIMITED Level 1, 570 St Kilda Road Melbourne VIC 3004 Postal Address: Locked Bag 4002 South Melbourne VIC 3205 Telephone: +61 3 9682 0700 ABN 54 143 841 801 ASX Code: SIO Email: company.secretary@simonds.com.au simondsgroup.com.au SHARE REGISTRY Boardroom Pty Ltd Level 12, 255 George Street Sydney NSW 2000 Postal Address: GPO Box 3993 Sydney NSW 2001 Telephone: 1300 737 760 International: +61 2 9290 9600 Email: simonds@boardroomlimited.com.au

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