ANNUAL REPORT 2014 VDM GROUP LIMITED and its Controlled Entities ABN 95 109 829 334 VDM GROUP LIMITED CORPORATE INFORMATION Directors Dr Dongyi Hua Mr Michael Fry Mr Vic Jakovich Mr Hiuming Luk Executive Chairman and Interim Chief Executive Officer Non-Executive Director Non-Executive Director Non-Executive Director Company Secretary Mr Padraig O’Donoghue Registered and Principal Office Postal Address Auditors Share Register Fortescue Centre Level 1, 30 Terrace Road East Perth WA 6004 Telephone (08) 9265 1100 Facsimile (08) 9265 1399 Website www.vdmgroup.com.au Locked Bag 8 East Perth WA 6872 Ernst & Young 11 Mounts Bay Road Perth WA 6000 Computershare Investor Services Pty Limited Level 2 45 St George’s Terrace Perth WA 6000 Telephone 1300 557 010 (outside Australia) +61 3 9323 2000 Facsimile +61 8 9323 2033 VDM Group Limited shares are listed on the Australian Securities Exchange (ASX) ASX Code VMG ACN ABN 109 829 334 95 109 829 334 In this report, the following definitions apply: “Board” means the Board of Directors of VDM Group Limited “Company” or “VDM” means VDM Group Limited ABN 95 109 829 334 and its controlled entities 2 VDM GROUP LIMITED CONTENTS EXECUTIVE CHAIRMAN'S REPORT DIRECTORS' REPORT AUDITOR’S INDEPENDENCE DECLARATION CORPORATE GOVERNANCE STATEMENT STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF FINANCIAL POSITION STATEMENT OF CASH FLOWS STATEMENT OF CHANGES IN EQUITY NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT ASX ADDITIONAL INFORMATION 4 7 - 26 27 28 - 35 36 37 38 39 40 - 88 89 90 - 91 92 - 93 3 VDM GROUP LIMITED EXECUTIVE CHAIRMAN’S REPORT OVERVIEW I was appointed non-executive director of VDM on 28 August 2013 and commenced as CEO on 9 September 2013. On 29 November 2013 I was appointed Executive Chairman. It is fair to say that the Company faced significant financial challenges when I assumed the CEO position, as evidenced by the Company's $11.9 million loss recorded for the first half of the year. The company also incurred losses in second half of the year, with the company recording a $21.4 million loss for the full year. The primary reasons for these losses were: i) low profit performance on the close-out of the existing suite of construction contracts, ii) call of $2.4 million of security bonds under the disputed Jimblebar ANSF contract, iii) losses recorded on discontinued operations and iv) absence of new revenue streams during the year. Despite the challenges I assure you that the board and I have high ambitions for VDM. We are confident that VDM's new business strategy will be transformational and VDM will become a strong and successful Australian company and shareholders will be rewarded for their investment in the company. Commencing this year, VDM had identifiable strengths that we could build on: a) it is a well-known engineering- procurement-construction (EPC) brand with significant experience in the Australian market; b) it has invested in systems and procedures for construction contract management, quality control, and safety; c) it has a fleet of well- maintained construction equipment; and d) it has a skilled workforce. During the year, we concentrated VDM’s turnaround in three areas: i) recapitalization through equity raisings, ii) restructuring the company’s operations through divestments of non-core businesses and close-out of existing contracts, and iii) introducing new management skills and business partners to implement VDM’s new business strategy. RECAPITALISATION Net cash flow used in operating activities was $33.1 million during the year and therefore VDM undertook a number of capital raisings to provide funding for the business: On 27 August 2013, 140,080,961 shares were issued to H&H Holdings Australia Pty Ltd (H&H) raising $1,401,000. On 27 August 2013, a $5,000,000 convertible loan was received from H&H that was converted into 500,000,000 shares by shareholder approval on 29 November 2013. On 29 November 2013, 143,997,917 shares were issued to Jimblebar creditors at $0.01 per share. On 10 December 2013, 75,000,000 shares were issued to a private investor raising $750,000. On 17 January 2014, 1,214,685,617 shares were issued pursuant to a non-renounceable entitlement offer (400,000,000 to underwriter H&H, 500,000,000 to sub-underwriter Australia Kengkong Investments Co Pty Ltd (Kengkong), and 778,531,439 under acceptances by other shareholders) raising $12,146,856, comprising 68 per cent of the offer. On 19 March 2014, 120,000,000 shares were issued to Kengkong raising $1,200,000. On 5 May 2014, a $4,500,000 convertible loan was received from Kengkong, convertible to 450,000,000 shares upon shareholder approval and at the option of Kengkong. As announced on 23 September 2014, VDM executed an agreement with Kengkong to provide a further $10,000,000 of funding via a loan which, subject to shareholder approval, is convertible into 1,000,000,000 shares at the option of Kengkong. VDM shareholders will have the opportunity to consider approving the conversion to shares of both this convertible loan and the preceding $4,500,000 convertible at the Company’s Annual General Meeting to be held before the end of November 2014. I would like to thank Kengkong and H&H for supporting these capital raisings, as well as the other shareholders who took up their share rights under the December 2013 entitlement offer. RESTRUCTURING The Queensland Construction business and the remaining Queensland and Western Australian Engineering Consulting businesses were sold in the first-half of the year. Although these divestments resulted in recognition of losses from discontinued operations of $6.7 million, exiting these businesses was considered an urgent and necessary measure to halt the cash outflows that would be required to maintain them. Another priority was the prompt efficient completion of the existing construction contracts. Contracts in progress was reduced from $7.8 million on the balance sheet at the beginning of the year to very close to nil at year end. These business divestments and project close-outs have resulted in a workforce reduction from 347 employees at the start of the year to 42 at the end of the year. The restructuring has simplified and rationalised the business which allows the board and management to concentrate VDM's resources on implementation of the new business strategy. 4 VDM GROUP LIMITED EXECUTIVE CHAIRMAN’S REPORT NEW BUSINESS STRATEGY VDM’s new business strategy will be arranged under four operating divisions in financial year 2015: VDM Construction: EPC including modular and steel construction VDM Equipment: equipment hire, sales, service, and parts VDM Trading: procuring quality Asian products for the Australian market VDM Mining: bringing Australian mining practices to Africa and Latin America VDM Construction We have provided more focus to VDM Construction’s EPC capabilities by improving the division’s market competitiveness in customised modular buildings, steel buildings, and other steel construction projects. Cooperation agreements have been completed with BNBM (one of China’s leading modular construction companies) and Ansteel Construction (a leading Chinese steel manufacturer) so that VDM can now provide highly competitive construction solutions in this market segment. VDM has also added experienced specialist skills in Australian modular and steel construction to its management team. VDM Construction can now deliver modern and technically-innovative custom buildings to the Australian market-place at highly competitive prices. This type of construction technology also provides customers with a cost advantage in terms of completion timeframes which are significantly shorter than normal construction methods. Efforts were concentrated on completing the large suite of existing contracts and no new construction contracts were signed before the end of the financial year, however, VDM Construction now has a clear strategy and a highly competitive offering that we believe will result in VDM winning new construction contracts during FY15. VDM Equipment As announced on 24 June 2014, VDM has signed a letter of intent to establish a joint venture with SANY Heavy Machinery (JV). SANY is a leading manufacturer and well-established brand of heavy equipment in Asia. SANY’s strategy is focused around product innovation, product quality, customer service and price competitiveness. VDM is proud to partner with SANY and is confident this innovative and successful brand will flourish in Australia. The JV company has been registered and VDM and SANY representatives are progressing plans and schedules for the JV including equipment fleet delivery, showroom and workshop premises, sales and promotion activities, and additional staffing requirements. VDM has already commenced hiring SANY equipment to customers and has ordered more equipment from the SANY to offer for hire and sale within the joint venture in the coming months. Plans are also underway for the JV to hold a large expo in Perth, Western Australia to formally launch the JV and showcase the SANY product range. VDM aims to reproduce similar JV arrangements with other established Asian manufacturers of high-quality equipment who want more success in the Australian market. The model significantly improves the competitive offering for these manufacturers through: 1) delivery of professional and knowledgeable after-sales maintenance and repair service, 2) improved Australian spare parts inventory management and parts sales, and 3) offering customers flexible and attractive equipment hire arrangements. VDM Trading VDM Trading is a procurement service for high-quality and either custom-designed or ready-made products from Asia. VDM has now established an experienced procurement team in Perth specialising in construction and industrial products from Asian manufacturers. VDM has also forged commercial arrangements with leading Chinese brands, such as BNBM and Ansteel Construction to improve the competitiveness of the offering to VDM customers. VDM Trading leverages the technical capabilities of VDM Construction and VDM Equipment to provide customers with more assurance that their needs are fully understood and will be satisfied by the products procured from Asia. VDM Trading also has a business objective of assisting Australian businesses who would like to export products to Asian markets. VDM Mining VDM plans to bring the advantages of Australia’s mining knowledge, technology and practices to mining opportunities in Africa and Latin America. Australia’s modern and advanced mining industry has world-class capability and reputation in all mining stages including exploration, feasibility, design, construction, and operation. The Australian mining industry’s safety record and environmental practices in Australia are internationally highly regarded. VDM intends to provide these advantages to projects in Africa and Latin America. 5 VDM GROUP LIMITED EXECUTIVE CHAIRMAN’S REPORT SAFETY I am pleased to report that VDM had another positive safety performance with no Lost Time Injuries in the year and a LTIFR of nil. Safety is a fundamental plank of VDM’s business and we will continue to ensure that safety is a top priority. CONCLUSION During the second-half of the year we welcomed two new directors to the VDM board: Mr Vic Jakovich, an independent director and Mr Hiuming Luk who is the nominee director of significant shareholder, Kengkong. Both are successful entrepreneurs and business leaders who provide tremendous value to VDM. I would again like to thank our shareholders for their support during a challenging period for the Company. Sincerely Dr D Hua Executive Chairman and Interim CEO 6 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Your directors submit their report for the year ended 30 June 2014. DIRECTORS The names and details of the directors of VDM Group Limited (“VDM” or “the Company”) in office during the year and until the date of this report are as follows. Directors were in office for the entire period unless otherwise stated. Current directors Dongyi Hua, Dr Executive Chairman and Interim Chief Executive Officer Initially appointed Director on 28 August 2013, Managing Director on 9 September 2013 and Executive Chairman and Interim Chief Executive Officer on 29 November 2013 Member of the Nominations & Remuneration Committee Member of the Audit & Risk Committee Dr Hua is the former Vice President, Executive Chairman and CEO of CITIC Pacific Mining, a position he held from October 2009 until April 2013. He was previously with Beijing-based CITIC Group, which he joined in 2002. Dr Hua has held executive management positions during the past 15 years for construction and resource development projects across Asia, Africa and Latin America in countries such as China, Angola, the Philippines, Pakistan, Brazil and Algeria. He has extensive experience in project, contractor, cost and risk management. Dr Hua is also the Vice President of the Australian China Business Council Western Australia. Dr Hua holds a Doctorate of Engineering from the China University of Geosciences. Dr Hua has a relevant interest (as defined section 608 of the Corporations Act 2001) in H&H Holdings Australia Pty Ltd (H&H). Michael Fry, BCom Non-Executive Director Appointed 3 June 2011 Chairman of the Audit & Risk Committee Member of the Nominations & Remuneration Committee Mr Fry is an experienced company manager across a broad range of industry sectors. Mr Fry has a strong background in accounting and corporate advice having worked with KPMG (Perth), Deloitte Touche Tohmatsu (Melbourne) and boutique corporate advisory practice Troika Securities Ltd (Perth). From 2006 to 2011, Mr Fry was the Chief Financial Officer and Finance Director at Swick Mining Services Limited, a publicly listed drilling services provider contracting to the mining industry in Australia and North America. Since 2011 Mr Fry has been Chief Financial Officer and Company Secretary of Cougar Metals NL, a publicly listed gold exploration and drilling services company operating in Brazil. Velko (Vic) Jakovich Non-Executive Director Appointed 1 February 2014 Member of the Nominations & Remuneration Committee Mr Jakovich has held executive positions including Managing Director of Stulz Australia Pty Ltd, Treasurer, Deputy Chair and Chair of Villa Dalmacia Nursing Home and non-executive positions as Board Member of St John of God Foundation for 7 years and Chair of steering committee to develop case for raising $20m towards construction of $50m Comprehensive Cancer Centre at St John of God Campus Subiaco and Non-Executive Director of Stulz Australia Pty Ltd. Mr Jakovich is a senior partner in Jako Industries Pty Ltd and is its Managing Director. Hiuming Luk Non-Executive Director Appointed 21 March 2014 Member of the Audit & Risk Committee Member of the Nominations & Remuneration Committee Mr Luk has extensive experience in a range of business sectors. In 2000, he set up the C.N.Team Ltd and Y.Z.I.T. Inc. He has invested in real estate in mainland China since 2001 and now invests in a variety of industries, including textile & clothing, steel, and new energy industries. Mr Luk is currently Chairman of the boards of C.N.Team Ltd, Y.Z.I.T. Inc, Wholly Fast International Ltd，Bondcooper Brothers Co Ltd, and Sunshine Real Estate Development Co Ltd. 7 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Past directors that resigned during the year and until the date of this report Michael Perrott AM, B.Com, FAIM, FAICD Initially appointed Non-Executive Director on 2 July 2009, appointed Chairman on 26 November 2010 and Deputy Chairman on 29 November 2013. Mr Perrott resigned as a Director on 7 August 2014. Current directorships of ASX listed companies: GME Resources Limited – Non-Executive Director and Chairperson since November 1996 Schaffer Corporation Limited – Non-Executive Director since February 2005 Xiangyang Ru Appointed 28 August 2013 Mr Ru resigned as a Director on 1 February 2014. Barry Nazer, BBus, FCPA, FFin, ANZIIF (Fellow), FAICD Appointed 1 October 2008 Mr Nazer resigned as a Director on 29 November 2013. Current directorships of ASX listed companies: Coventry Group Limited – Non-Executive Director since September 2003 Richard Mickle, B.Eng, FIEAust, FAICD Appointed 3 June 2011 Mr Mickle resigned as a Director on 29 November 2013. Andrew Broad Appointed 16 January 2012 Mr Broad was terminated as Managing Director and Chief Executive Officer on 23 August 2013. COMPANY SECRETARY Padraig O’Donoghue, BComm, CA Appointed 12 February 2014 Mr O’ Donoghue is VDM’s Chief Financial Officer and Company Secretary. He has significant experience as CFO and Company Secretary to Australian companies. He has been CFO/Company Secretary of mining companies: Consolidated Rutile Limited (ASX:CRT), Jabiru Metals Limited (ASX:JML) and Navigator Resources Limited (ASX:NAV). He was also CFO and Company Secretary of mining contractor Barminco. His early career includes PriceWaterhouseCoopers in Vancouver, Canada and 10-years with Barrick Gold in both head office and international Commercial Manager operational roles. Past Company Secretaries that resigned during the year and until the date of this report Samantha Drury was appointed as Company Secretary on 23 August 2013 and terminated on 12 February 2014. Michael Fry was appointed Company Secretary on 12 June 2013, as an interim measure until Mrs Drury’s appointment on 23 August 2013. INTERESTS IN THE SHARES AND OPTIONS OF THE COMPANY AND RELATED BODIES CORPORATE As at the date of this report, the interests of the directors in the shares of the Company were: Directors D Hua M Fry V Jakovich H Luk DIVIDENDS Number of Ordinary Shares 1,085,110,976 1,000,000 21,219,720 620,000,000 There were no dividends declared or paid during the year ended 30 June 2014. 8 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 NATURE AND PRINCIPAL ACTIVITIES VDM’s principal activities during the year were engineering designing and constructing (EPC) within the land development, road construction and resource industries. The activities were reduced during the year with the sale of VDM Construction (Eastern Operations) Pty Ltd (VDM Construction (Eastern Operations)) and VDM’s engineering consulting businesses. Under the prior year’s segment reporting these businesses were reported under ‘Eastern construction’ and ‘Consulting’ segments, respectively. General At 30 June 2014, VDM employed 42 people in Western Australia (30 June 2013: 347 across Australia). OPERATING AND FINANCIAL REVIEW Gross profit from continuing operations of $731,000 is significantly better than the prior year gross loss of $20,609,000. This line item reflects the combined profit result of work undertaken on construction contracts in the year. The prior year was negatively impacted by significant losses that were recorded on several large construction projects. Revenue from continuing operations of $24,590,000 represents a decrease of 80.8 per cent in comparison with the prior year. VDM’s construction activities were significantly reduced during the year as the Company concentrated on completing the large suite of active construction contracts and no new construction contracts were commenced in the year. Cost of services of continuing operations of $23,859,000 is 83.9 per cent below the prior year reflecting the reduced construction activities. Loss from continuing operations before tax of $16,406,000 is a 72.0 per cent improvement on the prior year’s $58,552,000 loss. The prior year loss result was significantly impacted by impairment expenses charged to goodwill of $16,717,000 and $881,000 of other impairment expenses. The current year result has significantly lower impairment expenses of $101,000 charged to leasehold improvements. Administration expenses of $17,039,000 are 15.4 per cent lower than the prior year reflecting the downsizing of the business that occurred over the year, offset by increased redundancy costs, increased provision for onerous leases, and reduced asset disposal gains. Additionally, administration expenses include $2,983,000 of impairment losses on receivables due from a customer for work done on the Jimblebar ANSF contract. The loss after tax was $21,378,000 (2013: $84,408,000 loss). This loss includes losses from discontinued operations of $6,678,000 (2013: $10,951,000). Re-capitalisation Net cash flow used in operating activities was $33,066,000 during the year and therefore VDM undertook a number of capital raisings to provide funding for the business: On 27 August 2013, 140,080,961 shares were issued to H&H Holdings Australia Pty Ltd (H&H) raising $1,401,000 before capital raising costs. On 27 August 2013, a $5,000,000 convertible loan was received from H&H that was converted into 500,000,000 shares by shareholder approval on 29 November 2013. On 29 November 2013, 143,997,917 shares were issued to Jimblebar creditors at $0.01 per share. On 10 December 2013, 75,000,000 shares were issued to a private investor raising $750,000 before capital raising costs. On 17 January 2014, 1,214,685,617 shares were issued pursuant to a non-renounceable entitlement offer (400,000,000 to underwriter H&H, 500,000,000 to sub-underwriter Australia Kengkong Investments Co Pty Ltd (Kengkong), and 778,531,439 under acceptances by other shareholders) raising $12,147,000 (before capital raising costs), comprising 68 per cent of the offer. On 19 March 2014, 120,000,000 shares were issued to Kengkong raising $1,200,000 before capital raising costs. On 5 May 2014, a $4,500,000 convertible loan was received from Kengkong, convertible to 450,000,000 shares upon shareholder approval and at the option of Kengkong. Business strategy VDM’s new business strategy is arranged under four operating divisions: VDM Construction: EPC including modular and steel construction VDM Equipment: equipment hire, sales, service, and parts VDM Trading: procuring quality Asian products for the Australian market VDM Mining: bringing Australian mining practices to Africa and Latin America 9 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 VDM Construction VDM Construction’s engineering-procurement-construction (EPC) capabilities are now focused on improving the division’s market competitiveness in customised modular buildings, steel buildings, and other steel construction projects. VDM Equipment As announced on 24 June 2014, VDM has signed a letter of intent to establish a joint venture with SANY Heavy Machinery (JV). SANY is a leading manufacturer and well-established brand of heavy equipment in Asia. VDM aims to reproduce similar JV arrangements with other established Asian manufacturers of high-quality equipment who want more success in the Australian market. The model significantly improves the competitive offering for these manufacturers through: 1) delivery of professional and knowledgeable after-sales maintenance and repair service, 2) improved Australian spare parts inventory management and parts sales, and 3) offering customers flexible and attractive equipment hire arrangements. VDM Trading VDM Trading is a procurement service for high-quality and either custom-designed or ready-made products from Asia. VDM has now established an experienced procurement team in Perth specialising in construction and industrial products from Asian manufacturers. VDM has also forged commercial arrangements with leading Chinese brands, such as BNBM and Ansteel Construction to improve the competitiveness of the offering to VDM customers. VDM Trading leverages the technical capabilities of VDM Construction and VDM Equipment to provide customers with more assurance that their needs are fully understood and will be satisfied by the products procured from Asia. VDM Trading also has a business objective of assisting Australian businesses who would like to export products to Asian markets. VDM Mining VDM plans to bring the advantages of Australia’s mining knowledge, technology and practices to mining opportunities in Africa and Latin America. Australia’s modern and advanced mining industry has world-class capability and reputation in all mining stages including exploration, feasibility, design, construction, and operation. The Australian mining industry’s safety record and environmental practices in Australia are internationally highly regarded. VDM intends to provide these advantages to projects in Africa and Latin America. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS The number of ordinary shares on issue increased 70.1 per cent from 933,873,071 shares at 30 June 2013 to 3,127,660,952 shares at 30 June 2014. The increase resulted from capital raisings that occurred during the year to fund ordinary ongoing operations as outlined above in the ‘Re-capitalisations” section of this report. On 21 August 2013 BHP Billiton (BHP) notified VDM that it was terminating the Jimblebar ANSF contract and instructed all VDM staff to exit the work site and camp facilities. A dispute under this contract between VDM and BHP is ongoing. Additionally, on 19 December 2013 BHP claimed and was paid $2,422,000 under surety bonds issued by VDM under the Jimblebar ANSF contract. VDM was subsequently required to repay $2,422,000 to Asset Insure, the surety bond provider and deposit a further $2,500,000 into a cash account held as security for Asset Insure on the value of bonds issued for VDM. The surety bond provider will not consent to release of the cash security until the value of the surety bonds issued for VDM is reduced below the $2,500,000 of cash held in the security deposit account The value of surety bonds issued for VDM at 30 June 2014 is $5,287,000. In the first half of the year, VDM sold the Queensland construction business (VDM Construction (Eastern Operations) Pty Ltd) and all the remaining engineering consulting businesses. Under the prior year’s segment reporting these businesses were reported under the ‘Eastern construction’ and ‘Consulting’ segments, respectively. On 5 May 2014, VDM executed a convertible loan and facility agreement with Australia Kengkong Investments Co Pty Ltd (Kengkong) ($4.5 million Convertible Loan) to provide funding of $4,500,000 for ordinary ongoing operations. Kengkong advanced $4,500,000 under the $4.5 million Convertible Loan on 6 May 2014. The loan is unsecured. Subject to shareholder approval, and upon such approval being granted, Kengkong will have the right to convert the loan into 450,000,000 ordinary shares at a conversion price of $0.01 per share. If shareholder approval is not obtained or the loan is not converted into VDM shares by Kengkong, VDM must repay the loan by the later of 5 September 2014 and 30 business days after the date of the shareholder meeting held to obtain approval (Shareholders Meeting). If shareholder approval is not obtained then VDM must pay a fee of $45,000. An interest rate of 10% per annum applies on the loan until 20 October 2014 at which time the interest rate increases to 15% per annum. A default interest rate of 2% per annum plus the applicable interest rate shall apply to any amount the Company fails to pay by the time it is due under the agreement. 10 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 SIGNIFICANT EVENTS AFTER THE BALANCE DATE Michael Perrott resigned as a Director of VDM on 7 August 2014. On 22 September 2014, VDM executed a convertible loan and facility agreement with Kengkong to provide funding of $10,000,000 for ordinary ongoing operations and project development proposals which are approved by Kengkong ($10m Convertible Loan) The $10m Convertible Loan is unsecured. Subject to shareholder approval, and upon such approval being granted, Kengkong will have the right to convert the $10m Convertible Loan into 1,000,000,000 ordinary shares at a conversion price of $0.01 per share. If shareholder approvals for conversion of both the $10m Convertible Loan and the $4.5m Convertible Loan are not obtained, or Kengkong does not elect to convert the $10m Convertible Loan into VDM shares then VDM must repay the $10m Convertible Loan within 60 business days after the shareholders meeting held to obtain approval (Shareholders Meeting). Interest is calculated at a rate of 8% per annum until one month after the date of the Shareholders Meeting, and 13% per annum following that date. A default interest rate of 2% per annum plus the applicable interest rate shall apply to any amount the Company fails to pay by the time it is due under the agreement. In the event that shareholders do not approve conversion of the $4.5m Convertible Loan and the $10m Convertible Loan, a fee of A$100,000 is payable by VDM in addition to the $45,000 fee payable in respect of the non-approval by shareholders of conversion of the $4.5m Convertible Loan. Conversion matters for both the $10m Convertible Loan and the $4.5m Convertible loan will be presented for consideration by shareholders at the Company’s Annual General Meeting to be held before the end of November 2014. LIKELY DEVELOPMENTS AND EXPECTED RESULTS VDM will be undertaking future capital raisings sufficient to fund ordinary ongoing operations and to grow the business until new revenue streams are established in the Construction, Equipment, Procurement and Mining divisions and the Company has to access debt capital markets. Any such capital raisings plans are currently incomplete and uncertain. ENVIRONMENTAL REGULATION AND PERFORMANCE VDM's operations are subject to environmental regulations under Commonwealth and State legislation. The Board believes that VDM has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to VDM. SHARE OPTIONS As at the date of this report, there were no unissued ordinary shares under option (2013: 464,992,686). During the year, 43,386 options were exercised and the remaining options expired on 30 November 2013. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS VDM has agreed to indemnify all the directors and executive officers for any costs or expenses that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities of the consolidated entity for which they may be held personally liable. The Company has paid a premium to insure the directors and officers of the Company and its controlled entities. Details of the premium are subject to a confidentiality clause under the contract of insurance. INDEMNIFICATION OF AUDITORS To the extent permitted by law, VDM has agreed to indemnify it auditors, Ernst & Young (EY) against claims by third parties arising from the audit (for an unspecified amount). This is consistent with EY’s standard audit engagement terms. No payment has been made to indemnify EY during or since the financial year. 11 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 DIRECTORS’ MEETINGS The number of meetings of directors (including meetings of committees of directors) held during the year, and the number of meetings attended by each director, were as follows: Number of meetings held: Number of meeting attended: D Hua M Fry V Jakovich H Luk Past directors M Perrott B Nazer R Mickle A Broad X Ru Meetings of committees Directors’ meetings 17 Audit & Risk 5 Nominations & Remuneration 1 13 17 4 1 16 10 9 3 2 3 5 1 - 3 2 - - - 1 1 1 - 1 1 1 - - As at the date of this report, VDM had an audit & risk committee and a nomination & remuneration committee of the board of directors. Members acting on the committees of the board during the year were: Audit & Risk M Fry (Chairman) D Hua M Perrott V Jakovich H Luk B Nazer Nominations & Remuneration M Perrott (Chairman) D Hua M Fry V Jakovich H Luk AUDITOR INDEPENDENCE AND NON-AUDIT SERVICES The directors received an Independence Declaration from the auditor of VDM, attached on page 27. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. Refer to Note 37 for disclosure relating to the cost of non-audit services conducted during the year. Rounding The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Class Order 98/0100. The Company is an entity to which the Class Order applies. 12 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 REMUNERATION REPORT (AUDITED) This remuneration report for the year ended 30 June 2014 outlines the remuneration arrangements of VDM in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308(3C) of the Act. The remuneration report details the remuneration arrangements for key management personnel (KMP) of VDM are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of VDM, directly or indirectly, including any director (whether executive or otherwise) of the parent company. For the purposes of this report, the term 'executive' includes the Interim Chief Executive Officer (CEO), executive directors and other senior executives of VDM. The remuneration report is presented under the following sections: 1. 2. 3. 4. 5. 6. 7. 8. 9. Individual KMP disclosures Board oversight of remuneration Executive remuneration arrangements Executive remuneration outcomes for 2014 (including link to performance) Executive contracts Non-Executive Director remuneration arrangements Additional statutory disclosure relating to options and shares Loans to key management personnel Other transactions and balances with key management personnel and their related entities 1. Individual KMP disclosures Details of KMP including the executives of the VDM are set out below. Current directors D Hua M Fry V Jakovich H Luk Past directors M Perrott R Mickle B Nazer X Ru A Broad Current executives P O’Donoghue Past executives S Drury R Gregg J Kemp Executive Chairman and Interim Chief Executive Officer Managing Director -– appointed director on 28 August 2013, Managing Director on 9 September 2013 and Executive Chairman and Interim Chief Executive Officer on 29 November 2013 Non – Executive Director Non – Executive Director -– appointed on 1 February 2014 Non – Executive Director -– appointed on 21 March 2014 Chairman until 29 November 2013 and then Deputy Chairman until his resignation on 7 August 2014. Acting CEO from 23 August 2013 to 6 September 2013. Non – Executive Director -– resigned on 29 November 2013 Non – Executive Director -– resigned on 29 November 2013 Non – Executive Director -– appointed on 28 August 2013 and resigned on 1 February 2014 Managing Director -– terminated on 23 August 2013 Chief Financial Officer and Company Secretary – appointed on 12 February 2014 Chief Financial Officer and Company Secretary – appointed on 24 June 2013 and resigned on 12 February 2014 Executive General Manager – Eastern Construction and Consulting – terminated on 11 October 2013 General Manager – Western Construction – appointed on 7 November 2012 and resigned on 6 September 2013 13 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 2. Board oversight of remuneration Nominations and Remuneration Committee The Nominations and Remuneration Committee comprises four non-executive directors and one executive director. The Nominations and Remuneration Committee is responsible for making recommendations to the Board on the remuneration arrangements for directors and executives. The Nominations and Remuneration Committee assesses the appropriateness of the nature and amount of remuneration of executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high performing director and executive team. The Board approves the remuneration arrangements of the Interim CEO and other executives and all awards made under the long-term incentive (LTI) plan, following recommendations from the Nominations and Remuneration Committee. The Board also sets the aggregate remuneration of NEDs which is then subject to shareholder approval. The Nominations and Remuneration Committee approves, having regard to the recommendations made by the Interim CEO, the level of the VDM short-term incentive (STI) pool. In accordance with good corporate governance practice, the structure of non-executive director and executive remuneration is separate and distinct. Remuneration report approval at 2013 Annual General Meeting The 2013 remuneration report was approved at the 2013 Annual General Meeting with a note of 94 per cent in favour. 3. Executive remuneration arrangements Remuneration strategy VDM’s executive remuneration strategy is designed to attract, motivate and retain high performing individuals and align the interests of executives and shareholders. To this end, key objectives of the Company’s reward framework are to ensure that remuneration practices: Are aligned to the VDM’s business strategy; Offer competitive remuneration benchmarked against the external market; Provide strong linkage between individual and group performance and rewards; and Align the interests of executives with shareholders through measuring total shareholder return (TSR). Remuneration levels and mix VDM aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within VDM and aligned with market practice. VDM’s policy is to position total employment cost (TEC) close to the median of its defined talent market to ensure a competitive offering. VDM undertakes an annual remuneration review to determine the total remuneration positioning against the market. The Interim CEO’s remuneration mix comprises 40% fixed remuneration as a proportion of total remuneration, 30% maximum STI and 30% maximum LTI. 14 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Structure The executive remuneration framework consists of the following components: Fixed remuneration; and Variable remuneration The table below illustrates the structure of VDM’s executive remuneration arrangements: Remuneration component Vehicle Purpose Link to performance Fixed remuneration Represented by total employment cost (TEC) Comprises base salary, superannuation contributions and other benefits Set with reference to role, market and experience Executives are given the opportunity to receive their fixed remuneration in a variety of forms including cash and fringe benefits such as motor vehicles. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for VDM STI component Paid in cash Rewards executives for their contribution to achievement of VDM and business unit outcomes, as well as individual key performance indicators (KPIs) No direct link to company performance Earnings before Interest and Tax Linked to safety performance improvement Linked to other internal non- financial measures including project performance and business development LTI component Awards are made in the form of performance shares Rewards executives for their contribution to the creation of shareholder value over the longer term Vesting of awards is dependent on VDM’s TSR performance relative to ASX 200 Industrial Index 15 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Fixed remuneration Executive contracts of employment do not include any guaranteed base pay increases. TEC is reviewed annually by the Nominations and Remuneration Committee. The process consists of a review of company, business unit and individual performance, relevant comparative remuneration internally and externally and, where appropriate, external advice independent of management. The fixed component of executives’ remuneration is detailed in the preceding table. Variable remuneration — short term incentive (STI) VDM operates an annual STI program that is available to executives and awards a cash bonus subject to the attainment of clearly defined VDM business unit and individual measures. The total potential STI available is set at a level so as to provide sufficient incentive to executives to achieve the operational targets and such that the cost to VDM is reasonable in the circumstances. Actual STI payments awarded to each executive depend on the extent to which specific targets set at the beginning of the financial year are met. The targets consist of a number of key performance indicators (KPIs) covering financial and non-financial, corporate and individual measures of performance. Performance measures Financial threshold VDM and divisional Earnings before Interest and Tax (EBIT) Financial measure: VDM and divisional Earnings before Interest and Tax (EBIT) Non-financial measures: Lost Time Injury Frequency Rate (LTIFR) Market and competitive positioning Project performance against tender expectations Risk management Leadership/ team contribution Implementation of key growth initiatives Proportion of STI award measure applies to No award unless minimum financial thresholds achieved 60-80% 20-40% These measures were chosen as they represent the key drivers for the short-term success of the business and provide a framework for delivering long-term value. The aggregate of annual STI payments available for executives across the VDM is subject to the approval of the Nominations and Remuneration Committee. On an annual basis, after consideration of performance against KPIs, the Nominations and Remuneration Committee, in line with their responsibilities, determine the amount, if any, of the short-term incentive to be paid to each executive. This process usually occurs within three months after the reporting date. Payments made are delivered as a cash bonus in the following reporting period. The KMP did not meet the specific KPI targets set at the beginning of the year and as such there were no STI payments approved by the Nominations & Remuneration Committee for the 2014 financial year. Variable remuneration — long term incentive (LTI) Under the LTI plan, KMP may be offered performance rights under the VDM Equity Incentive Plan every 12 months during their term of employment. Each performance right entitles the KMP to acquire one fully paid ordinary share in the Company for no consideration (subject to the predetermined performance and vesting conditions below). 16 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Each offer will be made on the following basis: The maximum number of performance rights available for each offer is up to 67.5% of the KMP’s annual TEC divided by the VWAP share price for the 5 days immediately preceding the relevant offer date. VDM’s TSR ranking will be determined by comparing VDM’s TSR over the performance period against the average TSR for the ASX 200 Industrial group over two years, commencing on the effective offer date. The actual number of performance rights offered will be determined in accordance with VDM’s Total Shareholder Return (TSR) ranking as follows: Relative TSR performance ranking Below the 50th percentile At the 50th percentile or above Percentage of award that will vest 0% 100% For the purpose of the rights issued during the 2012 financial year, the grant date was 1 December 2011. The performance rights vest over a period of three years. 50% of the rights vest two years from the effective offer date, and the remaining 50% vest three years from the grant date. Vesting of the rights is subject to VDM being profitable during the two year period from the effective offer date. In the event that VDM is not profitable during this two year period, but the TSR 50% hurdle has been exceeded, the Board has the discretion to allow up to 50% of the rights that would have otherwise been available to vest to vest to an employee. The employee is able to exercise the performance rights up to one year after vesting before the performance rights lapse. Where the KMP ceases employment during the term of their employment prior to the vesting of their award, the performance rights which have not vested or been granted will automatically lapse unless the Board determines otherwise in its absolute discretion. Average TSR for the ASX 200 Industrial group was considered the most appropriate benchmark to rank VDM’s TSR. This benchmark was chosen as the Directors believe it enables the best comparison of the Group’s performance compared to the performance of similar companies in the industrial sector. TSR and profitability were chosen to link LTI’s with shareholder wealth. A total of 34,391,304 performance rights were offered to KMP during the 2012 financial year. During the 2013 financial year, 16,565,217 performance rights lapsed as a result of KMP resigning during the year. The remaining 17,826,087 performance rights lapsed following the termination of Mr Broad on 23 August 2013 and Mr Gregg on 11 October 2013. KMP did not meet the predetermined performance and vesting conditions in the 2013 financial year. No additional performance rights were approved by the Nominations & Remuneration Committee in 2014. 17 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 4. Executive remuneration outcomes for 2014 (including link to performance) Company performance and the link to remuneration Company performance and its link to short-term incentives The financial performance measure driving the majority of the STI payment outcomes is Earnings before Interest and Tax (EBIT). The table below shows VDM’s gross EBIT history for the past five years (including the current period). EBIT $’000 (16,287) (58,769) (29,759) (62,810) 25,594 Closing share price (cents per share) 0.01 0.01 0.05 0.07 0.15 2014 2013 2012 2011 2010 As a result of the negative EBIT performance in 2013, no STI awards were made in the 2014 financial year. Company performance and its link to long-term incentives The performance measure which drives LTIs vesting is the Company’s TSR performance relative to the ASX-200 Industrial group. A total of 34,391,304 performance rights were offered to KMP during the 2012 financial year. During the 2013 financial year, 16,565,217 performance rights lapsed as a result of KMP resigning during the year. The remaining 17,826,087 performance rights lapsed following the termination of Mr Broad on 23 August 2013 and Mr Gregg on 11 October 2013. The graph below shows VDM’s TSR performance relative to the ASX-200 Industrial group since grant date on 1 December 2011. KMP did not meet the predetermined performance and vesting conditions in the 2014 financial year. As a result, no additional performance rights were approved by the Nominations & Remuneration Committee in 2014. ) 0 0 1 o t d e s a b e r ( R S T 200 150 100 50 - VMG share price ASX 200 Industrial Group 18 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Table 1: Executive remuneration for the year ended 30 June 2014 SHORT TERM POST EMPLOYMENT Base Salary & Fees $ Cash Bonus $ Non- Monetary Benefits $ Executive directors D Hua 495,122 Past executive directors A Broad1 133,522 Current key management personnel P O’Donoghue2 88,166 Past key management personnel S Drury3 R Gregg4 J Kemp5 157,743 118,516 109,229 Notes:- 1,102,298 - - - - - - - - - - - - EQUITY SETTLED SHARE BASED PAYMENT Value of Performance Rights $ Termination Benefits Total Performance Related $ $ - 511,694 % - Super Contributions $ 16,572 5,833 (94,394) 312,500 357,461 (26%) 7,280 13,331 18,509 - - - - 95,446 58,176 229,250 - - (153,690) 72,229 55,564 (277%) - - 109,229 - 61,525 (248,084) 442,905 1,358,644 (18%) 1. A Broad was terminated as Managing Director and Chief Executive Officer on 23 August 2013. 2. P O’Donoghue was appointed as Chief Financial Officer and Company secretary on 12 February 2014. 3. S Drury was terminated as Chief Financial Officer and Company secretary on 12 February 2014. 4. R Gregg was terminated with effect from 11 October 2013. 5. J Kemp was appointed with effect from 7 November 2012 and resigned on 6 September 2013. Table 2: Executive remuneration for the year ended 30 June 2013 SHORT TERM POST EMPLOYMENT Base Salary & Fees $ Cash Bonus $ Non- Monetary Benefits $ Super Contributions $ EQUITY SETTLED SHARE BASED PAYMENT Value of Performance Rights $ Past executive directors A Broad1 556,730 70,0002 Current key management personnel R Gregg S Drury3 410,620 - Past key management personnel J Kemp4 R Gonzales5 D Coyne6 T Fallon7 384,206 216,649 239,418 233,331 - - - - - - Notes:- 2,040,954 70,000 - - - - - - - - Termination Benefits Total Performance Related 25,000 (20,635) 1 53,128 97,222 $ 631,095 % 3% 560,970 17% $ - - - - - - 24,392 25,000 8,235 - - - 233,331 (56,468) (37,646) (65,252) 35,649 220,222 - - 371,560 182,401 135,755 (82,779) 35,649 2,199,579 - - (26%) (10%) (36%) - 1. The performance rights granted to Mr Broad of 11,956,522 in 2012 were approved at the Annual General Meeting on 29 November 2012. The performance rights granted to Mr Broad were revalued at $0.012 per right based on the underlying share price at that time. J Kemp was appointed with effect from 7 November 2012 and resigned on 6 September 2013. 2. The bonus paid to Mr Broad relates to a correction of his 2012 STI. 3. S Drury was appointed with effect from 24 June 2013. 4. 5. R Gonzales was terminated with effect from 25 January 2013. 6. D Coyne resigned with effect from 12 June 2013. 7. T Fallon resigned with effect from 27 November 2012. 19 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 5. Executive contracts Remuneration arrangements for KMP are formalised in employment agreements. Details of these contracts are provided below. Interim CEO The Interim CEO is employed under a rolling contract. With effect from 9 September 2013, the remuneration of the Interim CEO is as follows: Fixed remuneration of $625,000 per annum (representing 40% as a proportion of total maximum remuneration); Maximum STI opportunity is 75% of TEC (representing 30% as a proportion of total maximum remuneration); and Maximum LTI opportunity is 75% of TEC (representing 30% as a proportion of total maximum remuneration). The Interim CEO termination provisions are as follows: Notice period Employer-initiated termination 6 months Payment in lieu of notice 6 months None None 3 months 3 months Termination for serious misconduct Employee-initiated termination Other KMP Treatment of STI on termination Pro-rated for time and performance subject to Board discretion Pro-rated for time and performance subject to Board discretion Pro-rated for time and performance subject to Board discretion Treatment of LTI on termination Unvested awards forfeited subject to Board discretion Unvested awards forfeited Unvested awards forfeited subject to Board discretion The Company may terminate all other KMP by providing between 6 weeks to three months written notice or providing payment in lieu of the notice period. The Company may terminate a contract at any time without notice if serious misconduct has occurred. Payments applicable to outgoing executives Mr Broad received an employer-initiated termination payment of 6 months payment in lieu of notice in accordance with the terms of his employment contract, which amounted to $312,500. Ms Drury received a termination payment of $58,176, in accordance with the terms of her employment contract. Mr Gregg received a termination payment of $72,229, in accordance with the terms of his employment contract. 20 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 6. Non-Executive Director remuneration arrangements Remuneration policy The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually against fees paid to NEDs of comparable companies. The Board considers advice from external consultants when undertaking the annual review process. The constitution and the ASX listing rules specify that the NED fee pool shall be determined from time to time by a general meeting. The latest determination was at the 2010 AGM held on 19 November 2010 when shareholders approved an aggregate fee pool of $600,000 per year. This amount includes superannuation and fees paid to directors in their capacity as members of the Board and its committees. Structure The remuneration of NEDs consists of directors’ fees and committee fees. NEDs do not receive retirement benefits, other than superannuation and they do not participate in any incentive programs. The Deputy Chairman of the Board attends all committee meetings but does not receive any additional fees. The table below summarises the NED fees for 2014: Board fee Chairman of the Board1 Deputy Chairman of the Board Chairman of the Audit and Risk Committee Notes:- Annual NED fees including superannuation $75,000 $65,000 $96,000 $10,000 1. M Perrott was Chairman of the Board until 29 November 2014 and subsequently was appointed Deputy Chairman. M Perrott resigned on 7 August 2014. 21 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Table 3: Non- Executive remuneration for the year ended 30 June 2014 SHORT TERM POST EMPLOYMENT Base Salary & Fees $ Current non-executive directors M Fry V Jakovich2 H Luk3 75,885 28,604 19,011 Past non-executive directors M Perrott1 B Nazer4 R Mickle5 34,413 30,364 186,337 Notes:- 374,614 Cash Bonus $ - - - - - - - Non- Monetary Benefits $ - - - - - - - Super Contributions $ 7,019 2,646 1,758 - 3,183 2,809 17,415 EQUITY SETTLED SHARE BASED PAYMENT Value of Performance Rights $ - - - - - - - Termination Benefits Total Performance Related $ $ - - - - - - - 82,904 31,250 20,769 186,337 37,596 33,173 392,029 % 0% 0% 0% 0% 0% 0% 0% 1. M Perrott was acting CEO for the period 23 August 2013 to 6 September 2013 and was Chairman of the Board until 29 November 2013. He resigned as a Director of VDM on 7 August 2014. 2. V Jakovich was appointed as Director of VDM on 1 February 2014. 3. H Luk was appointed as Director of VDM on 21 March 2014. 4. B Nazer resigned as a Director of VDM on 29 November 2013. 5. R Mickle resigned as a Director of VDM on 29 November 2013. Table 4: Non- Executive remuneration for the year ended 30 June 2013 SHORT TERM POST EMPLOYMENT Base Salary & Fees $ Current non-executive directors M Perrott B Nazer R Mickle M Fry 131,488 73,891 59,005 59,005 Past non-executive directors T Crossley1 23,288 Notes:- 346,677 Cash Bonus $ - - - - - - Non- Monetary Benefits $ - - - - - - 1. T Crossley resigned with effect from 24 October 2012. Super Contributions $ - 6,650 5,311 5,311 2,096 19,368 EQUITY SETTLED SHARE BASED PAYMENT Value of Performance Rights $ - - - - - - Termination Benefits Total Performance Related $ - - - - - - $ % 131,488 80,541 64,316 64,316 25,384 366,045 - - - - - - 22 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 7. Additional disclosures relating to options and shares This section sets out the additional disclosures required under the Corporations Act 2001. The table below discloses the performance rights granted to executives as remuneration during the year ended 30 June 2013. Performance Rights do not carry any voting or dividend rights and will automatically become vested performance rights once the vesting conditions have been met. Table 5: Performance rights awarded and vested during the year ended 30 June 2014 Terms and conditions for each grant during the year Rights awarded during the year (No.) Grant date Fair value per right at award date ($) First vesting date Second vesting date No. vested during the year No. lapsed during the year Past executive directors A Broad1 - 1 December 2011 $0.012 1 December 2013 1 December 2014 - 11,956,522 Past key management personnel R Gregg2 - - Notes: 1 December 2011 $0.0398 1 December 2013 1 December 2014 - - 5,869,565 17,826,087 1. A Broad was terminated as Managing Director with effect from 23 August 2013 and his performance rights lapsed upon his date of termination. 2. R Gregg was terminated with effect from 11 October 2013 and his performance rights lapsed upon his date of termination. 23 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Table 6: Shareholdings of key management personnel Balance 1 July 2013 Granted as remuneration Options exercised Net change other Balance 30 June 2014 - 500,000 - - 6,200,000 1,228,568 1,200,000 3,400,164 86,605 12,615,337 - - - - - - - - - - - - - - - - - - - - 1,085,110,976 500,000 21,219,720 620,000,000 1,085,110,976 1,000,000 21,219,720 620,000,000 6,200,000 (1,228,568))) (1,200,000) 12,400,000 - - (3,400,164) (86,605) - - 1,727,115,359 1,739,730,696 Current directors D Hua1 M Fry2 V Jakovich H Luk3 Past directors M Perrott2 B Nazer4 A Broad5 Past executives R Gregg6 J Kemp7 Total shareholding Notes: 1. Issued 140,080,961 shares to H&H on 27 August, post this H&H held 185,110,976 shares. Issued 500,000,000 conversion shares on 29 November 2013. H&H exercised 400,000,000 of their rights under the entitlements offer detailed in the prospectus dated 10 December 2013. 2. M Perrott and M Fry exercised their rights under the entitlements offer detailed in the prospectus dated 10 December 3. 2013. M Perrott subsequently resigned as a Director on 7 August 2014. Issued 500,000,000 shares to Kengkong in terms of the Sub-Underwriting agreement with H&H as detailed in the prospectus dated 10 December 2013. Issued a further 120,000,000 shares to Kengkong on19 March 2014 under the Shortfall Offer contained in the 10 December 2013 entitlement offer prospectus. 4. B Nazer’s balance reduced to nil during the year as he resigned as a Non- Executive Director of VDM on 29 November 2013 5. A Broad’s balance reduced to nil during the year as he was terminated as Managing Director with effect from 23 August 2013. 6. R Gregg’s balance reduced to nil during the year as he was terminated on 11 October 2013. 7. J Kemp was appointed on 7 November 2012 and resigned on 6 September 2013. Table 7: Option holdings of key management personnel Balance 1 July 2013 Granted as remuneration Options exercised Net change other Balance 30 June 2014 Current directors M Perrott1 M Fry1 Past directors B Nazer2 A Broad3 Past executives R Gregg4 Total option holding Notes: 3,100,000 250,000 614,284 350,000 1,700,082 6,014,366 - - - - - - - - - - - - (3,100,000) (250,000) (614,284) (350,000) (1,700,082) (6,014,366) - - - - - - 1. The listed options expired on 30 November 2013. 2. B Nazer’s balance reduced to nil during the year as he resigned as a Non- Executive Director of VDM on 29 November 2013. 3. A Broad’s balance reduced to nil during the year as he was terminated as Managing Director with effect from 23 August 2013. 4. R Gregg’s balance reduced to nil during the year as he was terminated on 11 October 2013. 24 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 Table 8: Performance rights holdings of key management personnel Past directors A Broad1 Past executives R Gregg Total option holding Notes: Balance 1 July 2013 Granted as remuneration Rights exercised Net change other Balance 30 June 2014 11,956,522 5,869,565 17,826,087 - - - - - - (11,956,522) (5,869,565) (17,826,087) - - - 1. A Broad was terminated as Managing Director with effect from 23 August 2013 and his performance rights lapsed upon his date of termination. 2. R Gregg was terminated with effect from 11 October 2013 and his performance rights lapsed upon his date of termination. All equity transactions with KMP other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those VDM would have adopted if dealing at arm’s length. 8. Loans to key management personnel There were no loans granted to KMP during the year ended 30 June 2014 and 2013. 9. Other transactions and balances with key management personnel and their related entities (a) Details and terms and conditions of other transactions with KMP and their related parties: H&H On 29 October 2013, VDM entered into a $4,000,000 unsecured loan facility with H&H and the loan was subsequently fully drawn by VDM. Upon shareholder approval at the 29 November 2013 Annual General Meeting, VDM granted a general security to H&H in respect of the loan facility. The loan was repaid in full on 28 January 2014 with funds raised in the entitlements offer. H&H were entitled to interest of $65,000, which was still outstanding at 30 June 2014. The $5,000,000 convertible loan issued to H&H loan on 27 August 2013 was approved and converted into 500,000,000 ordinary shares at $0.01 per share at the Company’s 29 November 2013 Annual General Meeting. H&H was entitled to interest of $108,000, which was still outstanding at 30 June 2014. H&H exercised 400,000,000 of their rights under the entitlements offer detailed in the prospectus dated 10 December 2013. H&H was entitled to an underwriting fee of $75,000 which was still outstanding at 30 June 2014. At 30 June 2014, H&H held 1,085,110,976 shares (34.7% of the issued share capital of VDM). Kengkong Issued 500,000,000 shares to Kengkong in terms of the Sub-Underwriting agreement with H&H as detailed in the prospectus dated 10 December 2013. Kengkong was entitled to an underwriting fee of $75,000 this was repaid in full by 30 June 2014. Issued a further 120,000,000 shares to Kengkong on19 March 2014 under the Shortfall Offer contained in the 10 December 2013 entitlement offer prospectus. On 5 May 2014, VDM executed an agreement with Kengkong to provide funding of $4,500,000 via a convertible loan to be used for general working capital purposes in the ordinary course of business. The loan is unsecured and is convertible to 450,000,000 shares upon shareholder approval and at the option of Kengkong. Conversion matters for the loan will be presented for consideration by shareholders at the Company’s Annual General Meeting to be held before the end of November 2014. Interest accrues on the loan until the later of its conversion to shares or the repayment date which is 30 business days after the shareholder meeting. Accrued interest of $32,000 was outstanding at 30 June 2014. At 30 June 2014, Kengkong held 620,000,000 shares (19.8% of the issued share capital of VDM). VDM director Mr H Luk has a controlling interest in Kengkong. 25 VDM GROUP LIMITED DIRECTORS’ REPORT For the year ended 30 June 2014 (b) Amounts recognised at the reporting date in relation to other transactions: Assets and liabilities Current liabilities Trade and other payable Convertible loan Total liabilities Revenue and expenses Finance costs Total expenses Equity Capital raising costs Total Equity Signed in accordance with a resolution of the directors. Dr D Hua Executive Chairman and Interim CEO Perth, Western Australia 26 September 2014 2014 $’000 248 4,532 4,780 205 205 150 150 26 Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Auditor’s Independence Declaration to the Directors of VDM Group Limited In relation to our audit of the financial report of VDM Group Limited for the financial year ended 30 June 2014, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young T G Dachs Partner 26 September 2014 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation TD:MW:VDM:069 VDM GROUP LIMITED CORPORATE GOVERNANCE STATEMENT For the year ended 30 June 2014 CORPORATE GOVERNANCE STATEMENT ASX Principles and Recommendations The Board of Directors (“Board”) of VDM is responsible for establishing the corporate governance framework of VDM having regard to the ASX Corporate Governance Council (CGC) published guidelines as well as its corporate governance principles and recommendations. The Board guides and monitors the business and affairs of VDM on behalf of the shareholders by whom they are elected and to whom they are accountable. The table below summaries VDM’s compliance with the CGC’s 2nd edition Principles and Recommendations for its financial year commencing 1 July 2013. Recommendation Principle 1 – Lay solid foundations for management and oversight Comply? Yes/ No Reference / explanation 1.1 Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions. 1.2 Companies should disclose the process of evaluating the performance of Yes Yes Board function Performance senior executives. 1.3 Companies should provide the information indicated in the guide to Yes reporting on Principle 1. Principle 2 – Structure the board to add value 2.1 A majority of the Board should be independent directors. 2.2 The chairperson should be an independent director. 2.3 2.4 The roles of chairperson and chief executive officer should not be exercised by the same individual. The Board should establish a nomination committee. Yes No No Yes 2.5 Companies should disclose the process of evaluating the performance of Yes the Board, its committees and individual directors. 2.6 Companies should provide the information indicated in the guide to Yes reporting on Principle 2. Principle 3 – Promote ethical and responsible decision-making Structure of the Board Structure of the Board Structure of the Board Nomination and remuneration committee Performance 3.1 Companies should establish a code of conduct and disclose the code or a Yes Code of conduct summary of the codes as to: practices necessary to maintain confidence in the Company’s integrity the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders the responsibility and accountability of individuals for reporting and investigating reports of unethical practice. 3.2 Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity for the Board to assess annually both the objectives and progress in achieving them. Yes Diversity policy 3.3 Companies should disclose in each annual report the measurable Yes Diversity policy objectives for achieving gender diversity set by the Board in accordance with the diversity policy and progress towards achieving them 3.4 Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive Yes Diversity policy 28 VDM GROUP LIMITED CORPORATE GOVERNANCE STATEMENT For the year ended 30 June 2014 positions and women on the Board. 3.5 Companies should provide the information indicated in the guide to Yes reporting on Principle 3. Principle 4 – Safeguard integrity in financial reporting 4.1 The Board shall establish an audit committee. 4.2 The Audit Committee should be appropriately structured. 4.3 The Audit Committee should have a formal operating charter. 4.4 Companies should provide the information indicated in the guide to reporting on Principle 4. Principle 5 – Make timely and balanced disclosure 5.1 Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at senior management level for that compliance and disclose those policies or a summary of those policies. Yes Yes Yes Yes Yes Audit Committee Audit Committee Audit Committee Market disclosure policy 5.2 Companies should provide the information indicated in the guide to Yes reporting on Principle 5. Principle 6 – Respect the rights of shareholders 6.1 Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. Yes Shareholder communication policy 6.2 Companies should provide the information indicated in the guide to Yes reporting on Principle 6. Principle 7 – Recognise and manage risk 7.1 Companies should establish policies for the oversight and management Yes of material business risks. 7.2 The Board should require management to design and implement the risk management and internal control system to manage the Company’s material business risks and report to it on whether those risks are being managed effectively. Yes Risk management policy Risk management policy 7.3 The Board should disclose whether it has received assurance from the chief executive officer and the chief financial officer that: Yes CEO and CFO certification the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control the system is operating effectively in all material respects in relation to the financial reporting risks. In accordance with the Board’s policy, the chief executive officer and the chief financial officer made the attestations required by Recommendation 7.3 prior to the Board signing the annual report. 7.4 Companies should provide the information indicated in the guide to Yes reporting on Principle 7. Principle 8 – Remunerate fairly and responsibly 8.1 The Board should establish a remuneration committee. 8.2 The remuneration committee should be structured so that it: consists of a majority of independent directors is chaired by an independent chair has at least three members. Yes No Nomination and remuneration committee Nomination and remuneration committee 29 VDM GROUP LIMITED CORPORATE GOVERNANCE STATEMENT For the year ended 30 June 2014 8.3 Clearly distinguish the structure of non-executives directors’ remuneration Yes from that of executives. 8.4 Companies should provide the information indicated in the guide to Yes reporting on Principle 8. Nomination and remuneration committee VDM’s corporate governance practices were in place throughout the year ended 30 June 2014. Various corporate governance practices are discussed within this statement. For further information on corporate governance charters, codes and policies adopted by VDM, refer to our website: www.vdmgroup.com.au. Board functions The Company has established a Board Charter, which sets out the role, composition and responsibilities of the Board within the governance structure of VDM. The Board Charter sets out the following key responsibilities and functions of the Board: to develop, review and monitor the VDM’s long-term business strategies and provide strategic direction to senior executives to ensure policies and procedures are in place to safeguard the VDM’s assets and business and to enable the VDM to act ethically and prudently to develop and promote a system of corporate governance which ensures the VDM is properly managed and controlled to identify the VDM’s principal risks and ensure that it has in place appropriate systems of risk management, internal control, reporting and compliance and that management is taking appropriate action to minimise those risks to review and approve the VDM’s financial statements to monitor management’s performance and the VDM’s consolidated financial results on a regular basis to appoint, appraise and determine the remuneration and benefits of the chief executive officer to delegate powers to the chief executive officer as necessary to enable the day-to-day business of the VDM to be carried on, and to regularly review those delegations to ensure that the VDM has in place appropriate systems to comply with relevant legal and regulatory requirements that impact on its operations to determine the appropriate capital management for the VDM including share and loan capital and dividend payments to determine and regularly review an appropriate remuneration policy for employees of the VDM. The Board has developed and reviews at least every 12 months a formal instrument of delegation to the chief executive officer. The instrument contains all necessary powers to enable the chief executive officer to conduct business of the VDM on a day-to-day basis. The Board requires the chief executive officer to report at least every 12 months on the exercise of certain delegated powers, in particular sub-delegated authorities, to other senior executives. The Board has established the following committees to streamline the discharge of its responsibilities: Audit and Risk Committee Nominations and Remuneration Committee Each new non-executive director is required to sign and return a letter of appointment which sets out the key terms of the director’s appointment. The content of the letters of appointment for new non-executive directors is consistent with the ASX principles. The Company also has formal employment contracts with the chief executive officer, executive directors and chief financial officer which describe, amongst other things, their term of office, duties, rights, responsibilities and entitlements on termination. Performance At the commencement of each financial year the Board establishes performance targets. Each year the Board undertakes for the previous financial year a self-assessment of its collective performance and the assistance provided to it by its various Board committees. Senior executives and executive directors are assessed against previously agreed key performance indicators by the chief executive officer and the findings communicated to the independent directors. The performance of the chief executive officer is reviewed by the Nominations and Remuneration Committee. 30 VDM GROUP LIMITED CORPORATE GOVERNANCE STATEMENT For the year ended 30 June 2014 Structure of the Board Assessment of Directors Independence The Board is comprised of both executive and non-executive directors with a majority of non-executive directors. Non- executive directors bring a fresh perspective to the Board’s consideration of strategic, risk and performance matters and are best placed to exercise independent judgment and review and constructively challenge the performance of management. The Board Charter states that an independent director: is not a substantial shareholder of the Company or an officer of, or otherwise associated directly with, a substantial shareholder of the Company within the last three years has not been employed in an executive capacity by VDM, or been a director after ceasing to hold any such employment within the last three years has not been a principal of a material professional advisor or a material consultant to the VDM or an employee materially associated with the service provided is not a material supplier or customer of the VDM or an officer of or otherwise associated directly or indirectly with a material supplier or customer, has no material contractual relationship with the VDM other than as a director of the Company has not served on the Board for a period, which could or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company is free from any interest and any business or other relationship which could or could reasonably be perceived to, materially interfere with the directors’ ability to act in the best interests of the Company. The Board has adopted AASB Standard 1031 to determine the levels of materiality. A relationship is presumed immaterial when it generates less than 5% and presumed material when it generates more than 10% of revenue of the VDM over a 12 month period in the absence of evidence or convincing argument to the contrary. In considering such evidence or argument, VDM considers the strategic value and other material but non-quantitative aspects of the relationship in question. The threshold for materiality for the purposes of assessing the materiality of relationships between a non-executive director and VDM (other than as a director) shall be judged according to the significance of the relationship to the director in the context of their activities as a whole. The independent directors of the Company are: Mr M Fry (Chairperson of the Audit and Risk Committee) Mr V Jakovich Although Mr M Perrott was acting CEO for 15-days from 23 August 2013 to 6 September 2013 the board regards this as a necessary short-term interim measure that did not compromise his independence. Therefore the board considers Mr M Perrott to have been an independent director for the entire 2014 financial year. Independent Decision-making Each director has the right under the Board Charter to seek independent professional advice on matters of concern. Such advice will be at the expense of the VDM, if approval is first given by the chairperson. During the financial year no directors sought to obtain such independent legal, accounting or other professional advice in fulfilling their role as a director of VDM. Nomination and Remuneration committee The purpose of the Nominations and Remuneration Committee is to assist and advise the Board on matters relating to the appointment and remuneration of directors, the chief executive officer and other senior executives and employees of the VDM. The role of the committee in relation to nomination is to: review the size and composition of the Board review and advise the Board on the range of skills available on the Board and appropriate balance of skills for future Board membership review and consider succession planning for the chief executive officer, the chairperson and other directors and key executives develop criteria and procedures for the identification of candidates for appointment as directors, with the criteria including a consideration of the candidate’s: skills, experience, expertise and personal qualities capability to devote the necessary time and commitment to the role potential conflicts of interest and independence 31 VDM GROUP LIMITED CORPORATE GOVERNANCE STATEMENT For the year ended 30 June 2014 apply the criteria and procedures to identify prospective candidates for appointment as a director and make recommendations to the Board make recommendations to the Board regarding any directors who should not continue in office, having regard to the results of a formal performance appraisal of directors and/or consideration of the appropriate composition of the Board nominate for approval by the Board external experts (where appropriate) to advise on the matters listed above review the time required from a non-executive director and whether directors are meeting this requirement evaluate management’s recommendations on the appointment of key executives develop a plan for identifying, assessing and enhancing director competencies ensure that there is an appropriate induction program for new directors and reviewing its effectiveness. The role of the committee in relation to remuneration is to: determine remuneration policies and remuneration of directors determine remuneration and incentive policies and packages of key executives determine the VDM’s recruitment, retention and termination policies and procedures for senior management determine and review incentive plans and require that equity-based incentive plans involving the issue of new securities to executives, other than directors, be approved by shareholders where required, prior to implementation ensure that equity-based incentive plans prohibit hedging of unvested options or performance rights determine and review superannuation arrangements of the VDM determine and review professional indemnity and liability insurance for directors and senior management. The charter of the Nominations and Remuneration Committee provides that at least three directors, with the majority being independent directors, shall comprise the committee. The chairperson of the committee shall be an independent director. The Board has adopted a formalised policy for the appointment of non-executive directors. The current committee comprises: Dr D Hua Mr M Fry Mr V Jakovich Mr H Luk Due to the importance of remuneration and nomination matters to shareholders, the nominees of H&H and Kengkong, Dr Hua and Mr Luk respectively, have been invited onto the committee. As the VDM currently has only four directors, the committee does not have a majority of independent directors. The committee has not appointed a chairman since the resignation of the previous chairperson, Mr M Perrott. Each member of the executive team signs a formal employment contract at the time of their appointment covering a range of matters including duties, rights, responsibilities and entitlements on termination. The current remuneration of the directors and selected senior executives is published in the Directors’ Report and Notes to the Financial Statements. These Notes also describe the Company’s remuneration principles and policies. The non-executive directors of the Company are entitled to a fee that is determined by the Nominations and Remuneration Committee. The fee may include superannuation contributions. Additional fees are periodically payable for participation on Board committees. Non-executive directors do not participate in equity plans of the Company and do not receive retirement benefits other than statutory entitlements. The Nominations and Remuneration Charter sets out the committee’s purpose, membership (including procedures for attendance by non-members), role, and administrative procedures. The Nominations and Remuneration Charter is available on the Company’s website. Code of conduct VDM has a Code of Conduct (“Code”) which is endorsed by the Board and applies to all directors and employees. The Code is regularly reviewed and updated as necessary to ensure it reflects the highest standards of behaviour and professionalism and the practices necessary to maintain confidence in the VDM’s integrity. The objective of the Code is to: provide a benchmark for professional behaviour throughout the VDM support the VDM’s business reputation and corporate image within the community make employees aware of the consequences if they breach the Code. 32 VDM GROUP LIMITED CORPORATE GOVERNANCE STATEMENT For the year ended 30 June 2014 In summary, the Code requires that at all times the VDM personnel act with the utmost integrity, objectivity and in compliance with the letter and the spirit of the law and the VDM policies. The Code contains statements of commitments to employees, clients, shareholders, governments and communities. In addition, the Code deals with compliance with and respect for the law, fair dealing, equal opportunity and anti- discrimination, occupational health and safety, disclosure of the VDM’s information and securities dealing, conflicts of interest, gifts, prizes and entertainment, improper use or theft of property or assets. The Code of Conduct is available on VDM’s website. Diversity policy VDM recognises the value contributed to the organisation by employing people with varying skills, cultural backgrounds, ethnicity and experience. VDM believes its diverse workforce is the key to its continued growth, improved productivity and performance. We actively value and embrace the diversity of our employees and are committed to creating an inclusive workplace where everyone is treated equally and fairly, and where discrimination, harassment and inequity are not tolerated. VDM is committed to fostering diversity at all levels. The Diversity Policy is available on the Company’s website. The measurable objectives set by the Board for achieving gender diversity are as follows: Increase the number of woman in the workforce, including senior management positions and at board level Create development opportunities for woman that prepare then to take on senior positions To provide employment opportunities for people with disabilities Provide flexible workplace arrangement including part time arrangement and other incentives Review gender pay gaps on an annual basis and implement actions to address any variance Promote an inclusive culture that treats the workforce with fairness and respect Provide career development opportunities for every employee, irrespective of any cultural, gender and other differences The Company has achieved all objectives set by the Board. The proportion of women: employees at VDM: 34% (2013: 21%) in senior executive positions: 14% (2013: 25%) on the Board: 0% (2013: 0%) Audit committee The Audit and Risk Committee’s primary responsibilities are to assist the Board in: fulfilling its overview of the audit process overviewing financial reporting fulfilling its overview of the systems of internal control which the Board and management have established its processes of risk management and in monitoring compliance with corporate policies, the code of conduct and corporate governance and risk management policies generally. The charter of the Audit and Risk Committee provides for at least three directors to comprise the committee, but recognises that this may not be practicable at all times given its size and composition. The chairperson of the committee is appointed by the Board. The committee chairperson is an independent non-executive director. The chief executive officer, the chief financial officer and any other individual may attend meetings at the invitation of the chairperson of the committee, but are not members of the committee. The current committee comprises: Mr M Fry (Chairperson) Dr D Hua Mr H Luk The charter of the Audit Committee sets out the committee’s purpose, membership role, responsibilities and functions relating to financial reporting, auditors and risk, as well as committee administrative procedures. The charter of the Audit Committee is available on VDM’s website. 33 VDM GROUP LIMITED CORPORATE GOVERNANCE STATEMENT For the year ended 30 June 2014 Market disclosure policy The purpose of the Market Disclosure Policy is to establish procedures for: identifying material price-sensitive information reporting such information to the reporting officer for review ensuring the Company achieves best practice in complying with its continuous disclosure obligations under the Corporations Act and ASX Listing Rules ensuring VDM, the Board and key senior management do not contravene the Corporations Act or ASX Listing Rules. The rules set out in the policy are designed to ensure that announcements made by the Company are: made in a timely manner factual do not omit material information are expressed in concise and clear language that allows shareholders and the market to assess the impact of the information when making investment decisions. This policy applies to directors, executive officers and members of senior management who are most likely to be in possession of, or become aware of, the relevant information. All staff have been made aware of the existence of the policy so that they can assist with reporting of potentially sensitive information to the appropriate persons within VDM. The Market Disclosure Policy is available on VDM’s website. Shareholder communications policy The Communications Policy is based on compliance with VDM’s disclosure obligations and aims at all times to achieve best practice. The Communications Policy commits VDM to facilitating shareholder participation in the member meetings and to dealing promptly with shareholder enquiries. VDM believes that communicating with shareholders by electronic means, particularly through its website, is an efficient way of distributing information in a timely and convenient manner. The Company’s Communication Policy is available on VDM’s website. Risk management policy The Risk Management Policy is designed to assist in the development of organisational capabilities in risk management for internal control purposes. The Board should require management to design and implement the risk management and internal control system to manage VDM’s material business risks and report to it on whether those risks are being managed effectively. Risk management is regarded as an integral part of the Company’s strategic planning, business planning and project execution processes. The focus of risk management is the identification and treatment of risks with the objective to add maximum sustainable value to the activities of the organisation. The Risk Management Policy has been established to assist in the development of organisational capabilities in risk management. The Risk Management Policy sets out the following rules and responsibilities: the Board is ultimately responsible for VDM’s risk management and internal control framework the Board shall regularly review the effectiveness of the risk management and internal control framework the Board will review and discuss strategic risks and opportunities arising from changes in the VDM’s business environment regularly and on an as-needs basis the Board has delegated some of its responsibilities to the Audit and Risk Committee; however, maintains the overall responsibility for the process the responsibility for undertaking and assessing risk management and internal control effectiveness is delegated to management. Management is required to report back to the Board through the Audit and Risk Committee on the efficiency and effectiveness of risk management. Regularly scheduled board meetings are held approximately monthly and the meeting agendas and board reporting framework have been designed to provide information necessary for the board to effectively monitor both opportunities and threats and be informed of key individual risk matters. Management is required to report to the board on those risks which could have a material impact on the Company’s business. The Risk Management Policy is available on VDM’s website. 34 VDM GROUP LIMITED CORPORATE GOVERNANCE STATEMENT For the year ended 30 June 2014 CEO and CFO certification In accordance with section 295A of the Corporations Act, the chief executive officer and the chief financial officer have provided a written statement to the Board that: the Company’s financial report is founded on a sound system of risk management and internal control; and The system is operating effectively in all material respects in relation to the financial reporting risks. In accordance with the Board’s policy, the chief executive officer and the chief financial officer made the required attestations prior to the Board signing the annual report. 35 VDM GROUP LIMITED STATEMENT OF COMPREH ENSIVE INCOME For the year ended 30 June 2014 Continuing operations Rendering of services Other revenue Revenue Cost of services Gross profit / (loss) Administration expenses Finance costs Impairment charge Share based payment write-back Share of loss from joint venture Loss from continuing operations before income tax Income tax benefit / (expense) Loss from continuing operations after income tax Discontinued operations Loss from discontinued operations after income tax Loss for the year Other comprehensive income Total comprehensive loss for the year Total comprehensive loss for the year is attributable to: Owners of the parent Earnings per share (cents per share) Basic, loss for the year attributable to ordinary equity holders of the parent Diluted, loss for the year attributable to ordinary equity holders of the parent Earnings per share for continuing operations (cents per share) Basic, loss from continuing operations attributable to ordinary equity holders of the parent Diluted, loss from continuing operations attributable to ordinary equity holders of the parent Notes 6 8(a) 8(c) 31 23 9(a) 10 11 11 11 11 Consolidated 2013 $’000 2014 $’000 24,406 184 24,590 (23,859) 731 (17,039) (245) (101) 248 - (16,406) 1,706 (14,700) 127,069 755 127,824 (148,433) (20,609) (20,141) (196) (17,598) 90 (98) (58,552) (14,905) (73,457) (6,678) (21,378) (10,951) (84,408) - (21,378) - (84,408) (21,378) (21,378) (84,408) (84,408) (1.06) (9.04) (1.06) (9.04) (0.73) (7.87) (0.73) (7.87) 36 VDM GROUP LIMITED STATEMENT OF FINANCIAL POSITION As at 30 June 2014 ASSETS Current assets Cash and cash equivalents Security deposits Trade and other receivables Contracts in progress Development properties Investment in joint venture Inventory Other assets Non-current assets classified as held for sale Total current assets Non-current assets Trade and other receivables Security deposits Property, plant and equipment Deferred tax assets Intangible assets and goodwill Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Amounts due to customers for contract work Current tax liabilities Deferred tax liability Interest-bearing loans and borrowings Provisions Total current liabilities Non-current liabilities Interest-bearing loans and other borrowings Lease incentive liability Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Equity attributable to equity holders of the parent Contributed equity Reserves Accumulated losses Parent interests TOTAL EQUITY Notes Consolidated 2013 $’000 2014 $’000 13 14 15 16 17 23 18 19 20 15 14 21 9 22 24 16 9 25 26 25 26 27 28 28 3,366 1,242 990 49 3,389 - 150 36 9,222 - 9,222 - 3,584 3,320 - 99 7,003 16,225 5,506 49 858 - 4,760 3,066 14,239 49 175 1,128 1,352 15,591 634 11,857 5,238 12,319 7,848 4,061 1,350 308 621 43,602 900 44,502 258 - 6,359 - 307 6,924 51,426 26,219 7,200 3,152 - 1,782 10,493 48,846 299 - 244 543 49,389 2,037 268,509 636 (268,511) 634 634 248,286 884 (247,133) 2,037 2,037 37 VDM GROUP LIMITED STATEMENT OF CASH FLOWS For the year ended 30 June 2014 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid GST refunded / (paid) Income tax paid Net cash flows used in operating activities Cash flows from investing activities Purchase of property, plant and equipment Release from security deposit Proceeds from sale of property, plant and equipment Sale of interest in joint venture Purchase of intangibles Proceeds from external loans Payment of settlement adjustments Net proceeds from sale of subsidiary Net cash flows from investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Transaction costs on issue of shares Proceeds from share placements Net cash flows from / (used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Notes 29(a) 23 10 13 Consolidated 2013 $’000 2014 $’000 49,002 (81,805) 129 (7) 205 (590) (33,066) 319,022 (324,548) 455 (243) (6,837) - (12,151) (1,062) 413 1,899 1,350 (12) 930 - (644) 2,874 4,500 (1,682) (1,616) 20,499 21,701 (8,491) 11,857 3,366 (3,320) 8,330 9,674 - (195) 1,634 (707) 1,130 16,546 995 (3,513) (49) - (2,567) 1,828 10,029 11,857 38 VDM GROUP LIMITED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2014 Issued capital $’000 Accumulated losses $’000 Equity reserve $’000 Other capital reserve $’000 Balance at 1 July 2013 248,286 (247,133) 457 427 Comprehensive loss for the year Total comprehensive loss for the year Transactions with owners in their capacity as owners Share issued to H&H at $0.01 per share on 27 August 2013 Issue of conversion shares at $0.01 per share on 29 November 2013 Exercise of bonus issue option at $0.05 per share on 29 November 2013 Shares issued to Jimblebar creditors at $0.01 per share on 29 November 2013 Private placement shares issued at $0.01 per share on 10 December 2013 Shares issued under the 10 December 2013 entitlements offer prospectus on 28 January 2014 Shares issued under the Shortfall offer contained in the 10 December 2013 entitlements offer prospectus on 19 March 2014 Capital raising costs - - (21,378) (21,378) 1,401 5,000 2 1,440 750 12,147 1,200 (1,717) - - - - - - - - - - - - - - - - - - Balance at 30 June 2014 268,509 (268,511) 457 - - - - - - - - - (248) 179 Balance at 1 July 2012 248,612 (162,725) 457 510 Comprehensive loss for the year Total comprehensive loss for the year Transactions with owners in their capacity as owners Reversal of tax benefits on capital raising costs in prior years Transactions costs on share and option issue Share-based payments - - (84,408) (84,408) (268) (51) (7) - - - - - - - - Balance at 30 June 2013 248,286 (247,133) 457 - - - - (83) 427 Total $’000 2,037 (21,378) (21,378) 1,401 5,000 2 1,440 750 12,147 1,200 (1,965) 634 86,854 (84,408) (84,408) (268) (51) (90) 2,037 39 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 INDEX 1. CORPORATE INFORMATION 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS 4. INFORMATION RELATING TO SUBSIDIARIES, ASSOCIATES AND JOINT VENTURE 5. SEGMENT INFORMATION 6. OTHER REVENUE 7. OTHER INCOME 8. EXPENSES 9. INCOME TAX 10. DISCONTINUED OPERATIONS 11. EARNINGS PER SHARE 12. DIVIDENDS PROPOSED AND PAID 13. CASH AND CASH EQUIVALENTS 14. SECURITY DEPOSITS 15. TRADE AND OTHER RECEIVABLES 16. CONTRACTS IN PROGRESS 17. DEVELOPMENT PROPERTIES 18. INVENTORY 19. OTHER CURRENT ASSETS 20. NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE 21. PROPERTY, PLANT AND EQUIPMENT 22. INTANGIBLE ASSETS AND GOODWILL 23. INVESTMENT IN JOINT VENTURE 24. TRADE AND OTHER PAYABLES 25. INTEREST-BEARING LOANS AND OTHER BORROWINGS 26. PROVISIONS 27. CONTRIBUTED EQUITY 28. RETAINED EARNINGS AND RESERVES 29. CASHFLOW STATEMENT INFORMATION 30. RELATED PARTY DISCLOSURE 31. SHARE-BASED PAYMENT PLANS 32. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 33. PARENT ENTITY INFORMATION 34. COMMITMENTS 35. CONTINGENCIES 36. SIGNIFICANT EVENTS AFTER THE BALANCE DATE 37. AUDITORS’ REMUNERATION 38. CLOSED GROUP CLASS ORDER DISCLOSURES 41 41 55 57 58 59 59 59 60 62 63 64 64 64 65 66 66 66 66 67 67 69 69 70 71 72 73 74 75 76 77 79 82 83 84 85 85 86 40 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 1. CORPORATE INFORMATION The consolidated financial statements of VDM for the year ended 30 June 2014 were authorised for issue in accordance with a resolution of the directors on 26 September 2014. VDM is a for-profit company limited by shares incorporated and domiciled in Australia whose shares are publicly traded on the Australian Securities Exchange. The nature of the operations and principal activities of VDM are described in the Directors Report. Information on the VDM structure and other related party relationships is provided in note 4. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on the historical cost basis. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated. The consolidated financial statements provide comparative information in respect of the previous period. Certain comparative information has been reclassified to be presented on a consistent basis with the current year’s presentation. Compliance with IFRS The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. New and amended accounting standards and interpretations VDM has adopted all new and amended Australian Accounting Standards and AASB Interpretations effective from1 July 2013, including: AASB 10 Consolidated Financial Statements AASB 10 establishes a new control model that applies to all entities. It replaces part of AASB 127 Consolidated and Separate Financial Statements dealing with the accounting for consolidated financial statements and UIG- 112 Consolidation – Special Purpose Entities. The new control model broadens the situation when an entity is considered to be controlled by another entity and includes new guidance for applying the model to specific situations, including when acting as a manager may give you control, the impact of potential voting rights and when holding less than a majority voting rights may give control. The adoption of AASB 10 has no effect on the financial position or performance of VDM. AASB 11 Joint Arrangements AASB 11 replaces AASB 131 Interests in Joint Ventures and UIG-113 Jointly Controlled Entities – Non-monetary Contributions by Venturers. AASB 11 uses the principle of control in AASB 10 to define joint control, and therefore the determination of whether joint control exists may change. In addition it removed the option to account for jointly controlled entities using proportionate consolidation. Instead, accounting for joint arrangement is dependent on the nature of the rights and obligation arising from the arrangement. Joint operations that give the venturers a right to the underlying assets and obligations is accounted for by recognising the share of those assets an obligations. Joint ventures that give the venturers a right to the net assets is accounted for using the equity method. The application of AASB 11 impacted VDM’s accounting for its interest in a joint venture, Quartz South Hedland Pty Ltd (Quartz South Hedland). VDM sold its 52% interest in Quartz South Hedland on 9 August 2013. Prior to the transition to AASB 11, Quartz South Hedland was classified as a jointly controlled entity and VDM’s share of the assets, liabilities, revenue, income and expenses was proportionately consolidated in the consolidated financial statements. Upon adoption of AASB 11, VDM has determined it interest in Quartz South Hedland to be classified as a joint venture under AASB 11 and it is required to be accounted for using the equity method. The comparative information has been restated. It has no impact on the profit or loss, equity or cashflow for the year ended 30 June 2014. Consequential amendments were also made to other standards via AASB 2011-7 and amendments to AASB 128. 41 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Impact on the statement of profit or loss (increase / (decrease) in profit) Impairment Share of loss / profit from joint venture Loss before tax from continuing operations Tax (expense) / benefit Loss for the year 2014 $’000 - - - - - 2013 $’000 98 (98) - - - The adoption of AASB 11 did not have any impact either the OCI for the period or VDM’s basic and diluted EPS. Impact on equity (increase/ (decrease) in net equity) Current assets Development properties Investment in joint venture Total assets 2014 $’000 - - - 2013 $’000 (1,350) 1,350 - Net impact on equity Impact on cash flow statements (increase/ (decrease) in cash flows Net cash flows Operating Investing Financing Net cash (outflow) / inflow - - - - - - - - - - AASB 12 Disclosure of Interests in other Entities AASB 12 includes all disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and structures entities. New disclosures have been introduced regarding the judgements made by management to determine whether control exists, and to require summarised information about joint arrangements, associate and structured entities and subsidiaries with non-controlling interests. AASB 12 disclosures are provided in notes 4 and 23. AASB 13 Fair Value Measurement AASB 13 establishes a single source of guidance for determining the fair value of assets and liabilities. AASB 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to measure fair value under Australian Accounting Standards. Application of this definition may result in different fair values being determined for the relevant assets. AASB 13 also expands the disclosure requirements for all assets of liabilities carried at fair value. This includes information about the assumptions made and the qualitative impact of those assumptions on the fair value determined. The adoption of AASB 13 had no effect on the financial position or performance of the VDM. Consequential amendments were also made to other standards via AASB 2011-8 which has resulted in additional disclosures around the fair values of financial instruments. Fair value hierarchy is provided in note 32 (d). AASB 119 Employee Benefits (Revised 2011) The revised standard changes the definition of short-term employee benefits. The distinction between short-term and other long-term employee benefits is now based on whether the benefits are expected to be settled wholly within 12 months after the reporting date. The adoption of AASB 119 has no effect on the financial position or performance of the VDM. Consequential amendments were also made to other standards via AASB 2011-10. 42 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities. AASB 2012-2 principally amends AASB 7 Financial Instruments: Disclosures to require disclosure of the effect or potential effect of netting arrangements, including rights of set-off associated with the entity’s recognised financial assets and recognised financial liabilities, on the entity’s financial position, when all the offsetting criteria of ASAB 132 are not met. The adoptions of AASB 2012-2 had no effect on the financial position or performance of the VDM. AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual improvements 2009-2011 Cycle AASB 2012-5 makes amendments resulting from the 2009-2011 Annual Improvements Cycle. The standard addresses a range of improvements, including the following: -Repeat application of AASB 1 is permitted (AASB 1) -Clarification of the comparative information requirement when an entity provides a third balance sheet (AASB 101 Presentation of Financial Statements). The adoption of AASB 2012-5 had no effect on the financial position or performance of the VDM. AASB 2012-9 Amendment to AASB 1048 arising from the withdrawal of Australian Interpretation 1039. AASB 2012-9 amends AASB 1048 Interpretation of Standards to evidence the withdrawal of Australian Interpretation 1039 Substantive Enactment of Major Tax Bills in Australia. The adoption of AASB 2012-9 had no effect on the financial position or performance of the VDM. AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (AASB 124). This amendment deletes from AASB 124 individual key management personnel disclosure requirements for disclosing entities that are not companies. It also removes the individual KMP disclosure requirements for all disclosing entities in relation to equity holdings, loans and other related party transactions. The adoption of AASB 2011-4 had no effect on the financial position or performance of the VDM. The following standards and interpretations have been issued by the AASB but are not yet effective for the period ending 30 June 2014. VDM has not elected to early adopt any other new Standards or amendments that are issued but not yet effective. VDM is still evaluating the impact of these standards. Reference Title AASB 2012-3 Amendments to Australian Accounting Standards - Offsetting Financial Assets and Financial Liabilities Interpretation 21 Levies AASB 9/IFRS 9 Financial Instruments AASB 2013-3 AASB 2013-4 AASB 2013-5 Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting [AASB 139] Amendments to Australian Accounting Standards – Investment Entities [AASB 1, AASB 3, AASB 7, AASB 10, AASB 12, AASB 107, AASB 112, AASB 124, AASB 127, AASB 132, AASB 134 & AASB 139] Application date of standard* 1 January 2014 1 January 2014 1 January 2018 1 January 2014 1 January 2014 1 January 2014 43 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Reference Title AASB 2014-1 Part A -Annual Improvements 2010–2012 Cycle AASB 2014-1 Part A -Annual Improvements 2011–2013 Cycle Amendments to Australian Accounting Standards - Part A Annual Improvements to IFRSs 2010–2012 Cycle Amendments to Australian Accounting Standards - Part A Annual Improvements to IFRSs 2011–2013 Cycle Application date of standard* 1 July 2014 1 July 2014 AASB 1031 Materiality 1 January 2014 AASB 2013-9 Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments ^^ Amendments to IAS 16 and IAS 38***** AASB 2014-1 Part B Amendments to AASB 119 IFRS 15 ***** Notes: Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) 1 January 2016 Amendments to Australian Accounting Standards - Part B Defined Benefit Plans: Employee Contributions (Amendments to AASB 119) 1 July 2014 Revenue from Contracts with Customers 1 January 2017 * Designates the beginning of the applicable annual reporting period unless otherwise stated. ***** These IFRS amendments have not yet been adopted by the AASB. 44 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Going concern VDM incurred a net loss after tax from continuing operations for the year ended 30 June 2014 of $14,700,000 (2013: $73,457,000). Net cash flow used in operating activities was $33,066,000 (2013: $12,151,000). At 30 June 2014, VDM had net current liabilities of $5,017,000 (30 June 2013: $4,344,000 net current liabilities). The cash position of VDM at 30 June 2014 was $3,366,000 (30 June 2013: $11,857,000) with a further $4,826,000 (30 June 2013: $5,238,000) of security deposits. This report has been prepared on the going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and settlement of liabilities in the normal course of business. In forming this view, the Directors have taken into consideration: VDM was advanced $4,500,000 on 6 May 2014 under a convertible loan agreement with Australia Kengkong Investments Co Pty Ltd (Kengkong). On 22 September 2014 entered into a second separate convertible loan agreement with Kengkong for a further $10,000,000 to be advanced to VDM in three tranches during the period 25 September to 14 November 2014. Conversion of each of the loans into ordinary shares is subject to separate shareholder approval, and upon such approval being granted Kengkong will have the separate right for each loan during a period ending one month after the date on which approval is obtained to convert the loans into shares at a conversion price of A$0.01 per share. The directors expect shareholders to approve conversion of the loans and also expect that Kengkong will elect to exercise both conversion options. The meeting for shareholders to consider these matters will be VDM’s annual general meeting to be held before the end of November 2014. If shareholder approval for conversion of the loans into shares is not obtained or the loans are not converted into shares by Kengkong, then in the case of the $4,500,000 loan, it must be repaid within 30 business days after the date of the shareholders meeting held to obtain approval and in the case of the $10,000,000 loan, it must be repaid within 60 business days after the date of the shareholders meeting and the interest rate will increase from 8% to 13% per annum in from the date that is one month after the date of the shareholders meeting. There are also fees of up to $145,000 payable by VDM if shareholders do not approve the conversions. VDM continues to successfully implement the new business strategy as outlined in the Directors’ Report. VDM raises additional working capital and growth financing for the new business strategy. VDM has sufficient insurance cover and counterclaims to largely offset any significant legal claims. Should VDM not achieve the matters set out above, there is material uncertainty as to whether VDM will continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the annual financial report. The annual report does not include any adjustments to assets and liabilities that may be necessary if VDM is unable to continue as a going concern. (a) Basis of consolidation The consolidated financial statements comprise the financial statements of VDM Group Limited and its subsidiaries as at 30 June 2014. Control is achieved when VDM is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through it power over the investee. Specifically, VDM controls an investee if and only if VDM has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When VDM has less than a majority over the voting or similar rights of an investee, VDM considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements VDM’s voting rights and potential voting rights VDM re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one of more of the three elements of control. Consolidation of a subsidiary begins when VDM obtains control over the subsidiary and ceases when VDM loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date VDM gains control until the date VDM ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of VDM and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with VDM’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of VDM are eliminated in full on consolidation. 45 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction. If VDM loses control over a subsidiary, it: Derecognises the assets (including goodwill) and liabilities of the subsidiary; Derecognises the carrying amount of any non-controlling interest; Derecognises the cumulative translation differences, recorded in equity; Recognises the fair value of the consideration received; Recognises the fair value of any investment retained; Recognises any surplus or deficit in profit or loss; Reclassifies the parent's share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate, as would be required if VDM had directly disposed of the related assets or liabilities. (b) Business combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, VDM elects whether it measures the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred in administrative expenses. When VDM acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the VDM’s operating or accounting policies and other pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquiree is remeasured at fair value as at the acquisition date through profit or loss. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with AASB 139 either in profit or loss or in other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured and subsequent settlement is accounted for within equity. (c) Investment in associates and joint ventures An associate is an entity over which VDM has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. VDM’s investments in its associate and joint venture are accounted for using the equity method. Under the equity method, the investment in an associate or a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in VDMs share of net assets of the associate or joint venture since acquisition date. The statement of profit or loss reflects VDM’s share of the results of operations of the associate or joint venture. Any change in OCI of those investees is presented as part of VDM’s OCI. In addition, when there has been a change recognised directly in the equity of the associate or joint venture, VDM recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between VDM and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture. The aggregate of VDM’s share of profit or loss of an associate and a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate or joint venture. The financial statements of the associate or joint venture are prepared for the same reporting period as VDM. When necessary, adjustments are made to bring the accounting policies in line with those of VDM. After application of the equity method, VDM determines whether it is necessary to recognise an impairment loss on its investment in its associate or joint venture. At each reporting date, VDM determines whether there is objective evidence that the 46 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 investment in the associate or joint venture is impaired. If there is such evidence, VDM calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, then recognises the loss as ‘Share of profit of an associate and a joint venture’ in the statement of profit or loss. Upon loss of significant influence over the associate or joint control over the joint venture, VDM measures and recognises any retained investment at its fair value. Any difference between the carrying value amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of retained investment and proceeds from disposal is recognised in profit or loss. (d) Current versus non-current classification VDM presents assets and liabilities in statement of financial position based on current/ non-current classification. An asset is current when it is: Expected to be realised or intended to be sold or consumed in normal operating cycle Held primarily for the purposes of trading Expected to be realised within twelve months after the reporting period, or Cash or cash equivalent unless restrict3ed from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are classified as non-current. A liability is current when: It is expected to be settled in normal operating cycle It is held primarily for the purpose of trading It is due to be settled within twelve months after he reporting period, or There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. VDM classifies all other liabilities as non-current. Deferred tax asset and liabilities are classifies as non-current assets and liabilities. (e) Foreign currency translation Both the functional and presentation currency of VDM and its Australian subsidiaries is Australian dollars (A$). Transactions and balances Transactions in foreign currencies are initially recorded by VDM’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognized in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. (f) Revenue recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to VDM and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of Goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the cost incurred or to be incurred in respect of the transaction can be measured reliably. Risks and rewards of ownership are considered passed to the buyer at the time of delivery of the goods to the customers. Sale of development properties Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the cost incurred or to be incurred in respect of the transaction can be measured reliably. Transfer of the risks and rewards of ownership coincides with the transfer of the legal title. 47 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Construction and infrastructure development projects Revenue from construction and infrastructure development projects is recognised in the financial year in which the activities are performed on a percentage of completion method or, where an independent third party provides an estimate of the stage of works completed, based on the independent third party assessment. Where the percentage to complete method is used, it is based on the cost incurred to date over anticipated total contract costs. Where it is probable that total contract costs will exceed total contract revenue for a contract, the excess of costs over revenue is recognised as an expense immediately. Where the contract outcome cannot be measured reliably, revenue is recognised only to the extent expenses recognised are recoverable. Rendering of services Revenue from consulting services is recognised by reference to the stage of completion of a contract or contracts in progress at balance sheet date or at the time of completion of the contract and billing to the customer. Stage of completion is assessed by reference to the work performed. Where the contract outcome cannot be measured reliably, revenue is recognised only to the extent expenses recognised are recoverable. Interest Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Dividends Revenue is recognised when the shareholders’ right to receive the payment is established. Rental income Rental income from investment properties is accounted for on a straight-line basis over the lease term. Contingent rental income is recognised as income in the periods in which it is earned. Lease incentives granted are recognised as an integral part of the total rental income. (g) Income tax and other taxes Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except: when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or when the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except: when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or when the deductible temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, in which case a deferred tax asset is recognised only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. 48 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Tax consolidation legislation VDM Group Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation as of 1 July 2004. VDM Group Limited and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. VDM has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, VDM also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets and liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in VDM. Details of the tax funding agreement are disclosed in note 9. Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables, which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as part of operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (h) Non-current assets and disposal groups held for sale Non-current assets and disposal groups are classified as held for sale and measured at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. For an asset or disposal group to be classified as held for sale, it must be available for immediate sale in its present condition and its sale must be highly probable. Once classified as held for sale, they are not depreciated or amortised.. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition. (i) Property, plant and equipment Property, plant and equipment is stated at historic cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalisation. All other repairs and maintenance are recognised in profit or loss as incurred. 49 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Depreciation is calculated on a straight-line and diminishing balance method over the estimated useful life of the specific assets as follows: - Land – not depreciated Buildings – over 40 years Leasehold improvements – over 3 to 10 years Plant and equipment – over 3 to 15 years The assets’ residual values, useful lives and amortisation methods are reviewed and adjusted if appropriate, at each financial year end. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the period the item is derecognised. (j) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of an arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. VDM as a lessee Finance leases, which transfer to VDM substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in profit or loss. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that VDM will obtain ownership by the end of the lease term. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction in liability. (k) Contracts in progress Contracts in progress are valued at cost plus profit recognised to date based on the value of work completed, less provision for foreseeable losses. Costs include both variable and fixed costs directly related to specific contracts. Those costs that are expected to be incurred under penalty clauses and warranty provisions are also included. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract is recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period. An expected loss on the construction contract is recognised as an expense immediately as soon as the loss is foreseeable. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: total contract revenue can be measured reliably; it is probable that the economic benefits associated with the contract will flow to the entity; both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably; and the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: it is probable that the economic benefits associated with the contract will flow to the entity; and the contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably. 50 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (l) Intangible assets Intangibles Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is taken to the statement of comprehensive income in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level consistent with the methodology outlined for goodwill above. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised. Research and development costs Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when VDM can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project. Amortisation is recognised in the income statement in the line “administrative expenses”. The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use, or more frequently when an indication of impairment arises during the reporting period. Amortisation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Software – 4 years Development costs – 5 years (m) Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. (i) Financial assets Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are recognized initially at fair value and are subsequently measured at amortised cost using the effective interest method, less an allowance for impairment. The losses arising from impairment are recognized in the statement of profit or loss. VDM assesses, at each reporting date, whether there is objective evidence that a financial asset or group of financial assets is impaired. Individual debts that are known to be uncollectible are written off when identified. An impairment allowance is recognised when there is objective evidence that VDM will not be able to collect the receivable. Financial difficulties of the debtor, default payments or debts more than 60 days overdue are generally considered objective evidence of impairment. The amount of the impairment loss is the receivable carrying amount compared to the present value of estimated future cash flows, discounted at the original effective interest rate. 51 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (ii) Financial liabilities Trade and other payables Trade and other payables are carried at amortised cost due to their short term nature and are not discounted. They represent liabilities for goods and services provided to VDM prior to the end of the financial year that are unpaid and arise when VDM becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. Interest, when charged by the lender, is recognised as an expense using the effective interest method. Loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Fees paid on the establishment of loan facilities that are yield related are included as part of the carrying amount of the loans and borrowings. Gains and losses are recognised in profit or loss when the liabilities are de-recognised as well as through the effective interest rate amortisation process. The component of convertible bonds that exhibits characteristics of debt is recognised as a liability in the Statement of Financial Position, net of transaction costs. On issue of convertible bonds, the fair value of the liability component is determined using a market rate for an equivalent non-convertible bond and this amount is carried as a liability on the amortised cost basis until extinguished on conversion or redemption. The increase in the liability due to the passage of time is recognised as a finance cost. The remainder of the proceeds is allocated to the equity component and is recognised in shareholders’ equity. The carrying amount of the equity component is not remeasured in subsequent years. Except as explained below, borrowing costs are recognised as an expense when incurred. VDM currently has development properties which meet the definition of a qualifying asset. As such, the borrowing costs directly associated with the qualifying development properties are capitalised in the cost of the asset. (iii) Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position of there is a currently enforceable legal; right to offset the recognised amounts and there is an intention to settle on a net basis, to realised the assets and settle the liabilities simultaneously. (n) Inventories and development properties Inventories and development properties are measured at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Where held at cost, cost comprises all costs of purchase, cost of conversion and costs incurred bringing the inventories or development properties to their present location or condition. Inventory is measured on a first in, first out basis. (o) Impairment of non-financial assets other than goodwill Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. VDM conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset's recoverable amount is calculated. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. 52 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (p) Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over VDM’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the VDM’s cash-generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of VDM are assigned to those units or groups of units. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. The impairment testing involves using a value in use, discounted cash flow methodology for all the cash generating units to which goodwill has been allocated. When the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. When goodwill forms part of a cash-generating unit and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Impairment losses recognised for goodwill are not subsequently reversed. (q) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and security deposits with an original maturity of three months or less that are readily convertible to cash and which are subject to an insignificant risk of changes in value. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Bank overdrafts are included within interest bearing loans and borrowings in current liabilities on the balance sheet. (r) Treasury shares VDM's own equity instruments, which are reacquired for later use in employee share based payment arrangements (treasury shares) are deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of VDM's own equity instruments. (s) Earnings per share Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit attributable to members of the parent, adjusted for: Costs of servicing equity (other than dividends); The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and Other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares. divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. 53 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (t) Provisions and employee benefits Provisions are recognised when VDM has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where VDM expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the balance sheet date using a discounted cash flow methodology. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave due to be settled within 12 months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. Where a period end falls between pay dates an accrual is raised for any unpaid wages and salaries at the period end. Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity that match, as closely as possible, the estimated future cash outflows. (u) Share based payment transactions Equity settled transactions Senior executives of VDM receive share-based payment transactions (equity-settled) as part of their TEC (total employment cost). The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using a binomial model, further details of which are given in note 31. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of VDM (market conditions) if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). At each subsequent reporting date until vesting, the cumulative charge to the income statement is the product of: (i) (ii) the grant date fair value of the award; the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and the expired portion of the vesting period. (iii) The charge to the income statement for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding entry to equity. Equity-settled awards granted by VDM to employees of subsidiaries are recognised in the parent's separate financial statements as an additional investment in the subsidiary with a corresponding credit to equity. As a result, the expense recognised by VDM in relation to equity-settled awards only represents the expense associated with grants to employees of the parent. The expense recognised by VDM is the total expense associated with all such awards. Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. 54 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 The terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (note 11). Shares in VDM reacquired on-market are classified and disclosed as reserved shares and deducted from equity. 3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements and estimates on historical experience and on other various factors it believes to be reasonable under the circumstances, the result of which form the basis of the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Management has identified the following critical accounting policies for which significant judgements, estimates and assumptions are made. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Further details of the nature of these assumptions and conditions may be found in the relevant notes to the financial statements. (a) Determination of percentage of completion of contracts Contract revenue is recognised as revenue in the income statement using the percentage of completion method in the reporting periods in which the work is performed. The percentage complete is calculated on: actual costs over the sum of actual plus projected costs to complete the contract, or in the case where VDM participates in joint contracts and VDM’s costs are not representative of overall contract costs, based on the percentage of VDM’s costs to the total estimated cost for VDM associated with that project, or in the case where there is an independent assessment of the percentage complete, based on the independent assessment. Contract costs are recognised as an expense in the income statement in the reporting periods in which the work to which they relate is performed. Any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately. (b) Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences, where management considers that it is probable that future taxable profits will be available to utilise those temporary differences. (c) Impairment of non-financial assets other than goodwill VDM assesses impairment of all non-financial assets other than goodwill at each reporting date by evaluating conditions specific to VDM and to the particular asset that may lead to impairment. These include product and service delivery performance, technology, economic and political environments and future product expectations. If an impairment indicator exists the recoverable amount of the asset is determined. Given the current uncertain economic environment, management considered that the indicators of impairment were significant enough and as such the non-financial assets other than goodwill have been tested for impairment in this financial period. 55 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (d) Share-based payment transactions VDM measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined with the assistance of an external valuer using a binomial model, with the assumptions detailed in note 31. The accounting estimates and assumptions relating to equity-settled share based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity. (e) Estimation of useful lives of assets The estimation of the useful lives of assets has been based on historical experience as well as manufacturers’ warranties (for plant and equipment) and lease terms (for lease equipment). In addition, the condition of the assets is assessed at least once per year and considered against remaining useful life. Adjustments to useful lives are made when considered necessary. Depreciation charges are included in note 21. (f) Accounting for outstanding litigations Where VDM is involved with outstanding litigation, provisions are raised where claims against VDM are probable and are able to be measured, at the best estimate of the expenditure required to settle the obligation at the reporting date. Where claims are not able to be reliably measured or are subject to future events not wholly within control of the Group, disclosure is made by way of a contingent liability note (note 35). 56 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 4. INFORMATION RELATING TO SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES (a) Subsidiaries The consolidated financial statements include the financial statements of VDM Group Limited and the subsidiaries listed in the following table: Name VDM Hyparspace Pty Ltd Keytown Constructions Pty Ltd VDM Investments Pty Ltd VDM Developments Pty Ltd VDM Trading Pty Ltd (formerly VDM Engineering (Western Operations) Pty Ltd) VDM Consulting (NSW) Pty Ltd VDM Consulting (VIC) Pty Ltd VDM Engineering (Eastern Operations) Pty Ltd VDM Projects Pty Ltd VDM Asset Management Pty Ltd VDM Mining Pty Ltd (formerly Skilful Holdings Pty Ltd) Burchill VDM Pty Ltd VDM Construction Pty Ltd VDM Equipment Pty Ltd (formerly VDM Earthmoving Contractors Pty Ltd) VDM Group Ltd International (Dubai Branch) Pty Ltd VDM Contracting Pty Ltd VDM Construction (Eastern Operations) Pty Ltd Van Der Meer Consulting Vietnam Co Ltd BCA Consultants Pty Ltd The EB Trust VDM Consulting Pty Ltd VDM Equity Incentives Pty Ltd VDM CCE Pty Ltd Anagan Pty Ltd Belleng VDM Pty Ltd Barlow Gregg VDM Pty Ltd VDM Consulting (UAE) Pty Ltd VDMAHP Pty Ltd* Quartz Trust * Dormant entity (b) Ultimate parent VDM Group Limited is the ultimate Australian parent entity. Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Vietnam Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia % equity interest 2013 100% 100% 100% 100% 2014 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% - 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 100% 57 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 5. SEGMENT INFORMATION At 30 June 2013, VDM was organised into three reportable segments for management purposes namely Eastern Construction, Western Construction and Consulting. Since 30 June 2013, VDM has sold Eastern Construction, which comprised of VDM Construction (Eastern Operations) and divested the majority of its Consulting Businesses. Both reportable segments have been recognised as a discontinued operation for the year ended 30 June 2014. The Chief Operating Decision Makers of the Group are the Board of Directors. Based on internal reports provided to the Chief Operating Decision Makers, which are used to assess performance and allocate resources, there is only one remaining operating segment being the provision of construction services in Western Australia. Accordingly, the financial results from this segment will be equivalent to the financial statements of the Group as a whole for the year ended 30 June 2014. The four new operating divisions referenced in the directors’ report under VDM’s new business strategy were not in effect at 30 June 2014. Major customers VDM Group has a number of customers to which it provides services. During 2014, VDM had 3 customers that contributed greater that 10% of revenue. These three Western Australia construction services customers contributed a combined total of 67% of VDM revenue, with their individual contributions to revenue being 43%, 13% and 11%, respectively. During 2013, VDM had three customers that contributed greater than 10% of revenue. The two largest customers each contributed 20% of revenue and were reported under Western Construction and Eastern Construction Segments. The third largest customer contributed 11% of revenue and was reported under Western Construction. 58 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 6. OTHER REVENUE Interest Rental income Other Total other revenue 7. OTHER INCOME Gain on disposal of property, plant and equipment Total other income 8. EXPENSES (a) Finance costs Finance charges payable under hire purchase contracts Bank loans and overdrafts Total finance costs (b) Depreciation and amortisation Depreciation Amortisation of development costs and software Total depreciation and amortisation Depreciation and amortisation included in cost of services (c) Impairment charges Impairment of goodwill (note 22) Impairment of assets Impairment of development properties (note 17) Impairment of non-current assets held for sale (note 20) Impairment of property, plant and equipment (note 21) Total impairment charges (d) Employee benefits expense Wages and salaries Restructuring/ redundancy costs Superannuation expense Share based payment expense / (write-back) Other employee benefits expense Total employee benefits expense Employee benefit expenses included in cost of services Employee benefit expenses included in administration expenses 2014 $’000 Consolidated 2013 $’000 127 - 57 184 414 206 135 755 1,056 1,056 3,393 3,393 33 212 245 1,284 110 1,394 882 - - - - 101 101 11,335 765 554 (248) 324 12,730 6,164 6,566 50 146 196 2,834 212 3,046 2,476 16,717 370 116 395 - 17,598 45,525 172 1,492 (90) 2,140 49,239 37,567 11,672 59 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 9. INCOME TAX (a) Income tax expense 2014 $’000 Consolidated 2013 $’000 Income statement Current income tax: Income tax benefit on adjustments in respect of current income tax of previous years Deferred income tax: Relating to origination & reversal of temporary differences Prior year tax losses no longer recognised Losses recognised Adjustments in respect of deferred income tax of previous years Income tax (benefit) / expense reported in the income statement - - - - (1,706) 234 14,685 - (14) 14,905 (1,706) - Statement of changes in equity Deferred income tax: Paid up capital Income tax expense reported in equity - - 268 268 (b) Numerical reconciliation between aggregate tax expense recognised in the income statement and the tax expense calculated in the statutory income tax return Accounting loss before tax from continuing operations Accounting loss before tax from discontinued operations Accounting loss before income tax Prima facie income tax benefit @ 30% Employee share based payments Non-deductible items Unrecognised deductible temporary differences Prior year tax losses no longer recognised Other adjustments – discontinued operations Prior year over provision Aggregate income tax (benefit) / expense Income tax (benefit) / expense reported in the consolidated income statement Income tax expense attributed to discontinued operations Aggregate income tax (benefit)/ expense (16,406) (6,678) (23,084) (6,925) 74 408 6,443 - - (1,706) (1,706) (1,706) - (1,706) (58,552) (10,886) (69,438) (20,831) (27) 6,953 14,203 14,686 - (14) 14,970 14,905 65 14,970 60 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (c) Recognised deferred tax asset and liabilities Statement of financial position 2013 $’000 2014 $’000 Statement of comprehensive income 2013 $’000 2014 $’000 Consolidated Deferred tax liabilities Contracts in progress and inventory Other Gross deferred tax liabilities Deferred tax assets Provision for employee entitlements Provisions – other Recognised income tax revenue losses Trade and other receivable Trade and other payables Other assets Property, plant and equipment Contributed equity Discontinued operations Other Deferred tax assets not recognised Gross deferred tax assets Deferred tax expense Net deferred tax asset recognised in the balance sheet (d) Tax losses (59) - (59) (2,447) (306) (2,753) (2,387) (306) (2,693) 140 981 - 1,541 720 - 483 727 - 437 (4,970) 59 1,294 73 - 872 3,481 - 483 571 - 449 (4,470) 2,753 - - 1,154 (156) - (669) 2,761 - - 374 - 11 (782) 2,693 - (3,457) 306 (3,151) 355 76 14,685 40 (2,308) - - 268 (65) 803 4,470 18,324 15,173 VDM has estimated tax losses of $199,524,000 (2013: $98,226,000). Utilisation of the carried forward tax losses by the company is subject to satisfaction of the Continuity of Ownership Test (“COT”) or, failing that, the Same Business Test (“SBT”). It is likely that VDM has failed COT during the 2014 financial year, therefore in order to be able to utilise the losses in the future, VDM will be required to satisfy the SBT. Where VDM derives assessable income in a future income year, an assessment of whether the same business has been carried on between just before the COT failure and the intervening period will determine whether the losses are available for utilisation. (e) Unrecognised temporary differences At 30 June 2014, there are no unrecognised temporary differences associated with VDM’s investments in subsidiaries, or joint ventures, as VDM has no liability for additional taxation should unremitted earnings be remitted (2013: nil). (f) Tax consolidation Members of the tax consolidation group and the tax sharing arrangement VDM and its 100% owned Australian resident subsidiaries formed a tax consolidated group with effect from 1 July 2004. VDM Ltd is the head entity of the tax-consolidated group. Members of VDM have entered into a tax sharing agreement that provides for 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 on the basis that the possibility of default is remote. 61 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Tax effect accounting by members of the tax consolidated group Tax expense/ income benefit, deferred tax liabilities and deferred tax assets arising from temporary differences are recognised in the separate financial statements of the members of the tax consolidated group using the group allocation method. Current tax liabilities and assets and deferred tax assets and liabilities arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the Company (as head entity in the tax consolidated group). Members of the tax-consolidated group have entered into a tax funding agreement. Amounts are recognised as payable to or receivable by the Company and each member of the tax consolidated group in relation to the current tax liability paid or payable by the subsidiaries. Current tax liabilities in the subsidiaries are reflected back to the parent entity by way of specific tax loan accounts calculated and based on taxable income. 10. DISCONTINUED OPERATION On 7 October 2013, VDM sold 100% of the issued share capital of VDM Construction (Eastern Operations) Pty Ltd for $2,750,000. The business has been recognised in the accounts as a discontinued operation VDM announced on 28 November 2013 that it had divested the majority of its Consulting Businesses via a series of management buy-outs. The businesses have been recognised as a discontinued operation. The comparative discontinued operation results include the sale of Como Engineers Pty Limited, which was completed on 10 April 2013. Financial performance of discontinued operation Revenue Expenses Finance costs Loss on re-measurement to fair value less costs to sell Plant and equipment Goodwill (note 22) Loss on sale of discontinued operations Tax (expense) / benefit Loss from discontinued operations Earnings per share from discontinued operations Basic, loss for the year, from discontinued operations (cents per share) Diluted, loss for the year from discontinued operations (cents per share) Assets and liabilities and cash flow information of the disposed entities / businesses Assets Cash and cash equivalents Development properties Plant and equipment Intangible assets Contracts in progress Trade receivables Other assets Liabilities Trade and other liabilities Interest bearing debt Provision for employee entitlements Net assets attributable to discontinued operations 2014 $’000 19,988 (24,950) (4) (1,712) - (6,678) - (6,678) (0.22) (0.22) 3,666 675 765 80 6,181 1,472 387 13,226 8,714 159 1,274 10,147 3,079 2013 $’000 100,968 (106,013) (47) - (5,794) (10,886) (65) (10,951) (1.17) (1.17) 3,869 - 1,063 126 427 2,205 142 7,832 2,353 - 480 2,833 4,999 62 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Sale proceeds Transactions costs Net proceeds Less cash and cash equivalents Net cash flows from disposals Net cash flows Operating Investing Financing Net cash (outflow) / inflow 11. EARNINGS PER SHARE The following reflects the information used in the basic earnings per share computations: (a) Loss used in calculating loss per share Net loss from continuing operations attributable to ordinary equity holders of the parent Net loss from discontinued operations attributable to ordinary equity holders of the parent Net loss attributable to ordinary equity holders of the parent for basic earnings 2014 $’000 3,079 (3,666) (587) (57) (644) (1,708) 731 (1,080) (2,057) 2013 $’000 5,450 (451) 4,999 (3,869) 1,130 (168) 2,315 (20) 2,127 2014 $’000 Consolidated 2013 $’000 (14,700) (73,457) (6,678) (10,951) (21,378) (84,408) Consolidated 2013 2014 (b) Weighted average number of shares Weighted average number of ordinary shares for basic and diluted earnings per share 2,012,060,172 933,884,774 On 5 May 2014, VDM executed a $4,500,000 convertible loan and facility agreement with Kengkong. Subject to shareholder approval, and upon such approval being granted, Kengkong will have the right to convert the loan into 450,000,000 ordinary shares at a conversion price of $0.01 per share. Refer to note 25(e) for further details. 63 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 12. DIVIDENDS PROPOSED AND PAID (a) Declared and paid during the year: Dividends on ordinary shares: Final fully franked dividend for 2013: nil cents per share (2012: nil cents per share) Interim fully franked dividend for 2014: nil cents per share (2013: nil cents per share) (b) Dividend proposed, not recognised as a liability: Final fully franked dividend for 2014: nil cents per share (2013: nil cents per share) (c) Franking credits: Franking credits available for the subsequent financial year: - franking account balance as at the end of the financial year at 30% (2013: 30%) - franking debits that will arise from the refunds of income tax receivable as at the end of the financial year Franking credits available for future periods (d) Tax rates: The tax rate at which paid dividends have been franked is 0%. 13. CASH AND CASH EQUIVALENTS Cash at bank and in hand Total cash and cash equivalents Consolidated 2013 $’000 2014 $’000 - - - - - - - - 3,459 - 3,459 3,459 - 3,459 3,366 3,366 11,857 11,857 Cash at bank earns interest at floating rates based on daily or term bank deposit rates. Reconciliation to cash flow statement For the purposes of the Cash Flow Statement, cash and cash equivalents comprise the following at 30 June: Cash at bank and in hand Total cash for reconciliation of cash flow statement 3,366 3,366 11,857 11,857 14. SECURITY DEPOSITS Current Security deposits Total security deposits Non-Current Security deposits Total security deposits 1,242 1,242 3,584 3,584 5,238 5,238 - - Under the terms of the agreement with its principal banker and bond provider, VDM is required to place on deposit amounts as surety for bank guarantees and bonds issued in favour of VDM. The cash placed on deposit was not available for immediate use. 64 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 15. TRADE AND OTHER RECEIVABLES Current Trade receivables Allowance for impairment loss Other debtors Retentions Loans to related entities (note 30) Allowance for impairment of related loans and other debtors Total current receivables Non-Current Loan receivable (a) Ageing of trade receivables 0-30 days 31- 60 days > 60 days PDNI > 60 days CI PDNI – Past due but not impaired CI – Considered impaired (b) Allowance for impairment loss Balance at 1 July Charge for the year Utilised At 30 June 2014 $’000 Consolidated 2013 $’000 5,891 (5,138) 753 890 16 788 (1,457) 990 - - 331 99 323 5,138 5,891 4,364 3,108 (877) 6,595 12,684 (2,907) 9,777 2,068 1,143 788 (1,457) 12,319 258 258 5,639 2,741 1,397 2,907 12,684 3,462 2,714 (1,812) 4,364 Trade receivables are non-interest bearing and are generally on 30-60 day terms. An allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. An impairment loss of $3,108,000 (2013: $2,714,000 impairment loss) has been recognised by VDM. (c) Fair value and credit risk Due to the short term nature of these receivables, their carrying value is assumed to approximate their fair values. The maximum exposure to credit risk is the fair value of receivables. (d) Foreign exchange and interest rate risk Details regarding foreign exchange and interest rate risk exposure are disclosed in note 32. (e) Related party receivables For terms and conditions of related party receivables refer to note 30. 65 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 16. CONTRACTS IN PROGRESS Contract costs incurred to date Profit recognised to date (less recognised losses) Less progress billings Total construction contracts in progress Represented by: Amounts due from customers for contract work Amounts due to customers for contract work Total construction contacts in progress Amounts due from customers for contract work Other work in progress Total contracts in progress Amounts due to customers for contract work Other Total amounts due to customers for contract work Once billed, credit quality is expected to be the same as disclosed in note 15(c). 17. DEVELOPMENT PROPERTIES Development properties Total development properties 2013 $’000 Consolidated 2013 $’000 53,109 5,235 (58,351) (7) 218,217 (228) (217,801) 188 42 (49) (7) 42 7 49 (49) - (49) 7,388 (7,200) 188 7,388 460 7,848 (7,200) - (7,200) 3,389 3.389 4,061 4,061 Development properties represent an interest in an undeveloped land parcel and a 52% interest in an undeveloped land parcel held within the Quartz Trust in Western Australia. No interest was capitalised during the 2014 financial year (2013: nil). (a) Reconciliation of carrying amounts At 1 July Additions Discontinued operations (note 10) Impairment of development properties (note 17(b)) At 30 June (b) Impairment of development properties 4,061 3 (675) - 3,389 4,081 95 - (115) 4,061 There was no impairment loss recognised in the statement of comprehensive income in the 2014 financial year of (2013: $115,000). 18. INVENTORY Consumables at cost Total inventories 19. OTHER CURRENT ASSETS Prepayments Total other current assets 150 150 36 36 308 308 621 621 66 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 20. NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE Other property, plant and equipment Total non-current assets classified as held for sale (a) Reconciliation of carrying amounts At 1 July Transferred in Sale Transfer (to) / from property, plant and equipment (note 21(a)) Impairment At 30 June 21. PROPERTY, PLANT AND EQUIPMENT Leasehold improvements at cost Accumulated depreciation Freehold land and buildings at cost Accumulated depreciation Plant and equipment under lease at cost Accumulated depreciation and impairment Plant and equipment at cost Accumulated depreciation and impairment Total property, plant and equipment 2014 $’000 - - 900 - - (900) - - 683 (177) 506 900 - 900 611 (124) 487 8,582 (7,155) 1,427 3,320 Consolidated 2013 $’000 900 900 1,295 - (950) 950 (395) 900 1,043 (135) 908 - - - 2,381 (1,267) 1,114 16,035 (11,698) 4,337 6,359 67 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (a) Reconciliation of carrying amount Leasehold improvements At 1 July net of accumulated depreciation Additions Disposals Write down Impairment Depreciation Discontinued operations (note 10) Transferred from plant & equipment and plant & equipment under lease At 30 June net of accumulated depreciation Freehold land and buildings At 1 July net of accumulated depreciation Transferred from / (to) non-current assets held for sale (note 20) At 30 June net of accumulated depreciation Plant and equipment under lease At 1 July net of accumulated depreciation Additions Disposals Depreciation Transferred (to) / from plant & equipment and leasehold improvements Discontinued operations (note 10) At 30 June net of accumulated depreciation Plant and equipment At 1 July net of accumulated depreciation Additions Disposals Depreciation Transferred (to) plant & equipment under lease and leasehold improvements Write down Transfer from non-current assets classified as held for sale (note 20(a)) Discontinued operations at cost (note 10) Impairment At 30 June net of accumulated depreciation Total property, plant and equipment (b) Plant and equipment pledged as security for liabilities 2014 $’000 Consolidated 2013 $’000 908 173 (11) (14) (101) (221) (840) 612 506 - 900 900 1,114 - (19) (133) (7) (468) 487 4,337 889 (811) (1,114) (605) (100) - (1,169) - 1,427 3,320 615 2,511 (2,061) - - (172) (13) 28 908 950 (950) - 869 734 (130) (368) 77 (68) 1,114 10,413 771 (3,130) (3,165) (105) - - (447) - 4,337 6,359 Included in the balances above are assets of VDM to the value of $487,000 (2013: $1,114,000) granted as security for hire purchase debts. There are floating charges over the remaining property, plant and equipment, refer to Note 25 (c) for details of plant and equipment pledged as security for borrowings. (c) Impairment of property, plant and equipment Within VDM, recoverable amount was estimated for property, plant and equipment based on current market value. There was an impairment loss of $101,000 (2013: $nil) recognised in the statement of comprehensive income to reduce the carrying amount of plant and equipment to its recoverable amount. There was no reversal of impairment charges recognised in prior periods. (d) Transfers At 30 June 2014, freehold land and building to the value of $900,000 was transferred from non-current assets classified as held for sale to property, plant and equipment as a result of a change in use. 68 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 22. INTANGIBLE ASSETS AND GOODWILL Goodwill Software Accumulated amortisation and impairment Total intangibles assets and goodwill (a) Reconciliation of carrying amounts Goodwill At 1 July Impairment of goodwill Discontinued operations (note 10) At 30 June Software At 1 July net of accumulated amortisation Additions Disposals Amortisation Discontinued operations (note 10) At 30 June net of accumulated amortisation (b) Impairment losses recognised Consolidated 2013 $’000 2014 $’000 - - 3,025 (2,926) 99 4,090 (3,783) 307 - - - - 307 12 - (140) (80) 99 22,511 (16,717) (5,794) - 643 195 (35) (370) (126) 307 There was no impairment loss recognised in the statement of comprehensive income during the year ended 30 June 2014 in relation to intangible assets. An impairment loss of $16,717,000 was recognised for continuing operations during the year ended 30 June 2013. 23. INVESTMENT IN ASSOCIATE AND A JOINT VENTURE On 9 August 2013, VDM sold its 52% interest in Quartz South Hedland Pty Ltd, a jointly controlled entity involved in the development of a property for $1,350,000. VDM’s share of the assets and liabilities as at 30 June 2014 and 2013 and income and expenses of the jointly controlled entity for the years ended 30 June 2014 and 2013, are as follows: Joint venture’s statement of financial position Joint Venture’s current assets Share of Joint Venture’s equity Share of the joint venture’s revenue and profit Impairment Loss for the year from continuing operations The joint venture has no contingent liabilities or capital commitments as at 30 June 2014 and 2013. - - - - 2,596 1,350 (98) (98) 69 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 24. TRADE AND OTHER PAYABLES Current Trade payables and accruals Employee related payables Sundry creditors GST payable Total current payables (a) Fair values Consolidated 2013 $’000 2014 $’000 3,004 59 2,361 82 5,506 19,162 1,140 5,060 857 26,219 Due to the short term nature of these payables, their carrying value is assumed to approximate their fair value. (b) Interest rate, foreign exchange and liquidity risk Information regarding interest rate, foreign exchange and liquidity risk exposure is disclosed in note 32. (c) Financial guarantees VDM provides financial guarantees to its subsidiaries by way of a Deed of Cross Guarantee as disclosed in note 33(b). 70 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 25. INTEREST-BEARING LOANS AND OTHER BORROWINGS Current Interest bearing loan (9% fixed secured loan) Australia Kengkong (convertible loan (e)) Insurance premium funding Hire purchase liabilities (note 34) Total current interest-bearing loans and borrowings Non-Current Hire purchase liabilities (note 34) Total non-current interest-bearing loans and borrowings (a) Fair values Consolidated 2013 $’000 2014 $’000 - 4,569 - 191 4,760 49 49 1,018 - 442 322 1,782 299 299 The carrying amount of VDM’s current and non-current borrowings approximates their fair values. (b) Interest rate, foreign exchange and liquidity risk Information regarding interest rate, foreign exchange and liquidity risk exposure is disclosed in note 32. (c) Assets pledged as security Finance arrangements Plant and equipment Floating charge All the remaining wholly owned assets (d) Total financing facilities Bank overdrafts Bank guarantees Contract performance bond Total financing facilities available 487 1,114 16,033 56,739 139 2,085 5,287 7,511 450 7,000 25,000 32,450 The contract performance bond facility limit equals the value of the drawn bonds and the limit automatically reduces as bonds are returned or expire. The bank guarantee and credit card facilities are available subject to annual review. At 30 June 2014, $1,957,000 (2013: $4,798,000) was drawn on the bank guarantee facility and $5,287,000 (2013: $18,087,000) was drawn on the contract performance bond facility. (e) Terms of the convertible note On 5 May 2014, VDM executed a convertible loan and facility agreement with Kengkong to provide funding of $4,500,000 for ordinary ongoing operations. Kengkong advanced $4,500,000 under the $4.5 million Convertible Loan on 6 May 2014. The loan is unsecured. Subject to shareholder approval, and upon such approval being granted, Kengkong will have the right to convert the loan into 450,000,000 ordinary shares at a conversion price of $0.01 per share. If shareholder approval is not obtained or the loan is not converted into VDM shares by Kengkong, VDM must repay the loan within 30 business days after the date of the shareholder meeting held to approve conversion. An interest rate of 10% per annum applies on the loan until 20 October 2014 at which time the interest rate increases to 15% per annum. The conversion matter will be presented for shareholder approval at the Company’s annual general meeting to be held before the end of November 2014. 71 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 26. PROVISIONS Current Provision for employee entitlements Provision for insurance excess Provision for warranty Provision for onerous contracts Provision for loss making contracts Total current provision Non-Current Provision for employee entitlements Provision for onerous leases Total non-current provision (a) Movements in provisions 2014 $’000 Consolidated 2013 $’000 457 170 765 1,666 8 3,066 10 1,118 1,128 4,324 - 621 - 5,548 10,493 244 - 244 Employee entitlements $’000 Insurance excess $’000 Warranty $’000 Onerous contracts $’000 Loss making contracts $’000 Total $’000 Balance at 1 July 2013 Discontinued operations Arising during the year Utilised Balance at 30 June 2014 Current Non-Current Total provisions 4,568 (1,274) - (2,827) 467 457 10 467 - - 170 - 170 170 - 170 621 - 313 (169) 765 765 - 765 - - 3,605 (821) 2,784 1,666 1,118 2,784 5,548 - - 10,737 (1,274) 4,088 (5,540) (9,357) 8 8 - 8 4,194 3,066 1,128 4,194 (b) Nature and timing of provisions Insurance excess A provision is recognised for the balance of the excess expected to be paid on a professional indemnity insurance claim. It is expected that these costs will be incurred in the next financial year Warranty A provision is recognised for expected defect claims on completed construction projects based on past experience. It is expected that these costs will be incurred in the next financial year. The 30 June 2013 comparatives have been adjusted to reclassify the provision for warranty of $621,000 from trade payable to appropriately reflect the nature of the obligation.. Onerous contracts A provision is recognised for expected net unavoidable costs of meeting its obligations under onerous contacts. Loss making contracts A provision is recognised for the expected loss on construction contracts. 72 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 27. CONTRIBUTED EQUITY (a) Ordinary shares Issued and fully paid Movement in ordinary shares on issue Balance at 30 June 2013 Share issued to H&H at $0.01 per share Issue of conversion shares at $0.01 per share Exercise of bonus issue option at $0.05 per share Shares issued to Jimblebar creditors at $0.01 per share Private placement shares issued at $0.01 per share Shares issued under the 10 December 2013 entitlements offer prospectus Shares issued under the Shortfall offer contained in the 10 December 2013 entitlements offer prospectus Capital raising costs Balance at 30 June 2014 (b) Treasury shares Treasury shares held in trust Movement in treasury shares Balance at 30 June 2013 and 30 June 2014 Consolidated 2013 $’000 2014 $’000 268,509 248,286 Shares Value ($’000) 248,286 1,401 5,000 2 933,873,071 140,080,961 500,000,000 43,386 27 August 2013 29 November 2013 29 November 2013 29 November 2013 143,977,917 1,440 10 December 2013 75,000,000 750 28 January 2014 1,214,685,617 12,147 19 March 2014 120,000,000 1,200 3,127,660,952 2014 No. (1,717) 268,509 2013 No. 222,864 222,864 Shares 222,864 73 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (c) Terms and conditions of contributed equity Ordinary shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company. (d) Capital Management When managing capital, the Board's objective is to ensure the Company continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. The Board also aims to maintain a capital structure that provides the lowest weighted average cost of capital available to the Company. Following the significant restructuring activities during the year, the Company remains focussed on returning to profitability in the short term and maintaining an appropriate amount of working capital. Upon realisation of the benefits of the restructuring activities, the Directors shall reconsider the levels of after tax profits that the Company anticipates paying as dividends. The payment of dividends by the Company in the future will depend upon the availability of distributable earnings, the Company’s franking credit position, operating results, available cash flow, financial condition, taxation position, future capital requirements, as well as general business and financial conditions and any other factors the Directors may consider relevant. The Board considers net debt and total equity to be capital and monitors this through the gearing ratio. Given the low capital expenditure intensity nature of the restructured business model, VDM is targeting to maintain a gearing ratio of less than 15%. The gearing ratio based on continuing operations at 30 June 2014 and 2013 were as follows: Interest bearing loans and other borrowings (note 25) Less cash and security deposits (notes 13 and 14) Net (cash) / debt Total equity Total capital Gearing ratio (net debt: total capital) VDM is not subject to any externally imposed capital requirements. 28. RETAINED EARNINGS AND RESERVES (a) Movement in retained earnings Balance at the beginning of the year Net loss attributable to members of VDM Group Ltd Balance at the end of the year Consolidated 2013 $’000 2014 $’000 4,809 (8,192) (3,383) 929 (2,454) 2,081 (17,095) (15,014) 2,332 (12,682) (138%) (118%) (247,133) (21,378) (268,511) (162,725) (84,408) (247,133) The retained earnings balance at beginning of 2013 includes a $295,000 correction to the previously reported amount. The adjustment flows through to the balance at beginning of 2014. (b) Movement in other capital reserve Balance at the beginning of the year Share based payment (note 31) Balance at the end of the year 427 (248) 179 510 (83) 427 The other capital reserve is used to record the value of share based payment provided to employees, including KMP, as part of their remuneration. Refer to note 31 for further details of these plans. 74 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (c) Movement in equity reserve Balance at the beginning of the year Balance at the end of the year Consolidated 2013 $’000 2014 $’000 457 457 457 457 The equity reserve is used to record differences between the carrying value of non-controlling interests and the consideration paid/received, where there has been a transaction involving non-controlling interests that do not result in a loss of control. The reserve is attributable to the equity of the parent. 29. CASHFLOW STATEMENT INFORMATION (a) Reconciliation of net profit after tax to the net cash flows from operations Net loss after tax Non-Cash Items: Depreciation Amortisation Impairment of goodwill, assets, development costs and software Assets written off Allowance for doubtful debts Net profit on disposal of property, plant and equipment Share based payment reversal Settlement transaction costs from sale of subsidiary Profit on sale of subsidiary Loss recognised on remeasurement to fair value less costs to sell Loss on onerous contract Interest expense accrued Lease expense Change in assets and liabilities: Decrease in trade and other receivables Increase / (decrease) in contracts in progress Decrease in other assets Increase in development properties Decrease in inventory Decrease in deferred tax assets Decrease in trade and other creditors Decrease / (increase) in provisions Decrease / (increase) in current tax payable Net cash flows used in operating activities (b) Non-cash financing and investing activities Purchase of property, plant and equipment on hire purchase (21,378) (84,408) 1,468 140 101 114 3,108 (1,058) (248) - - 1,712 3,183 242 194 6,131 (5,531) 198 (3) 158 - (11,302) (8,001) (2,294) (33,066) 3,705 370 19,486 26 2,714 (3,383) (90) 451 (879) 4,004 - - - 29,249 15,035 1,508 (95) 555 14,968 (18,551) 3,177 7 (12,151) - (734) 75 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 30. RELATED PARTY DISCLOSURE Note 5 provides the information about VDM’s structure including details of the subsidiaries and the holding company. (a) Ultimate parent VDM Group Limited is the ultimate Australian parent entity. (b) Loans to an associate As at 30 June 2014, $788,000 (2013: $788,000) was receivable from Track Procurement Services Pty Ltd an associate disclosed in note 4. This loan receivable has been fully provided for. (c) Transactions with key management personnel Refer to note 9 in the remuneration report for transactions and balances with key management personnel. (d) Transactions with related parties other than key management personnel There were no transactions that were entered into with related parties other than key management personnel during 2014 and 2013. (e) Compensation for key management personnel Short Term Post Employment Share based payment Termination benefits Total compensation Consolidated 2013 2014 1,476,912 78,940 (248,084) 442,905 1,750,673 2,457,631 155,123 (82,779) 35,649 2,565,624 76 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 31. SHARE-BASED PAYMENT PLANS (a) Recognised share based payment expense Reversal arising from equity-settled share-based payment transactions Total share-based payment reversal (b) Types of share-based payment plans Consolidated 2013 $’000 2014 $’000 (248) (248) (90) (90) Employee Option Plan (EOP) On 31 January 2008 VDM offered employees the right to participate in a share option scheme. The offer closed on 11 February 2008. 1,710,000 options were taken up at an exercise price of $2.25. 25% of the options vested on 21 December 2008, 25% of the options vested on 21 December 2009, 25% of the options vest on 21 December 2010 and the remaining 25% of the options vest on 21 December 2011. No options lapsed or were cancelled during the year (2013: 90,625). Executive Performance Rights Plan (EPRP) Under the executive long term incentive (LTI), awards are made to executives who have an impact on VDM’s performance. LTI awards are delivered in the form of performance rights. A performance right is an entitlement to acquire a fully paid ordinary share in the capital of VDM at a future date for no consideration should all relevant vesting conditions be met. Performance rights vest over a period of 3 years where the Total Shareholder Return (TSR) that VDM delivers to its shareholders exceeds the average Total Shareholder Return of the S&P ASX 200 Industrial Group in the same corresponding period, provided that VDM has been profitable during that same period and the senior executive is employed on such date. Refer to the remuneration report for further details of the Executive Performance Rights Plan. The fair value of the performance right is estimated at the grant date using a Monte-Carlo simulation model for the market based vesting conditions and a binomial pricing model for the non-market based vesting conditions, taking into account the terms and conditions upon which the performance rights were granted. During the year 17,826,087 options lapsed during the year (2013: 16,565,217). (c) Summaries of options granted under the Employee Option Plan (EOP) The following table illustrates the number (No.) and weighted average exercise price (WAEP) of, and movements in, share options during the year: Outstanding at the beginning of the year Forfeited during the year Outstanding at the end of the year 2014 No. - - - 2014 WAEP - - - 2013 No. 90,625 (90,625) - 2013 WAEP 2.25 2.25 - The weighted average remaining contractual life for the share options outstanding as at 30 June 2014 is nil years (2013: nil years). There were no options granted during the year ended 30 June 2014 and 2013. 77 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (e) Summaries of performance rights granted under the Executive Performance Rights Plan (EPRP) The following table illustrates the number (No.) and weighted average exercise price (WAEP) of, and movements in, performance rights during the year: Outstanding at the beginning of the year Revalued during the year Forfeited during the year Granted during the year Outstanding at the end of the year 2014 No. 17,826,087 - (17,826,087) - - 2014 WAEP 0.0212 - (0.0212) - - 2013 No. 34,391,304 - (16,565,217) - 17,826,087 2013 WAEP 0.0398 (0.0278) (0.0398) - 0.0212 The weighted average remaining contractual life for the share options outstanding as at 30 June 2014 is nil years (2013: 0.92 years). The following table lists the inputs to the model used for the EPRP for the year ended 30 June 2014 and 2013: Expected volatility % Risk-free interest rate % Underlying security spot price $ Expected life of the performance rights (years) Model used for market based vesting conditions Model used for non-market based vesting conditions Value per performance right $ EPRP 70 2.39 0.058 2 to 3 Monte-Carlo Binomial 0.0398 The expected volatility reflects the assumption that the historical volatility from 27 October 2011 (since the trading halt) to the valuation date of 18 May 2012 is indicative of future trends, which may also not necessarily be the actual outcome. The performance rights granted to Mr Broad of 11,956,522 in 2012 were approved at the Annual General Meeting on 29 November 2012. The performance rights granted to Mr Broad were revalued at $0.012 per right based on the underlying share price at that time. Following the termination of A Broad on 23 August 2013, these performance rights have lapsed. There were no performance rights granted in 2014. 78 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 32. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES Credit, liquidity and market risk (including interest rate and foreign exchange risk) arise in the normal course of the VDM’s business. VDM manages its exposure to these key financial risks in accordance with VDM's financial risk management policy. The objective of the policy is to support the delivery of VDM's financial targets whilst protecting future financial security. VDM's principal financial instruments comprise receivables, payables, bank loans and overdrafts, hire purchase liabilities, cash and security deposits. VDM uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate and foreign exchange risk and assessments of market forecasts for interest rate and foreign exchange. Ageing analysis and monitoring of specific credit allowances are undertaken to manage credit risk, liquidity risk is monitored through the development of future rolling cash flow forecasts. Primary responsibility for identification and control of financial risks rests with the Audit and Risk Committee under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below. Risk exposures and responses (a) Market risk Interest rate risk Interest rate risk is the risk that VDM’s financial position will be adversely affected by movements in interest rates that will increase the cost of floating rate debt or opportunity losses that may arise on fixed rate borrowings in a falling interest rate environment. Interest rate risk on cash and security deposits is not a material risk due to the short term nature of these financial instruments. The financial instruments exposed to variable interest rate risk are as follows: Financial assets Cash and cash equivalents (note 13) Security deposits (note 14) Financial liabilities Interest bearing borrowings and loans (note 25) Consolidated 2013 $’000 2014 $’000 3,366 4,826 11,857 5,238 - - The following table summarises the sensitivity on the interest rate exposures, (excluding opportunity cost of fixed rate borrowings) in existence at the balance sheet date. The sensitivity is based on foreseeable changes over a financial year. Post-tax gain/ (loss) + 1% (200 basis points) – 1% (100 basis points) Impact on profit 57 (57) 120 (120) The movement in profit is due to lower / higher interest income from variable rate cash balances. Other than retained earnings, there is no impact on equity in the consolidated entity. 79 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 Foreign currency risk Foreign currency risk arises from transactions, assets and liabilities that are denominated in a currency that is not the functional currency of the transacting entity. Measuring the exposure to foreign currency risk is achieved by regularly monitoring and performing sensitivity analysis on VDM’s financial position. Currently there is no foreign exchange hedge programme in place. At balance date, VDM had no exposure on their foreign financial instruments. (b) Credit risk Credit risk arises from the financial assets of VDM, which comprises cash and cash equivalents and trade and other receivables. VDM’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. VDM manages its credit risk by trading only with recognised, creditworthy third parties, and as such collateral is not requested nor is it VDM's policy to securitise its trade and other receivables. Customers are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Receivables balances are monitored on an ongoing basis. At balance sheet date there were no significant concentrations of credit risk within VDM and financial instruments are held amongst reputable Australian financial institutions thus minimising the risk of default of counterparties. The maximum exposure to credit risk at the reporting date was as follows: Current Cash and cash equivalents (note 13) Security deposits (note 14) Trade and other receivables (note 15) Consolidated 2013 $’000 2014 $’000 3,366 4,826 990 9,182 11,857 5,238 12,319 29,414 80 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (c) Liquidity risk Liquidity risk is the risk that the entity will encounter difficulty in meeting its commitments concerning its financial liabilities. As a result, the liquidity position of VDM is managed to ensure sufficient liquid funds are available to meet our financial commitments in a timely and cost-effective manner. VDM continually monitors its liquidity position including cash flow forecasts to determine the forecast liquidity position and maintain appropriate liquidity levels. The objective of VDM is to have sufficient cash and finance facilities to meet short term commitments, and to fund capital expenditure through a mixture of hire purchase and cash. The table below reflects all contractually fixed payments for settlement, repayments and interest resulting from recognised financial assets and liabilities and does not recognise any cash for unresolved claims against our projects which have not been recognised as income. The obligations presented are the undiscounted cash flows for the respective upcoming fiscal years. Cash flows for financial assets and liabilities without fixed amount or timing are based on the conditions existing at 30 June 2014. Repayment obligations in respect of the bank loans, hire purchase facilities and trade and other payables are as follows: No later than one year Later than one year but not later than two years Later than two years but not later than three years Consolidated 2013 $’000 2014 $’000 10,432 49 - 10,481 28,709 253 63 29,025 The following table reflects a maturity analysis of financial assets and liabilities based on management’s expectation of settlement. Year ended 30 June 2014 Consolidated Financial assets Cash and cash equivalents (note 13) Security deposits (note 14) Other receivables (note 15) Trade receivables (note 15) Financial liabilities Trade and other payables Other payables Hire purchase liabilities (note 34) Interest bearing loans and borrowings Net maturity Year ended 30 June 2013 Consolidated Financial assets Cash and cash equivalents (note 13) Security deposits (note 14) Other receivables (note 15) Trade receivables (note 15) Financial liabilities Trade and other payables Other payables Hire purchase liabilities (note 34) Interest bearing loans and borrowings Net maturity Total $’000 0-60 days $’000 61 days - 1 year $’000 1-5 years >5 years $’000 $’000 3,366 4,826 237 753 9,182 1,843 3,663 253 4,722 10,481 (1,299) 3,366 207 237 430 4,240 758 3,663 34 - 4,455 (215) - 1,035 - 323 1,358 1,085 - 170 4,722 5,977 (4,619) - 3,584 - - 3,584 - - 49 - 49 3,535 - - - - - - - - - - - Total $’000 0-60 days $’000 61 days - 1 year $’000 1-5 years >5 years $’000 $’000 11,857 5,238 2,542 9,777 29,414 12,289 14,551 676 1,508 29,024 390 11,857 - 2,542 8,380 22,779 11,577 14,551 43 786 26,957 (4,178) - 5,238 - 1,397 6,635 712 - 317 722 1,751 4,884 - - - - - - - 316 - 316 (316) - - - - - - - - - - - 81 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (d) Fair value At 30 June 2014 there are no financial assets or financial liabilities which are accounted for at fair value. There is no difference between the carrying amounts and fair value of financial assets and financial liabilities presented in the Consolidated Statement of Financial Position. 33. PARENT ENTITY INFORMATION Information relating to VDM Group Ltd: Current assets Total assets Current liabilities Total liabilities Issued capital Accumulated losses Option reserve Total shareholders’ equity Loss of the parent entity Total comprehensive loss of the parent entity (a) Bank guarantees: Parent entity 2013 $’000 2014 $’000 54,079 12,685 14,376 12,051 268,509 (268,511) 636 634 26,750 12,651 15,627 10,614 248,286 (247,133) 884 2,037 (22,250) (22,250) (93,298) (93,298) As at 30 June 2014 VDM Group Ltd had $313,000 (2013: $260,000) held in bank guarantees with BankWest, relating to bonds on leased property. (b) Guarantees in relation to debts of subsidiaries: Pursuant to class order 98/1418 VDM Group Ltd and the Closed Group have entered into a Deed of Cross Guarantee on 1 February 2010. The effect of the deed is that VDM Group Ltd has guaranteed to pay any deficiency in the event of winding up of controlled entities or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. (c) Contingent liabilities Refer to note 35(a) for legal claims against the parent entity. (d) Property, plant and equipment commitments VDM Group Ltd had no capital commitments at 30 June 2014 and 2013. 82 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 34. COMMITMENTS (a) Operating leases Future minimum rentals payable under non-cancellable operating leases as follows: Within one year One year or later but not later than five years After more than five years Total minimum lease payments Consolidated 2013 $’000 2014 $’000 2,794 5,788 - 8,582 2,338 5,335 - 7,673 During the year VDM made operating lease payments totalling $2,458,000 (2013: $2,261,000). Other operating leases entered into on various commercial properties have an average life of between 2 and 5 years and generally provide VDM with a right of renewal, at which time, all terms are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental. Contingent rentals are generally based on movements in the Consumer Price Index and do not include the renewal period. There are no restrictions placed upon VDM from entering into the leases. (b) Hire purchase commitments Not later than one year After one year but not more than five years Total minimum hire purchase payments Future finance charges Present value of minimum lease payments (note 25) Total hire purchase liability Included in the financial statements as: Current – Hire purchase liabilities Non – Current Hire purchase liabilities Total included in interest bearing liabilities (note 25) 204 49 253 (13) 240 191 49 240 360 316 676 (55) 621 322 299 621 VDM has plant and equipment under hire purchase agreements expiring from 1 to 2 years. (c) Property, plant and equipment commitments VDM has no capital commitments at 30 June 2014 (2013: $115,000) (d) Remuneration commitments VDM did not have any remuneration commitments at 30 June 2014 (2013: $nil) other than as disclosed in the remuneration report. 83 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 35. CONTINGENCIES (a) Legal claim VDM is involved in the provision of engineering and construction services. The nature of these services is such that claims arise from time to time for and against VDM. A number of claims and counter-claims exist at 30 June 2014, the majority of which would not lead VDM Group to incur material losses. Four matters existing as at 30 June 2014 may lead to VDM incurring material losses if claims made by counterparties are successful for the full amount of the values claimed. REG Camp VDM is the claimant under a contract dispute with the Principal related to works performed by VDM under contract at the Central REG Accommodation Camp. At this stage both parties have agreed to attempt to have the matter resolved by means of non-binding expert determination. VDM has not disclosed the value of each party’s claims as it may be prejudicial to the successful outcome thereof. Gendredge Pty Ltd VDM engaged Gendredge Pty Ltd (Gendredge) as a subcontractor on a project in Western Australia. Gendredge has commenced proceedings in the courts of Western Australia for amounts it claims are owed by VDM to Gendredge. VDM has issued a defence and counter-claim against Gendredge for their repudiation of the contract which was accepted by VDM together additional costs incurred to engage an alternate subcontractor to complete the work not completed by Gendredge. Statements of claim, defence and counter-claims have been submitted to the court. The Parties met in August 2014 in mediation without an agreed position being achieved at that time. In the event that Gendredge is successful in the courts of Western Australia, VDM may incur a material loss. VDM has not disclosed the value of the claims as it may be prejudicial to the successful outcome thereof. Jimblebar Since the Notice of Take-over Direction issued to VDM relating to the Jimblebar Ammonium Nitrate Storage Facility Contract (Jimblebar Contract) on 21 August 2013, VDM has received various claims from BHP for the costs of rectification of defective works, liquidated damages, costs to complete and monies otherwise claimed due under the Jimblebar contract. The total amount claimed is approximately $9,000,000. All claims are disputed by VDM Group. On 19 December 2013 BHP demanded and was paid $2,422,000 under a bond facility provided by VDM under the Jimblebar Contract, thereby reducing BHP’s claims by that amount. VDM asserts that it is entitled to around $10,000,000 for variations, delay damages and other payments under the Jimblebar Contract from BHP. In addition, VDM claims that the Jimblebar Contract was repudiated by BHP when BHP took action to take out of VDM’s hands all remaining work on 21 August 2013. VDM is currently preparing an alternative significantly larger claim against BHP under quantum meruit. VDM continues to seek full resolution of all outstanding matters and will continue to pursue its claims including the reimbursement of these bonds. Costs of services from continuing operations includes $2,422,000 to reflect the payment to BHP on 19 December 2013 under the bond facility. No assets or liabilities relating to the above claims have been recognised in the accounts. Natadola Bay In 2006 VDM’s insurers were notified of a claim under VDM’s professional indemnity insurance cover for engineering consulting work provided by one of VDM’s sold consulting businesses. VDM have recently been advised that the Plaintiff is reviewing their position. VDM has a remaining maximum exposure of approximately $130,000 relating to this matter under its insurance policy. (b) Bank guarantees and insurance bonds: As at 30 June 2014 VDM had bank guarantees with BankWest of $1,957,000 (2013: $4,798,000) given to various clients for satisfactory contract performance. As at 30 June 2014 VDM had insurance bonds with Assetinsure Pty Ltd of $5,287,000 (2013: $18,087,000) given to various clients for satisfactory contract performance. 84 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 36. SIGNIFICANT EVENTS AFTER THE BALANCE DATE Mr Perrott resigned as a Non-Executive Director of VDM on 7 August 2014. On 22 September 2014, VDM executed a convertible loan and facility agreement with Kengkong to provide funding of $10,000,000 for ordinary ongoing operations and project development proposals which are approved by Kengkong ($10m Convertible Loan). The $10m Convertible Loan is unsecured. Subject to shareholder approval, and upon such approval being granted, Kengkong will have the right to convert the $10m Convertible Loan into 1,000,000,000 ordinary shares at a conversion price of $0.01 per share. If shareholder approvals are not obtained for conversion of both the $10m Convertible Loan and the $4.5m Convertible Loan that VDM also has with Kengkong, or Kengkong does not elect to convert the $10m Convertible Loan into VDM shares then VDM must repay the $10m Convertible Loan within 60 business days after the shareholders meeting held to obtain approval (Shareholders Meeting). Interest is calculated at a rate of 8% per annum until one month after the date of the Shareholders Meeting, and 13% per annum following that date. A default interest rate of 2% per annum plus the applicable interest rate shall apply to any amount the Company fails to pay by the time it is due under the agreement. In the event that shareholders do not approve conversion of the $4.5m Convertible Loan and the $10m Convertible Loan, a fee of A$100,000 is payable by VDM in addition to the $45,000 fee payable in respect of the non-approval by shareholders of conversion of the $4.5m Convertible Loan. Conversion matters for both the $10m Convertible Loan and the $4.5m Convertible loan will be presented for consideration by shareholders at the Company’s Annual General Meeting to be held before the end of November 2014. 37. AUDITORS’ REMUNERATION Amount received or receivable by Ernst & Young for: An audit or review of the financial statements Other audit or review procedures Non audit fees – tax compliance Total auditors’ remuneration Consolidated 2013 2014 $ $ 126,935 - 129,840 256,775 293,550 8,498 145,279 447,327 85 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 38. CLOSED GROUP CLASS ORDER DISCLOSURES (a) Closed group class order disclosures The consolidated financial statements include the financial statements of VDM Group and the subsidiaries listed in the following table: Name VDM Hyparspace Pty Ltd Keytown Constructions Pty Ltd VDM Investments Pty Ltd VDM Developments Pty Ltd VDM Trading Pty Ltd (formerly VDM Engineering (Western Operations) Pty Ltd) VDM Consulting (NSW) Pty Ltd VDM Consulting (VIC) Pty Ltd VDM Engineering (Eastern Operations) Pty Ltd VDM Projects Pty Ltd VDM Asset Management Pty Ltd VDM Mining Pty Ltd (formerly Skilful Holdings Pty Ltd) Burchill VDM Pty Ltd VDM Construction Pty Ltd VDM Equipment Pty Ltd (formerly VDM Earthmoving Contractors Pty Ltd) VDM Group Ltd International (Dubai Branch) Pty Ltd VDM Contracting Pty Ltd VDM Construction (Eastern Operations) Pty Ltd Van Der Meer Consulting Vietnam Co Ltd BCA Consultants Pty Ltd The EB Trust VDM Consulting Pty Ltd VDM Equity Incentives Pty Ltd VDM CCE Pty Ltd Anagan Pty Ltd Belleng VDM Pty Ltd Barlow Gregg VDM Pty Ltd VDM Consulting (UAE) Pty Ltd VDMAHP Pty Ltd Quartz Trust Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Vietnam Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia % equity interest 2013 2014 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% - 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 100% 86 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (b) Entities subject to class order relief Pursuant to Class Order 98/1418, relief has been granted to VDM Construction Pty Ltd from the Corporations Act 2001 requirements for the preparation, audit and lodgement of their financial reports. As a condition of the Class Order, VDM Group Ltd, VDM Trading Pty Ltd (formerly VDM Engineering (Western Operations) Pty Ltd), VDM Engineering (Eastern Operations) Pty Ltd, Barlow Gregg VDM Pty Ltd, VDM Consulting (NSW) Pty Ltd, VDM Consulting (VIC) Pty Ltd, VDM Projects Pty Ltd, VDM Mining Pty Ltd (formerly Skilful Holdings Pty Ltd), VDM Group Ltd International (Dubai Branch) Pty Ltd, VDM Asset Management Pty Ltd, Burchill VDM Pty Ltd, Belleng VDM Pty Ltd, VDM Consulting Pty Ltd, BCA Consultants Pty Ltd, Keytown Constructions Pty Ltd, VDM Investments Pty Ltd, VDM CCE Pty Ltd, VDM Construction Pty Ltd, VDM Developments Pty Ltd, ACN 087 442 877 Pty Ltd (formerly called VDM Constructions Pty Ltd), VDM Equipment Pty Ltd (formerly VDM Earthmoving Contractors Pty Ltd), VDM Contracting Pty Ltd, VDM Equity Incentives Pty Ltd, (the “Closed Group”), entered into a Deed of Cross Guarantee on 1 February 2010. The effect of the deed is that VDM Group Ltd has guaranteed to pay any deficiency in the event of winding up of controlled entities or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that VDM Group Ltd is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. (c) Statement of comprehensive income The consolidated income statement and balance sheet of the entities that are members of the Closed Group are as follows: Loss from continuing operations before income tax Income tax benefit Loss after tax from continuing operations (Loss) / profit from discontinued operation Net loss for the year Non-controlling interest Dividends paid Accumulated losses at the beginning of the year Accumulated losses at the end of the year Closed Group 2013 $’000 2014 $’000 (16,488) 1,706 (14,782) (6,678) (21,460) (58,497) (14,905) (73,402) (10,951) (84,353) (245,208) (266,668) (160,855) (245,208) 87 VDM GROUP LIMITED NOTES TO THE FINANCI AL STATEMENTS For the year ended 30 June 2014 (d) Statement of financial position ASSETS Current assets Cash and cash equivalents Security deposit Trade and other receivables Contracts in progress Inventory Income tax receivable Development properties Other assets Non-current assets classified as held for sale Total current assets Non-current assets Trade and other receivables Security deposit Investments Property, plant and equipment Deferred tax assets Intangible assets and goodwill Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Amount due to customers for contract work Interest-bearing loans and borrowings Current tax liabilities Provisions Total current liabilities Non-current liabilities Interest-bearing loans and other borrowings Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Accumulated losses TOTAL EQUITY Closed Group 2013 $’000 2014 $’000 3,361 1,242 6,690 49 150 - - 36 11,528 - 11,528 - 3,584 665 3,320 - 99 7,668 19,196 5,812 49 4,760 1,680 3,066 15,367 224 1,128 1,352 16,719 2,477 11,853 5,238 19,410 7,848 308 - 675 621 45,953 900 46,853 257 - 665 6,359 - 307 7,588 54,441 27,110 7,200 1,782 3,974 9,872 49,938 299 243 542 50,480 3,961 268,509 636 (266,668) 2,477 248,286 883 (245,208) 3,961 88 VDM GROUP LIMITED DIRECTORS’ DECLARATI ON For the year ended 30 June 2013 In accordance with a resolution of the directors of VDM Group Limited, I state that: In the opinion of the directors: (a) the financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) (c) (d) (e) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 2; Subject to the satisfactory achievement of the matters described in note 2, there are reasonable grounds to believe that the consolidated entity will be able to pay its debts as and when they become due and payable; this declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 June 2014; and as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 38 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee. On behalf of the Board Dr D Hua Executive Chairman and Interim CEO Perth, Western Australia 26 September 2014 89 Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Independent auditor's report to the members of VDM Group Limited Report on the financial report We have audited the accompanying financial report of VDM Group Limited, which comprises the consolidated statement of financial position as at 30 June 2014, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor's responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation TD:MW:VDM:068 2 Opinion In our opinion: a. the financial report of VDM Group Limited is in accordance with the Corporations Act 2001, including: i ii giving a true and fair view of the company's financial position as at 30 June 2014 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 2. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 2 in the financial report which describes the principal conditions that raise doubt about the entity’s ability to continue as a going concern. These conditions indicate the existence of a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern and therefore, the company may be unable to realise its assets and discharge its liabilities in the normal course of business. Report on the remuneration report We have audited the Remuneration Report included in of the directors' report for the year ended 30 June 2014. 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. Opinion In our opinion, the Remuneration Report of VDM Group Limited for the year ended 30 June 2014, complies with section 300A of the Corporations Act 2001. Ernst & Young T G Dachs Partner Perth 26 September 2014 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation TD:MW:VDM:068 VDM GROUP LIMITED ASX ADDITIONAL INFORMATION For the year ended 30 June 2014 SHAREHOLDER INFORMATION Additional information required by ASX Listing Rules and not shown elsewhere in the report is set out below. The information is current as of 11 August 2014. Shareholder H&H Holdings Australia Pty Ltd Australia Kengkong Investments Co Pty Ltd J P Morgan Nominees Australia Limited Golden Bloom Investments Pty Ltd UBS Nominees Pty Ltd UOB Kay Hian (Kong Kong) Limited James Howard Nigel Smalley Austindo (WA) Pty Ltd Citicorp Nominees Pty Ltd Jako Industries Pty Ltd Miss Shan He Mr Brian Hon Leung Lee Mr Aaron Francis Quirk Duncraig Investment Services Pty Ltd Mr John Finlay Mckenzie Rowley Mrs Cheng Huang Mr Joseph Paul Snare Noel Kennedy Smith Washington H Soul Pattinson and Company Limited Mrs Feng Lin Total SHARES IN VOLUNTARY ESCROW There are no shares in voluntary escrow. SUBSTANTIAL SHAREHOLDINGS Number of ordinary fully paid shares held 1,085,110,976 620,000,000 241,220,469 125,000,000 121,404,232 72,470,474 50,000,000 30,000,000 24,478,236 21,219,720 20,502,126 18,000,000 12,558,250 12,400,000 12,000,000 10,500,000 9,364,075 8,000,000 7,000,000 6,897,874 2,508,126,432 % held of capital 34.69 19.82 7.71 4.00 3.88 2.32 1.60 0.96 0.78 0.68 0.66 0.58 0.40 0.40 0.38 0.34 0.30 0.26 0.22 0.22 80.20 The following shareholders have declared a relevant interest in the number of voting shares at the date of giving notice under Part 6C.1 of the Corporations Act. Shareholder H & H Holdings Australia Pty Ltd Australia Kengkong Investments Co Pty Ltd Number of ordinary fully paid shares held 1,085,110,976 620,000,000 % held of capital 34.69 19.82 92 VDM GROUP LIMITED ASX ADDITIONAL INFORMATION For the year ended 30 June 2014 DISTRIBUTION OF SHAREHOLDINGS Range of holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and above Total Number of shareholders 602 802 442 1,441 891 4,178 Number of ordinary shares 229,548 2,265,648 3,458,082 59,602,070 3,062,105,604 % 0.01 0.07 0.11 1.91 97.90 3,127,660,952 100.00 The number of shareholders with less than a marketable parcel is 2,878 holding in total 33,493,277 shares. VOTING RIGHTS All ordinary shares issued by VDM Group Limited carry one vote per share without restriction. 93
Continue reading text version or see original annual report in PDF format above