ABN 80 129 643 492 ANNUAL REPORT 2015 108 FERTILITY SPECIALISTS 881 NURSES, COUNSELLORS AND PATIENT SUPPORT 212 SCIENTISTS 44 FERTILITY CLINICS 6 DAY HOSPITALS 58 LABORATORIES VIRTUS HEALTH ABN 80 129 643 492 VIRTUS HEALTH ANNUAL REPORT 2015 1 CHAIRMAN’S STATEMENT CHIEF EXECUTIVE’S OVERVIEW OPERATING AND FINANCIAL REVIEW BOARD OF DIRECTORS DIRECTORS’ REPORT FINANCIAL REPORT NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF VIRTUS HEALTH LIMITED SHAREHOLDER INFORMATION CORPORATE DIRECTORY 2 4 6 12 14 31 36 83 84 86 88 LEADING MINDS LEADING SCIENCE Virtus Health is one of the most successful medical collaborations of its kind in the world. We combine the strength of clinical collaboration with advanced scientific techniques to deliver the best possible outcomes for our patients. For over 30 years, our clinicians, scientists, nurses, counsellors and support staff have helped shape the face of Assisted Reproductive Services (ARS). Our patients benefit from the wisdom and insights of our fertility specialists, our ability to rapidly implement advances in clinical practice, and our strength to deliver this care across a broad network of clinics and day hospitals. Our research, innovation and expertise in fertility treatment extends to advanced genetic testing, andrology, embryology, cryopreservation and fertility preservation. 2 VIRTUS HEALTH ANNUAL REPORT 2015 RESEARCH AND DEVELOPMENT IS INTEGRAL TO THE CLINICAL AC- TIVITY OF VIRTUS AND SUPPORTS IMPROVED OUT- COMES FOR OUR PATIENTS. CHAIRMAN’S STATEMENT I AM PLEASED TO PRESENT THE ANNUAL REPORT OF VIRTUS HEALTH FOR THE FINANCIAL YEAR ENDING 30 JUNE 2015. Our results for the financial year ending 30 June 2015 reflected cycle growth weakness in our Australian state markets and growth from our international activities. Group revenue increased 16% to $233.7 million primarily as a result of growth in Ireland and Singapore. We also benefited from the acquisitions of two Australian clinics, Sunshine Coast IVF and TasIVF in October and December 2014 respectively. Net profit after tax decreased 1.7% to $30.4 million. There were a number of significant factors that contributed to this decline. A change in clinical practice at Melbourne IVF resulted in a reduction in cycles and this translated into a revenue loss of approximately $3 million with a corresponding decline in earnings. The change led by our scientific and clinical team at Melbourne IVF has, we believe, had a positive benefit for our Victorian patients and so in the longer term will benefit the company. In Singapore we incurred set-up costs and start-up losses of approximately $1.9 million. In addition there were non-cash interest charges on future acquisition liabilities related to Sims Clinic Limited (“Sims”) and TasIVF of $1.0 million and acquisition transaction costs of $1.4 million. After adjusting for the non-recurring expenses and non- cash interest adjusted net profit after tax increased by 5.1% to $33.6 million. In the Australian markets in which we operate there was an overall market volume increase of 1.4% for Assisted Reproductive Services (“ARS”) during the financial year, although this was largely driven by the increased activity of a bulk bill ARS provider in New South Wales (“NSW”). Some markets have remained weak with the Victorian market contracting 1.3% and Queensland market unchanged against prior year comparatives. Underlying cycle volume in Virtus clinics declined by 1.6% with growth in New South Wales offset by a decline in Victoria and continued weakness in the Queensland market. We continue to experience growth in “The Fertility Centre” (“TFC”) branded clinics with all states meeting growth objectives. However, this growth has been offset by weakness in full service cycles and the loss of a small amount of market share in Victoria and Queensland. Specialised diagnostic revenue increased by 14.6% in FY2015, as a result of greater utilisation of cytogenetic and non-invasive pre-natal testing activities. Our commitment to improving patient outcomes through the application of diagnostic testing to improve ARS success rates and the treatment of complex infertility conditions has shown positive outcomes in terms of revenue growth, but more importantly, the delivery of healthy babies. VIRTUS HEALTH ANNUAL REPORT 2015 3 GROUP REVENUE INCREASED 16% TO $233.7M For the year ended 30 June 2015 the Directors are pleased to announce a final dividend of 14.0 cents per share fully franked and this resulted in a full year dividend payout of 27 cents per share fully franked, an increase of 3.8% over the prior year comparison. Finally I would like to thank all of our staff, fertility specialists and management teams who contribute daily to the success of Virtus Health. As you will appreciate from this year’s expansion activities we are fortunate to have a team of highly professional people committed to improving the services provided by Virtus Health. PETER MACOURT Chairman ADJUSTED NPAT INCREASED 5.1% TO $33.6M Our day hospitals achieved revenue growth of 4.3% with non-IVF revenue growth of 8.7% offsetting the weakness in IVF procedure revenue. City West Specialist Day Hospital in Sydney performed particularly well, and several locations improved their non-IVF procedure activity which now accounts for 56% of day hospital revenue. Sue Channon and the executive team continued to build our domestic and international ARS capabilities with a range of new developments. Sims acquired in May 2014 and based in Dublin, Ireland enjoyed a year of strong volume growth and also expanded their clinic network to Cork, in the south west of Ireland. We also welcomed the team at Rotunda IVF to Sims in December and I am pleased to report that we completed our Irish business integration activities in June. In January we opened a Virtus branded clinic in Singapore. We recruited three highly regarded fertility specialists and a senior embryology scientist who all have extensive experience in the Singapore ARS sector. The clinic fit-out and preparation for accreditation was supported by several people from our Australian teams working closely with our new Singaporean team. I am pleased to report that interest in our services from patients and other Singaporean fertility specialists has been increasing and we believe the clinic will provide an excellent service to the Singapore community. In Australia we acquired TasIVF and Sunshine Coast IVF, which we rebranded to TFC Sunshine Coast. We also established a new TFC in Wollongong and a consulting and monitoring centre at Sydney Adventist Hospital. In our core ARS activity the long term trend of women over 30 delaying the birth of children is a key factor in each of our geographic markets and the demand for ARS is expected to grow. Although market growth rate has moderated in Australia, Virtus believes that demand for ARS will be supported by a range of social and demographic drivers, continued improvements in success rates and the increased application of specialised diagnostic services. We will continue to selectively invest in our network of full service and low cost fertility clinics and also the clinical and scientific services offered to patients in Australia and offshore. The Board is working closely with management to identify international markets where we can leverage the considerable expertise Virtus has in the provision of ARS. Research and development is integral to the clinical activity of Virtus and supports improved outcomes for our patients. Our international reputation as opinion leaders in reproductive medicine is based on and evidenced by, our contributions as lecturers at major national and international conferences and our publications in key scientific journals and textbooks. Virtus staff in multiple disciplines are internationally recognised as experts and innovators in rapidly developing areas as diverse as fertility preservation, advanced genetic testing, embryology, cryopreservation and andrology. In a rapidly evolving field, research and development constitutes a vital part of our business development strategy. 4 VIRTUS HEALTH ANNUAL REPORT 2015 CHIEF EXECUTIVE’S OVERVIEW THE DEDICATION, SKILL AND COM- MITMENT OF OUR FERTILITY SPECIAL- ISTS, STAFF AND A DIVERSE RANGE OF SPECIALIST PROVIDERS IN OUR DAY HOSPI- TALS MAKES VIR- TUS HEALTH THE SUCCESS IT IS TO- DAY. Virtus is an Australian healthcare services company who has been a leader in the provision of Assisted Reproductive Services (“ARS”) for more than 30 years. Our clinicians, scientists and support staff have significantly influenced the development of the profession and its services from both an academic and clinical perspective. It is from this leadership position and our research and innovation across all aspects of our business that we ensure our patients have access to some of the most highly qualified doctors and scientists in Australia and leading scientific and clinical outcomes. Our strategy for diversification into new markets has continued this year with expansion both in Australia and internationally, driving growth. Whilst our main activity is providing patients with ARS, our vertically integrated model which includes specialised diagnostics and day hospital services ensures our patients receive continuous and high quality care. Our medical teams are highly regarded internationally for their clinical and scientific expertise, and our fertility treatment programs, including fertility preservation, advanced genetic testing, embryology, cryopreservation and andrology are considered some of the safest and most successful in the world. Our doctors are supported by a team of medical, administrative and professional health care managers, allowing them to concentrate on patient care. Virtus Health is one of the largest integrated practices and one of the most successful medical collaborations of its kind in the world. With 108 of the world’s leading fertility specialists supported by 1,093 professional staff, we are the largest network and provider of fertility services in Australia. We are the largest provider of ARS in Ireland and in January 2015, we opened our first Virtus branded fertility centre in Singapore. Our combined expertise creates a unique and powerful body of knowledge which when combined with the collegial team approach of our specialists and scientists, means we are able to find new and advanced solutions for achieving success for our patients. Our expert teams of clinicians and scientists meet regularly to compare and review results and outcomes to ensure that we remain leaders in our field and meet or exceed global best practice standards. Our clinics, fertility specialists and scientists are formally recognised by relevant national Colleges for the training of future fertility specialists and surgeons. In Ireland, the Royal College of Surgeons recognises Sims IVF as a teaching hospital and has to date educated over 700 students, 50% of whom are from the Middle East. In Australia, the Royal Australian and New Zealand College of Obstetricians and Gynaecologists (RANZCOG) recognise Virtus Clinics for sub specialist fertility training, and we are committed through these training programs to making a significant contribution to the profession both now and in the years to come. VIRTUS HEALTH ANNUAL REPORT 2015 5 We continue to maintain best practice care and success by facilitating our doctors, nurses and researchers involvement in international educational forums to search for ideas for continual improvement in our fertility programs as well as sharing our world-class research on the global stage. Virtus actively encourages the exchange of clinical and scientific ideas through a range of internal committees and also supports an annual international clinical day, where fertility specialists and senior scientists from across the group meet to review best practice and new clinical and scientific developments in ARS. FERTILITY SPECIALISTS AND EMPLOYEES The dedication, skill and commitment of our fertility specialists, staff and a diverse range of specialist providers in our day hospitals makes Virtus Health the success it is today. It is this group of people who are collectively responsible for our exceptional patient care which is evident in our leading market position in Australia and Ireland. In new territories such as Singapore we will deliver the same high level of patient care and service. As an organisation we support our staff in the ongoing delivery of operational excellence and exceptional patient care. Virtus encourage all employees to apply for employment opportunities across the group and subject to meeting the qualification requirements of individual position descriptions, seek to appoint employees to new positions. Virtus is committed to ensuring the safety and well-being of all its employees and has a program committed to workplace safety. We have recently upgraded our incident reporting software to improve monitoring of workers’ health and safety particularly in the areas of hazard analysis and incident reporting. Virtus provides an employee assistance program to support the well-being of its staff. LOOKING FORWARD Virtus has built a strong foundation on which to base future growth. We are the leading provider of ARS in Australia and Ireland and have established a new clinic in Singapore. Our focus on driving innovation and advancing the science and technology behind ARS ensures we remain at the forefront of fertility treatments. Our core strategy of “Leading Minds, Leading Science” remains essential to our long term growth plans and ability to attract the best doctors and staff to care for an increasing number of patients. We have a full service premium ARS offering that is augmented by a clearly differentiated lower cost offering which enables us to optimise market share and this is underpinned by our vertically integrated business model across three key pillars – ARS, diagnostics and day hospitals. This vertically integrated platform offers the full suite of services and treatment options for individuals requiring ARS and is a platform that facilitates further growth and diversification. We will continue to grow our footprint with acquisitions and greenfield developments in key international and domestic markets and will look to further diversify our product offering across our three key pillars of ARS, diagnostics and day hospital services. Sue Channon Group CEO 6 VIRTUS HEALTH ANNUAL REPORT 2015 OPERATING AND FINANCIAL REVIEW DEMAND FOR ARS WILL BE SUPPORTED BY A RANGE OF SOCIAL AND DEMOGRAPHIC DRIVERS AS WELL AS CON- TINUED IMPROVEMENTS IN SUCCESS RATES AND THE AP- OUR GLOBAL FOOTPRINT IRELAND SIMS CLINIC ACQUIRES ROTUNDA IVF EXPANDING LOCAL PRESENCE AUSTRALIA LEADING FERTILITY SERVICES PROVIDER, WITH A NETWORK OF DAY HOSPITALS AND SPECIALISED DIAGNOSTICS SINGAPORE FIRST VIRTUS BRANDED FERTILITY CENTRE OPENS IN JANUARY 2015 VIRTUS HEALTH ANNUAL REPORT 2015 7 KEY FEATURES OF THE RESULTS ARE: $233.7m REVENUE INCREASED BY 16.1% TO $233.7 $61.4m GROUP EBITDA INCREASED BY 3.3% TO $61.4M $71.0m SEGMENT EBITDA INCREASED BY 4.6% TO $71.0M $68.6m AUSTRALIAN SEGMENT EBITDA INCREASED BY 1.9% TO $68.6M INTERNATIONAL SEGMENT EBITDA WAS $2.4M INCLUDING SINGAPORE OPERATION START-UP LOSSES AND INTERNATIONAL BUSINESS DEVELOPMENT EXPENSES OF $1.9M ADJUSTED NPAT AFTER ADDING BACK NON-RECURRING EXPENSES AND NON-CASH ACQUISITION RELATED INTEREST INCREASED BY 5.1% TO $33.6M $30.4m NET PROFIT AFTER TAX (“NPAT”) DECREASED BY 1.7% TO $30.4M Segment EBITDA in Australia was adversely affected by a change in clinical practice at Melbourne IVF. The clinical and scientific team implemented a combined ‘blastocyst’ (five day embryo transfer) and two day embryo transfer protocol with the specific protocol applied being determined by the scientific and clinical team. The change in practice resulted in a slight reduction in the number of fresh cycles and a more significant reduction in frozen cycles undertaken and this translated into a revenue loss of approximately $3m compared to the prior year. In the period since the change was effected Melbourne IVF has recorded improvements in their implantation rates for fresh and frozen embryos. Adjusted NPAT is calculated after adding back non-recurring expenses and non- cash acquisition related interest totalling $3,174,000. Details of this adjustment are set out below: • Singapore set-up costs of $911,000; • A gain of $300,000 on the acquisition of Sunshine Coast IVF; • Acquisition transaction costs of $1,146,000; • Non-cash interest of $960,000 related to non-current liability to acquire non- controlling interests; • Amortisation of bank fees of $653,000 relating to the retired borrowing facility; and • Tax effect credit of $196,000 related to the above items. ACQUISITIONS Virtus completed three acquisitions during the year: • IVF Sunshine Coast – since acquiring the remaining 80% of this full service clinic at the end of October 2014 in conjunction with the three fertility specialists and the Scientific Director Virtus has established two new clinics: – Queensland Fertility Group, a full service clinic based in Buderim; and – a new TFC, based at Kawana Private Hospital • TasIVF – Virtus acquired 70% of Tasmania’s leading IVF clinic based in Hobart on 5 December 2014; and • Human Assisted Reproductions Limited, (“Rotunda IVF”) – our 70% owned subsidiary, Sims Clinic acquired an Irish fertility centre, the HARI clinic from the Rotunda Hospital in Dublin for €6 million on 31 December 2014. 8 VIRTUS HEALTH ANNUAL REPORT 2015 WE RECENTLY ANNOUNCED THE ARRIVAL OF THE FIRST BABIES BORN USING OUR NEW KARYOMAP- PING DIAGNOS- TIC TECHNOLO- GY. OPERATING AND FINANCIAL REVIEW CONTINUED • IVFAustralia opened The Fertility Centre (“TFC”) a new low cost facility in Wollongong, New South Wales in February. Virtus now has six low cost facilities in Australia. Specialised diagnostic revenue increased by 14.6% in FY2015, with greater utilisation of cytogenetic and non-invasive pre-natal testing activities. Diagnostic test revenue growth continues to be a focus for the business and Virtus has invested in new gene sequencing technologies to further develop our capability and patient services in our PGD and genetic activities in Melbourne and Brisbane. We recently announced the arrival of the first babies born using our new karyomapping diagnostic technology. In our day hospitals Virtus achieved revenue growth of 4.3% with non-IVF revenue growth of 8.7% offsetting the weakness in IVF procedure revenue. City West Specialist Day Hospital in Sydney performed particularly well, and several locations improved their non-IVF procedure activity which now accounts for 56% of day hospital revenue. AUSTRALIA There was an overall market volume increase in New South Wales, Queensland, Tasmania and Victoria of 1.4% for Assisted Reproductive Services (“ARS”) and the eastern state market outlook remains subdued. (Note: market volume reflects fresh and cancelled cycles). Underlying cycle volume in Virtus clinics declined by 1.6% with growth in New South Wales offset by a decline in Victoria and continued weakness in the Queensland market. Virtus continues to experience growth in its “The Fertility Centre” branded clinics with all states meeting growth objectives. However, this growth has been offset by weakness in full service cycles. Growth has been impacted by the following factors: • Although market growth in NSW has improved in the twelve months to 30 June by 4.5% compared to prior year comparatives (Source: Medicare Statistics for item numbers 13200,13201,13202), as previously disclosed Virtus has not achieved comparable cycle growth. Virtus believes the market growth is attributable to the increased activity of the bulk bill provider in NSW; • Virtus lost a small amount of market share in Victoria and Queensland in the financial year. In addition the state markets have remained weak with the Victorian market contracting 1.3% and the Queensland market unchanged against prior year comparatives; VIRTUS HEALTH ANNUAL REPORT 2015 9 PGD PRE-IMPLANTATION GENETIC DIAGNOSIS CASE STUDY – KARYOMAPPING Discovering a child has developed a deadly hereditary disease is a devastating experience for parents. Now a new genetic test introduced by Virtus Health, using karyomapping technology, will provide peace of mind to couples seeking to have children where disease-causing genes could be passed on through natural conception. Karyomapping enables Virtus Health scientists to develop a test for a particular couple and a particular inheritable disease faster than any other pre-implantation genetic diagnosis (PGD) technology available in Australia. Then when transferring the embryo through an IVF cycle, our fertility specialists can select the embryo that does not carry a gene that causes a life threatening condition. The first Australian couples to use the karyomapping technology delivered healthy babies coincidentally on the same day. One baby will grow up free from the risk of developing breast or ovarian cancer from a mutated BRCA 1 gene, while the other baby will not develop congenital myasthenic syndrome, after it was discovered the parents were carriers of the rare condition. OPERATING AND FINANCIAL REVIEW CONTINUED Sims Clinic, acquired in May 2014, enjoyed a strong year with cycle volumes increasing by 11% compared to FY2014; EBITDA margin improved to 21% of revenue after absorbing start-up costs for our new full service Cork clinic; volumes have improved steadily since opening in January 2015. OUTLOOK The long term trend of women over 30 delaying the birth of children is a key factor in each of our geographic markets and the demand for ARS is expected to grow. Although market growth rate has moderated in Australia, Virtus believes that demand for ARS will be supported by a range of social and demographic drivers as well as continued improvements in success rates and the application of specialised diagnostic services. 10 VIRTUS HEALTH ANNUAL REPORT 2015 INTERNATIONAL Virtus completed the development and commissioning of a new Virtus branded clinic in Singapore. Operating EBITDA loss for the activity in Singapore was $1,905,000 in the financial year. Virtus has contracted three fertility specialists in Singapore and IVF cycles commenced during late February 2015; four non-contracted fertility specialists are also using the facility for some of their ARS activities. CASE STUDY – GROWTH IN SOCIAL EGG FREEZING An increasing number of women are choosing to freeze their eggs in order to increase their chances of having a family in later life. This relatively new option for women applies Virtus Health’s excellence in medical fertility preservation. Our doctors and scientists have already led the way in preserving the future fertility of cancer patients before they undergo radiotherapy or chemotherapy treatment. The cryopreservation technique used in egg freezing, called vitrification, has been likened to snap freezing peas. IVFAustralia, Melbourne IVF and Queensland Fertility Group have held a number of successful events providing Australian women with the ‘facts about egg freezing’. VIRTUS HEALTH ANNUAL REPORT 2015 11 CAPITAL EXPENDITURE Total expenditure on tangible and intangible assets was $12.6 million in FY2015 (FY2014; $8.0 million) including approximately $3.4 million in our new facility in Singapore. We also invested in new fertility clinics in Wollongong, NSW and Cork, Ireland. DEBT AND INTEREST EXPENSE Virtus negotiated a new Syndicate Facility Agreement with the existing group of facility providers and this was completed in October 2014. The total facility available was increased by $60 million to $210 million and the consolidated entity comfortably met the financial covenants as set out in the agreement. At 30 June 2015, total facilities drawn were $153 million in cash and $3,430,000 in guarantees. Cash balances at the end of June 2015 were $18,371,000. OTHER FINANCIAL LIABILITIES ($24.7 MILLION) The non-controlling interests of Sims Clinic Limited and TasIVF Pty Limited hold put options established at the time of acquisition. Consequently in accordance with accounting standards the group is required to recognise a liability for the estimated consideration to acquire the non-controlling interests. This liability has been discounted at the date of acquisition and the corresponding entry is included in the business combinations reserve. The unwinding of the inherent discounting within the liability has resulted in a non-cash interest expense in FY2015 of $960,000 (FY2014: $45,000). AMORTISATION OF BORROWING COSTS Amortisation of borrowing cost expense for FY2015 was $911,000, including a write off of $653,000 in respect of the now retired Syndicate Facility Agreement originally established at the IPO in June 2013. TAXATION The effective tax rate on operating earnings for FY2015 was 28.3% (FY2014: 29.4%) as a consequence of the true-up of the prior year R&D tax concession and also the lower tax rate applied to the Virtus Ireland activities. EARNINGS PER SHARE Basic earnings per share decreased by 5.0% to 36.86 cents per share (FY2014: 38.80 cents per share). Diluted earnings per share decreased by 5.0% to 36.54 cents per share (FY2014: 38.48 cents per share). DIVIDEND A final dividend of 14.00 cents per share fully franked (October 2014:14.00 cents per share) will be paid on 16 October to shareholders on the register at 2 October 2015. CASE STUDY – VIRTUS FERTILITY CENTRE SINGAPORE Virtus Fertility Centre, Singapore has been a great example of Virtus Health leveraging its impressive expertise in fertility to enter new markets. Virtus Fertility Centre opened in January 2015 as one of the largest dedicated fertility centres in the region providing consultation and monitoring services, with its own theatres and embryo transfer rooms connected to the first ISO-certified ‘clean room’ embryology laboratory in Singapore ensuring optimal care for developing embryos. This is complemented by a radio frequency identification (RFID) electronic witnessing system – another first for the region – to further enhance patient safety and mitigate risks. 12 VIRTUS HEALTH ANNUAL REPORT 2015 BOARD OF DIRECTORS Peter Macourt Chairman Peter Macourt Chairman BCom.; ACA; GAICD BCom.; ACA; GAICD Peter is a former director and Chief Operating Officer of News Limited. Whilst at News Limited, Peter is a former director and Chief Operating Officer of News Limited. Whilst at News Limited, he served as a director of Premier Media, Foxtel, Independent Newspapers Limited and a he served as a director of Premier Media, Foxtel, Independent Newspapers Limited and a number of subsidiaries and associated companies of The News Corporation Limited. number of subsidiaries and associated companies of The News Corporation Limited. Peter is currently Chairman of SKY Network Television Limited and a director of Prime Media Limited. Susan Channon Group CEO Sue Channon Group CEO Registered Nurse Div1; OR Management Certificate Registered Nurse Div1; OR Management Certificate Susan (Sue) has held senior management positions in various Australian healthcare Susan (Sue) has held senior management positions in various Australian healthcare organisations organisations for over 20 years. Before her appointment to Chief Executive Officer (‘CEO’) for over 20 years. Before her appointment to Chief Executive Officer (‘CEO’) of the company of the company in November 2010, Sue was CEO of IVF Australia Pty Ltd. Prior to joining the in November 2010, Sue was CEO of IVF Australia Pty Ltd. Prior to joining the company, Sue was company, Sue was State Manager for NSW and ACT for Medical Imaging Australia, the National State Manager for NSW and ACT for Medical Imaging Australia, the National Director of Nursing Director of Nursing for Mayne Group (now part of Ramsay Health Care), CEO of Kareena Private for Mayne Group (now part of Ramsay Health Care), CEO of Kareena Private Hospital, CEO Hospital, CEO of Castlecrag and Mosman Private Hospital and CEO and Director of Nursing for of Castlecrag and Mosman Private Hospital and CEO and Director of Nursing for Castlecrag Private Hospital. Castlecrag Private Hospital. Dennis O’Neill Non-executive Director Dennis O’Neill Non-executive Director BSc. (Hons) Mech. Eng; CPE (ret), FIEA; FAICD; FAIM BSc. (Hons) Mech. Eng; CPE (ret), FIEA; FAICD; FAIM Dennis is the former Chief Executive Officer and Managing Director of Evans Deakin Industries Dennis is the former Chief Executive Officer and Managing Director of Evans Deakin Industries Ltd and United Group Ltd and the former Chairman of Decmil Group Ltd. In March 2009 Dennis Ltd and United Group Ltd and the former Chairman of Decmil Group Ltd. In March 2009 Dennis was appointed as Chairman and Advisory Chairman of Queensland Fertility Group Pty Ltd was appointed as Chairman and Advisory Chairman of Queensland Fertility Group Pty Ltd and stepped down as the Advisory Chairman in October 2014. He is also Advisory Chairman and stepped down as the Advisory Chairman in October 2013. He is also Advisory Chairman to several unlisted companies and was the Steel Supplier Advocate for the Commonwealth to several unlisted companies and was the Steel Supplier Advocate for the Commonwealth Government until 30 June 2014. Government until 30 June 2014. VIRTUS HEALTH ANNUAL REPORT 2015 13 Lyndon Hale Executive Director MBBS; FRACOG; CREI Lyndon has been the Medical Director of Melbourne IVF Pty Ltd since 2008. He is also director of Reproductive Surgery at The Women’s Hospital, and is on the board of the Fertility Society of Australia. Lyndon is highly regarded for his knowledge and proactive approach and brings extensive experience in assisted reproduction treatments to the care of his patients. Peter Turner Non-executive Director BSc.; MBA; GAICD Prior to joining the company, Peter served as Executive Director and Chief Operating Officer of CSL Limited and was the founding President of CSL Behring LLC. Peter is currently Chairman of NPS MedicineWise and Ashley Services Group Limited. Sonia Petering Non-executive Director LLB; BCom; FAICD Sonia is a corporate lawyer who brings extensive experience as a Director. She is currently Chair of the Rural Finance Corporation of Victoria and a Non-Executive Director of Victoria’s Transport Accident Commission. Sonia is also a director of TAL, Dia-Ichi Life Australia Pty Limited. 14 VIRTUS HEALTH ANNUAL REPORT 2015 DIRECTORS’ REPORT The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘consolidated entity’) consisting of Virtus Health Limited (referred to hereafter as the ‘company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2015. DIRECTORS The following persons were directors of Virtus Health Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: A final dividend of 14.00 cents per share, fully franked, will be paid on 16 October 2015 to the shareholders on the register at 2 October 2015. REVIEW OF OPERATIONS The profit for the consolidated entity after providing for income tax and non-controlling interest amounted to $29,434,000 (30 June 2014: $30,885,000). A reconciliation of Segment EBITDA to profit before tax for the year is as follows: Peter Macourt – Chairman Susan Channon Dennis O’Neill Lyndon Hale Peter Turner Sonia Petering (appointed on 1 September 2014) Marcus Darville (resigned on 7 October 2014) PRINCIPAL ACTIVITIES During the financial year the principal continuing activities of the consolidated entity were the provision of healthcare services which include fertility services, medical day procedure services and medical diagnostic services. DIVIDENDS Dividends paid during the financial year were as follows: Interim ordinary dividend for the year ended 30 June 2015 of 13.0 cents (2014: 12.0 cents) per fully paid ordinary share paid in April 2015 Final ordinary dividend for the year ended 30 June 2014 of 14.0 cents per fully paid ordinary share paid in October 2014 Consolidated 2015 $’000 2014 $’000 10,385 9,446 10,915 21,300 – 9,446 Segment EBITDA Share-based payment expense Net gain on acquisition of associate Consolidated 2015 $’000 70,977 (945) 300 2014 $’000 67,881 (456) – Other non-trading expenses (8,977) (8,021) EBITDA (reported) 61,355 59,404 Depreciation and amortisation expense (9,994) (8,192) EBIT Interest revenue Interest expense Interest on other financial liability – non-cash interest Amortisation of bank facility fee 51,361 220 (7,235) (960) (911) 51,212 349 (7,211) (45) (463) Profit before income tax from continuing activities 42,475 43,842 The consolidated entity continued to engage in its principal activities, the results of which are disclosed in the attached financial statements. For further information on review of operations, please refer to the Chief Executive’s operating and financial review which precedes this Directors’ report. VIRTUS HEALTH ANNUAL REPORT 2015 15 SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS In September 2014, Virtus Health renegotiated and extended its bank facilities to September 2019 and added a further $60 million debt capacity to support its growth and acquisition strategies. Virtus Health acquired 80% of the issued share capital and units of IVF Sunshine Coast Pty Ltd on 31 October 2014; 70% of the issued share capital and units of Tas IVF Pty Ltd on 5 December 2014; and formed a new company, Human Assisted Reproduction Ireland on 31 December 2014 to acquire the IVF business and assets from The Governors and Guardians of the Hospital For The Relief Of Poor Lying In Women, Dublin (commonly known as the Rotunda Hospital). For more information please refer to note 40. Virtus Health also established a clinic in Singapore, Virtus Fertility Centre Singapore Limited; the clinic commenced operations in December 2014. There were no other significant changes in the state of affairs of the consolidated entity during the financial year. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR No matter or circumstance has arisen since 30 June 2015 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Based on the long term trend of women in Australia delaying the birth of children and the fertility rate among Australian women aged over 30 continuing to increase as a consequence of a range of social and economic demographic factors, we expect that demand for assisted reproductive services and the associated diagnostic testing and day hospital procedures will continue to increase. We will continue to invest in our network of fertility clinics and also the clinical and scientific services offered to patients to enable the consolidated entity to meet the demand from the Australian market. Additionally we will consider further investment in our international network of fertility clinics. BUSINESS RISKS The consolidated entity is faced with certain material business risks that could have an effect on the financial prospects of the consolidated entity. These include: Change in Commonwealth Government funding/increasing patient out of pocket expenses Patients receive partial reimbursement for the consolidated entity’s services through Commonwealth Government programs, including the Medicare Benefits Schedule (‘MBS’) and the Extended Medicare Safety Net (‘EMSN’). We anticipate that each of these programs will be reviewed during 2015. If the level of reimbursement provided by these programs for the consolidated entity’s services were to change, the consolidated entity’s patients may face higher out-of-pocket expenses for Assisted Reproductive Services. This may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. Availability of fertility specialists The consolidated entity relies on maintaining its relationship with existing fertility specialists, as well as contracting with and growing In-Vitro Fertilisation (‘IVF’) cycles for new fertility specialists to assist in capturing market growth, increasing market share and replacing any retiring fertility specialists. If the consolidated entity cannot successfully maintain its relationship with existing fertility specialists or contract and grow IVF cycles for new fertility specialists this may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. Variability of growth The growth in patient demand and IVF cycles has historically experienced variability over short-term periods notwithstanding the long-term social and demographic trends driving patient demand for Assisted Reproductive Services. Variability in the historic growth in IVF cycles over short-term periods has been attributable to changes in local economic conditions, natural disasters and regulatory changes. Whilst Virtus is diversified across regional markets, the consolidated entity’s revenue generation and profitability can be positively and negatively affected in the short term by variability in the growth in IVF cycles in the regional markets in which it operates. Increased competition The consolidated entity may face increased competition from new IVF providers and this may cause the consolidated entity to experience reduced demand for its range of services, potentially leading to a reduction in the consolidated entity’s revenue and profitability. ENVIRONMENTAL REGULATION The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. 16 VIRTUS HEALTH ANNUAL REPORT 2015 INFORMATION ON DIRECTORS Name: Peter Macourt Title: Chairman Qualifications: BCom.; ACA; GAICD Experience and expertise: Peter is a former director and Chief Operating Officer of News Limited. Whilst at News Limited, he served as a director of Premier Media, Foxtel, Independent Newspapers Limited and a number of subsidiaries and associated companies of The News Corporation Limited. Other current directorships: Chairman of SKY Network Television Limited (since August 2002); Director of Prime Media Limited Former directorships (last 3 years): None Special responsibilities: Member of the Audit Committee and the Nomination and Remuneration Committee. Interests in shares: 18,485 ordinary shares held directly Interests in options: None Name: Susan Channon Title: Chief Executive Officer Qualifications: Registered Nurse Div1; OR Management Certificate Experience and expertise: Susan (Sue) has held senior management positions in various Australian healthcare organisations for over 20 years. Before her appointment to Chief Executive Officer (‘CEO’) of the company in November 2010, Sue was CEO of IVF Australia Pty Ltd. Prior to joining the company, Sue was State Manager for NSW and ACT for Medical Imaging Australia, the National Director of Nursing for Mayne Group (now part of Ramsay Health Care), CEO of Kareena Private Hospital, CEO of Castlecrag and Mosman Private Hospital and CEO and Director of Nursing for Castlecrag Private Hospital. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of the Risk Committee Interests in shares: 448,633 ordinary shares Interests in options: 298,972 options over ordinary shares Name: Dennis O’Neill Title: Non-Executive Director Qualifications: BSc. (Hons) Mech. Eng; CPE (ret), FIEA; FAICD; FAIM Experience and expertise: Dennis is the former Chief Executive Officer and Managing Director of Evans Deakin Industries Ltd and United Group Ltd and the former Chairman of Decmil Group Ltd. In March 2009 Dennis was appointed as Chairman and Advisory Chairman of Queensland Fertility Group Pty Ltd and stepped down as the Advisory Chairman in October 2013. He is also Advisory Chairman to several unlisted companies and was the Steel Supplier Advocate for the Commonwealth Government until 30 June 2014. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Chair of the Audit Committee Interests in shares: 50,000 ordinary shares Interests in options: None Name: Lyndon Hale Title: Executive Director Qualifications: MBBS; FRACOG; CREI Experience and expertise: Lyndon has been the Medical Director of Melbourne IVF Pty Ltd since 2008. He is also director of Reproductive Surgery at The Women’s Hospital, and is on the board of the Fertility Society of Australia. Lyndon is highly regarded for his knowledge and proactive approach and brings extensive experience in assisted reproduction treatments to the care of his patients. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: None Interests in shares: 823,694 ordinary shares Interests in options: None Name: Peter Turner Title: Non-Executive Director Qualifications: BSc.; MBA; GAICD Experience and expertise: Prior to joining the company, Peter served as Executive Director and Chief Operating Officer of CSL Limited and was the founding President of CSL Behring LLC. Peter is currently Chairman of NPS MedicineWise. Other current directorships: Chairman, Ashley Services Group Ltd Former directorships (last 3 years): CSL Limited Special responsibilities: Chair of the Risk Committee and the Nomination and Remuneration Committee and member of the Audit Committee. Interests in shares: 50,000 ordinary shares Interests in options: None Name: Sonia Petering Title: Non-Executive Director Qualifications: LLB; BCom; FAICD Experience and expertise: Sonia is a corporate lawyer who brings extensive experience as a Director. She is currently Chair of the Rural Finance Corporation of Victoria and a Non-Executive Director of Victoria’s Transport Accident Commission. Sonia is also a director of TAL, Dia-Ichi Life Australia Pty Limited. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of the Risk Committee and the Nomination and Remuneration Committee. Interests in shares: 2,500 ordinary shares Interests in options: None ‘Other current directorships’ quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. ‘Former directorships (in the last 3 years)’ quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. DIRECTORS’ REPORT CONTINUED VIRTUS HEALTH ANNUAL REPORT 2015 17 COMPANY SECRETARY Glenn Powers joined Virtus as Chief Financial Officer (‘CFO’) and Company Secretary in August 2008. Prior to joining Virtus, Glenn was CFO and Company Secretary of Tower Software Limited. Glenn has a broad range of experience in private equity backed businesses, working in a range of engineering, electronics, software and service businesses. Glenn has also been a Director for both main and AIM market listed businesses in the UK. Glenn is a Chartered Management Accountant (CMA). MEETINGS OF DIRECTORS The number of meetings of the company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 30 June 2015, and the number of meetings attended by each director were: Peter Macourt – Chairman Marcus Darville Susan Channon Dennis O’Neill Lyndon Hale Peter Turner Sonia Petering Peter Macourt – Chairman Marcus Darville Susan Channon Dennis O’Neill Peter Turner Sonia Petering Full Board Nomination and Remuneration Committee Attended Held Attended Held 9 – 8 9 7 9 8 9 1 9 9 9 9 8 2 – – – – 2 1 2 1 – – – 2 1 Audit Committee Risk Committee Attended Held Attended Held 4 1 – 4 4 – 4 1 – 4 4 – – – 3 – 3 3 – – 3 – 3 3 Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. REMUNERATION REPORT (AUDITED) The directors present the remuneration report, which outlines the key management personnel remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. The information provided in this Remuneration report, which forms part of the Directors’ report has been audited as required by section 308(3C) of the Corporations Act 2001. The remuneration report is set out under the following main headings: • A. Principles used to determine the nature and amount of remuneration • B. Details of remuneration • C. Service agreements • D. Share-based compensation • E. Additional information • F. Additional disclosures relating to key management personnel A. Principles used to determine the nature and amount of remuneration The objective of the consolidated entity’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and conforms to the market best practice for delivery of reward. The Board of Directors (the ‘Board’) ensures that executive reward satisfies the following key criteria for good reward governance practices: 18 VIRTUS HEALTH ANNUAL REPORT 2015 • competitiveness and reasonableness • acceptability to shareholders • performance linkage/alignment of executive compensation • transparency The role of the Nomination and Remuneration Committee is to assist and advise the Board on the following nomination related matters: • director selection, CEO selection and appointment practice; • director performance evaluation processes and criteria; • Board composition; and • succession planning for the Board and senior executives. In consultation with external remuneration consultants (refer to the section ‘use of remuneration consultants’ below), the Nomination and Remuneration Committee has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the consolidated entity. Key objectives of the remuneration framework are as follows: Alignment to shareholders’ interests; the framework: • has economic profit as a major component of plan design; • focuses on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on equity as well as focusing the executive on key non-financial drivers of value; and • attracts and retains high calibre executives. Alignment to program participants’ interests; the framework: • rewards capability and experience; • reflects competitive reward for contribution to growth in shareholder wealth; and • provides a clear structure for earning rewards. In accordance with best practice corporate governance, the structure of non-executive directors’ and executive remunerations are separate. Non-executive directors remuneration Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the directors. Non-executive directors’ fees and payments are reviewed annually by the Nomination and Remuneration Committee. The Nomination and Remuneration Committee may, from time to time, receive advice from independent remuneration consultants to ensure non-executive directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to determination of his own remuneration. Non-executive directors do not receive share options or other incentives. Under the Constitution, the directors decide the total amount paid to each director as remuneration for their services as a director to the company. However, under the listing rules of the ASX (‘ASX Listing Rules’), the total amount paid to all non-executive directors for their services must not exceed in aggregate in any financial year the amount approved by the shareholders. This amount has been fixed at $500,000 with effect from 17 May 2013. Aggregate annual directors’ fees paid to directors in the financial year ending 30 June 2015 were $420,331; details of the fees payable to each director are set out in the section B. A shareholder resolution will be submitted at the Annual General Meeting recommending an increase in the total amount payable to all non-executive directors for their services from $500,000 to $600,000. All directors’ fees include superannuation at the superannuation guarantee rate for the respective amounts. Executive remuneration The executive remuneration and reward framework has four components: • base pay and non-monetary benefits; • short-term performance incentives; • long-term performance incentives; and • other remuneration such as superannuation and long service leave. The combination of these comprises the executive’s total remuneration. Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, are reviewed annually by the Nomination and Remuneration Committee, based on individual and business unit performance, the overall performance of the consolidated entity and comparable market remunerations. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the consolidated entity and provides additional value to the executive. Short-term incentives The short-term incentives (‘STI’) program is designed to align the targets of the business units with the targets of those executives in charge of meeting those targets. STI payments are granted to executives based on specific annual targets and key performance indicators (‘KPI’s’) being achieved. KPI’s include EBIT performance at group and territory level, volume growth in territory, cost management targets and individual management and business development objectives. Based on the achievements of Virtus Health Limited, this year the Nomination and Remuneration Committee determined that that executives had achieved the following percentages of their targets: • Susan Channon – 50% • Glenn Powers – 55% • Andrew Othen – 33% • Steve Zappia – 33% • Nadia Stankovic – 58% • Anthony Walsh – no target was set as Mr. Walsh is incentivised to enhance shareholder value by way of his minority shareholder interest in the business performance of Sims IVF. DIRECTORS’ REPORT CONTINUED VIRTUS HEALTH ANNUAL REPORT 2015 19 In making this assessment the Nomination and Remuneration Committee considered the following factors: • EBIT target achievements; • Volume growth achievement; Use of remuneration consultants The Nomination and Remuneration Committee engaged KPMG to provide recommendations on the following matters: • Long term incentive performance hurdles; • Cost management achievement; and • Executive remuneration benchmarking; and • Acquisitions. • Non-executive director fees benchmarking Each of the targets above are measurable in financial terms. 40%-60% of the annual STI is payable in relation to the achievement of the financial year EBIT targets which are established by the Nomination and Remuneration Committee on an annual basis. Other operational KPIs account for the remainder of the STI. Financial and non-financial KPIs are reviewed and amended annually by the Nomination and Remuneration Committee to ensure STI payments are aligned with the short term objectives of the business. Long-term benefits The long-term benefits (‘LTB’) include long service leave accruals and share-based incentives. Performance rights are awarded to executives at the end of a period of three years based on the achievement of certain vesting conditions. These include increase in shareholder return relative to the entire market and the increase compared to the consolidated entity’s industry peers. The Nomination and Remuneration Committee reviewed the long-term equity-linked performance incentives specifically for executives during the year ended 30 June 2015. Performance rights will vest and become exercisable to the extent that the applicable performance, service, or other vesting conditions specified at the time of the grant are satisfied. Vesting conditions may include conditions relating to continuous employment or service, the individual performance of the participant in the plans or the company’s performance. The Board has the discretion to set the terms and conditions on which it will offer performance rights under the plans, including the vesting conditions and different terms and conditions which apply to different participants in a plan. Upon the satisfaction of the vesting conditions and any other conditions to exercise, each performance right will convert to a number of shares based on the terms of issue of the performance rights. Performance rights granted to employees, including executive directors, will typically convert on a one-for- one basis. Participants may be required to pay an exercise price to exercise the performance rights which is based on the market price of shares at or around the time of the grant of the options. The plans also include flexibility to allow the company to grant options with no exercise price. Participants will not need to pay any money to be granted options under the plans. Consolidated entity performance and link to remuneration Remuneration for certain individuals is directly linked to performance of the consolidated entity. A portion of bonus and incentive payments are dependent on defined earnings per share targets being met. The total consideration payable to KPMG for the advice provided was $24,000 excluding GST. The scope of the report and all discussions with KPMG were undertaken by the Chairman of the Nomination and Remuneration Committee, Peter Turner, in consultation with the independent directors, Peter Macourt, Chairman, and Sonia Petering who are both members of the Nomination and Remuneration Committee. No discussions were held between KPMG and the CEO, CFO or other key management personnel. Accordingly the Board is satisfied that the recommendations made by KPMG are free from undue influence by any member of the key management personnel to whom the recommendations relate. The Chairman of the Nomination and Remuneration Committee is also satisfied that the recommendation relating to non- executive director fees, including the fees for the Chairman, has not been subject to any undue influence by the Chairman or other independent directors. Other information about directors’ remuneration Directors may also be reimbursed for expenses reasonably incurred in attending to the company’s affairs. Non-executive directors may be paid such additional or special remuneration as the directors decide is appropriate where a director performs extra work or services which are not in the capacity as a director of the company or a subsidiary. There is no contractual redundancy benefit for directors. Share option plans The company has adopted an option plan (‘Plan’) to assist in the reward, motivation and retention of personnel (including executive directors, eligible employees and fertility specialists). The Plan is also designed to recognise the abilities, efforts and contributions of participants to Virtus’ performance and success and provide the participants with an opportunity to acquire or increase their ownership interest in the company. The Plan contemplates the grant of options over shares. There is no ability for the company to provide any cash equivalent on exercise. Eligibility Eligibility to participate in the Plans and the number of options offered to each individual participant will be determined by the Board. Grants of options or performance rights – senior executives and employees It is expected that options or performance rights may be granted to certain senior executives of the company on an annual basis as part of their annual remuneration review. Generally, vesting conditions attaching to grants of options or 20 VIRTUS HEALTH ANNUAL REPORT 2015 performance rights made to senior executives will relate to the performance of the company over the performance period as well as continued employment. Options may also be granted to other employees from time to time subject to consideration by the Board. Senior executives – 2013 grant Susan Channon and Glenn Powers were granted options under the prospectus at the time of Listing. The key terms and conditions attaching to that grant of options are set out below. The options granted to Susan Channon and Glenn Powers are in two tranches, with each tranche subject to two separate vesting conditions which are both based on external measures as follows: • The hurdle for 50% of the options is based on a share price hurdle which measures the growth in the company’s share price over a three year performance period. The number of options that vest will depend on the share price growth (‘SPG’) of shares over the performance period. The SPG is determined by subtracting the share price at the beginning of the performance period from the share price at the end of the performance period, and dividing that figure by the share price at the beginning of the performance period. No options will vest at growth below 15%. 50% will vest at 15% growth and vesting thereafter will be determined on a straight-line scale with 100% vesting at 50% growth. • The hurdle for the remaining 50% of the options is based on the company’s total shareholder return (‘TSR’) relative to a peer group of companies in both the S&P/ASX 300 Index and the S&P/ASX 300 Healthcare Index (weighted 50% each) over the three year performance period. No options will vest if the TSR performance is less than the 50th percentile. 50% of the options will vest at median (i.e. the 50th percentile) TSR performance and vesting thereafter will be determined on a straight-line scale with 100% vesting if the TSR performance is greater than or equal to the 75th percentile. TSR is a measure of the return on investment in a company’s shares, including dividends and all other returns to shareholders notionally invested over the relevant performance period. The performance hurdles for each tranche of options are not interdependent, meaning that it is possible for one tranche to vest while the other does not vest. In each case, the performance hurdles will only be measured once and there will be no retesting. Importantly, no value will be received by Susan Channon or Glenn Powers if the performance hurdles are not met and the options do not vest. The vesting of the options is also subject to continued service by the relevant executive over the relevant performance period. Senior executives – 2014 grant On 10 November 2014, performance rights were granted to the following members of the executive management team: Sue Channon; Glenn Powers; Andrew Othen; Nadia Stankovic; Steve Zappia; and Anthony Walsh. The main features of the performance rights are set out below. The performance rights vest subject to the following performance hurdles: • The performance hurdles for the Plan are relative total shareholder return (TSR) and earnings per share (EPS) growth. Each hurdle applies to 50% of the grant. TSR is measured on the Company’s TSR relative to a peer group of companies in both the S&P/ASX 200 Index and the S&P/ASX 200 Healthcare Index (weighted 50% each) over the three year performance period. TSR is a measure of the return on investment in a company’s shares, including dividends and all other returns to shareholders notionally invested over the relevant performance period. • The percentage of the TSR Component which may vest is based on a sliding scale as follows: – 0% if the TSR does not reach the 50th percentile of the TSRs of the S&P/ASX 200 index and the S&P/ASX 200 Healthcare index (weighted 50% each) – 50% if the TSR reaches the 50th percentile of the TSRs of the S&P/ASX 200 index and the S&P/ASX 200 Healthcare index (weighted 50% each) – Progressive rate (straight-line) vesting from 50% to 100% if the TSR exceeds the 50th percentile of the TSRs of the S&P/ASX 200 index and the S&P/ASX 200 Healthcare index (weighted 50% each) but does not reach the 75th percentile – 100% if the TSR reaches or exceeds the 75th percentile of the TSRs of the S&P/ASX 200 index and the S&P/ASX 200 Healthcare index (weighted 50% each) • The percentage of the EPS growth component which may vest is based on a sliding scale as follows: – 0% if the compound average growth rate (“CAGR”) does not reach 7.5%; – 50% if the CAGR reaches 7.5%; – Progressive rate (straight-line) vesting from 50% to 100% if the CAGR exceeds 7.5% but does not reach 10%; and – 100% if the CAGR reaches or exceeds 10% Calculations of the Company’s TSR and EPS will be determined at the end of the three year vesting period and approved by the Board. Grants of options – fertility specialists Options will be granted on an annual basis to existing fertility specialists who achieve a benchmark level of IVF Cycles above a base or adjusted base number of IVF cycles established in one of the financial years ending after June 2008, up to June 2015. In addition, consistent with the practice pre-Listing on the ASX, options will also be granted to new fertility specialists upon commencing a contractual relationship with the company post-Listing. The initial benchmark level for new fertility specialists is 50 IVF Cycles and subsequent benchmark levels are at each 50 cycle increment thereafter. The key terms and conditions to these option grants are set out below: For existing fertility specialists, options will generally vest equally in three tranches on the third, fourth and fifth anniversary of the grant of the options, conditional upon the fertility specialist DIRECTORS’ REPORT CONTINUED VIRTUS HEALTH ANNUAL REPORT 2015 21 performing a number of IVF Cycles in the immediately preceding year not less than 75% of the relevant benchmark in the year pursuant to which the options were awarded. For new fertility specialists who join the company, options will generally vest equally in three tranches on the third, fourth and fifth anniversary of the grant of the options, subject to: • the fertility specialist achieving the relevant benchmark (currently 50 IVF Cycles) in a 12 month period during the two years post commencement of the contractual relationship with Virtus and concurrent grant of options; and • the fertility specialist then achieving a number of IVF Cycles in the year before the relevant vesting date that is not less than 75% of the benchmark number. In addition, an option may not be exercised unless it is “in the money” (i.e. if the share price at the relevant time is greater than the share price at the time of the option grant). Vesting Conditions Options will vest and become exercisable to the extent that the applicable performance, service, or other Vesting Conditions specified at the time of the grant are satisfied. Vesting Conditions may include conditions relating to continuous employment or service, the individual performance of the participant in the Plan or the company’s performance. The first vesting date is 1 January 2017 and vesting is also dependent on the ordinary share price at exercise being higher than the base price set at the time of incentive commencement; • The actual number of vested options awarded will be in accordance with the calculation methodology applied to the Fertility Specialist performance incentive structure. • Performance option grants may still be accrued for incremental performance above 400 cycles. • Once a vesting award is achieved after three years of consecutive high performance, a Fertility Specialist may then commence a new three year high performer incentive period. For example in a six year period a Fertility Specialist may achieve 2 vested awards with a base value of $500,000 each if he/she achieves 400 cycles per annum for a consecutive period of 6 years. • The 2015-2017 high performer share incentive commenced on 1 January 2015 for all eligible Fertility Specialists who did not achieve 400 cycles in calendar year 2014. The base price at date of grant was the average daily closing share price for the month ending 31 December 2014. • The high performer share incentive is administered in accordance with the plan rules established in the Virtus Health Limited Specialist Option Plan approved by the Board in June 2013. The Board has the discretion to set the terms and conditions on which it will offer options under the Plan, including the Vesting Conditions and different terms and conditions which apply to different participants in the Plan. The second incentive period commenced on 1 January 2015 and will run for a three year period ending 31 December 2017 and the base price at the date of grant is $7.42 with a base incentive value of $500,000. Upon the satisfaction of the Vesting Conditions and any other conditions to exercise, each option will be exercisable into a variable number of shares based on the terms of issue of the options. The number of shares to be issued will be calculated by multiplying the applicable component of the offer value of the grant by the amount of the increase in the share price between the share price at vesting compared to the price at grant all divided by the share price at vesting. Participants will not need to pay any money to be granted options under the Plans. High performance options – fertility specialists The Virtus Board wishes to recognise those Fertility Specialists that achieve a high level of fresh cycles over a defined period acknowledging the value they generate for all stakeholders. The Board has created a High Performer Share Incentive Scheme to reward Fertility Specialists who consistently deliver more than 400 cycles per annum for a consecutive three year period. The structure for such an incentive is set out below: The High Performer incentive will have a performance hurdle whereby Fertility Specialists are required to achieve fresh cycle activity at greater than or equal to 400 cycles per annum over a consecutive three year qualifying period; The first incentive period commenced on 1 January 2014 and will run for a three year period ending 31st December 2016; Three fertility specialists currently meet the performance criteria after one year of the qualifying period and the base price at date of grant is $8.69 with a base value of the incentive value of $500,000; Ranking of shares Shares issued upon exercise of options granted under the Plan will rank equally with the other issued shares. Voting and dividend rights Options do not carry any voting or dividend rights. Shares issued or transferred to participants on exercise of an option carry the same rights and entitlements as other issued shares, including dividend and voting rights. Approval Grants of options under the Plan to directors may be subject to the approval of shareholders, to the extent required under the ASX Listing Rules. Issue or acquisition of shares Shares allocated to participants in the Plan on the exercise of options may be issued by Virtus or acquired on or off market by the company or its nominee. The company may appoint a trustee to acquire and hold shares on behalf of participants or otherwise for the purposes of the Plan. No transfer of options Without the prior approval of the Board, options may not be sold, transferred, encumbered or otherwise dealt with. Further, participants cannot enter into any transaction, scheme or arrangement which hedges or otherwise affects the participant’s economic exposure to the options before they vest. 22 VIRTUS HEALTH ANNUAL REPORT 2015 Lapse of options Options will lapse if the applicable vesting conditions and any other conditions to exercise are not met during the prescribed period or if they are not exercised before the applicable expiry date. B. Details of remuneration Amounts of remuneration Details of the remuneration of key management personnel of the consolidated entity are set out in the following tables. The key management personnel of the consolidated entity consisted of the directors of Virtus Health Limited and the following persons: • Glenn Powers – Group Chief Financial Officer and Company Secretary • Nadia Stankovic – Managing Director, New South Wales • Andrew Othen – Managing Director, Victoria • Steve Zappia – Managing Director, Queensland • Anthony Walsh – Managing Director, Ireland • William Watkins – Medical Director, Tasmania • Peter Illingworth – Medical Director, New South Wales • David Molloy – Medical Director, Queensland Short-term benefits Cash salary and fees $ Non-monetary and termination $ Bonus $ Post- employment benefits Long-term benefits Share-based payments Super- annuation $ Employee leave $ Equity- settled $ 132,991 84,246 100,228 66,400 – – – – 470,857 75,000 85,000 – 331,622 254,800 290,638 257,013 158,026 177,290 80,126 60,500 46,617 28,189 27,337 – – – 2,479,237 247,643 – – – – – – – – – – – – – – 12,634 8,003 9,521 6,308 – – – – – – – – 36,966 11,078 147,593 – – – 37,521 27,770 30,199 26,590 – – – 6,947 4,576 9,050 966 – – – 89,520 13,467 16,699 13,750 5,211 – – Total $ 145,625 92,249 109,749 72,708 751,494 75,000 526,110 347,230 374,775 325,656 163,237 177,290 80,126 2015 Non-Executive Directors: P Macourt D O’Neill P Turner S Petering Executive Directors: S Channon L Hale Other Key Management Personnel*: G Powers N Stankovic A Othen S Zappia A Walsh P Illingworth D Molloy * William Watkins did not receive any remuneration in his capacity as a key management person in the financial year ending 30 June 2015 Marcus Darville agreed to provide his services to Virtus for no salary or fee for the period of his directorship up until his date of resignation. 195,512 32,617 286,240 3,241,249 DIRECTORS’ REPORT CONTINUED VIRTUS HEALTH ANNUAL REPORT 2015 23 Post- employment benefits Super- annuation $ Long-term benefits Share-based payments Employee leave $ Equity- settled $ 11,959 7,620 7,832 – – – – – – 24,992 26,146 110,149 – – – 25,010 10,934 842 31,489 21,797 – – 6,156 62,943 – 340 7,543 353 – – – – – – – – Total $ 141,250 116,660 92,500 679,570 75,000 447,084 137,827 10,282 362,776 278,989 176,288 79,943 – – – – – – 52,929 – – – – – Short-term benefits Bonus $ Non-monetary $ Cash salary and fees $ 129,291 109,040 84,668 – – – 440,008 75,000 78,275 – 305,000 47,975 73,964 9,100 283,197 236,748 176,288 79,943 – – 40,547 20,091 – – 2014 Non-Executive Directors: P Macourt D O’Neill* P Turner Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers B Ayres N Stankovic A Othen S Zappia P Illingworth D Molloy 2,002,247 186,888 52,929 142,475 40,538 173,092 2,598,169 * Dennis O’Neill received fees of $26,660 in the financial year ending 30 June 2014 in respect of his role as Advisory Chairman of Queensland Fertility Group Pty Ltd.; the role ceased in October 2013. ** Marcus Darville agreed to provide his services to Virtus for no salary or fee for the period of his directorship following the IPO in June 2013. The following key management personnel received provider fees for IVF services delivered to patients: Lyndon Hale, David Molloy, Peter Illingworth and William Watkins. Details are disclosed in note 38 to the financial report. 24 VIRTUS HEALTH ANNUAL REPORT 2015 The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Non-Executive Directors: P Macourt D O’Neill P Turner S Petering Executive Directors: S Channon L Hale Other Key Management Personnel: G Powers B Ayres A Othen N Stankovic S Zappia A Walsh P Illingworth D Molloy Fixed remuneration At risk – STI At risk – LTI 2015 2014 2015 2014 2015 2014 100% 100% 100% 100% 69% 100% 72% –% 88% 83% 87% 97% 100% 100% 100% 100% 100% –% 72% 100% 75% 100% 89% 100% 93% –% 100% 100% –% –% –% –% 11% –% 11% –% 8% 13% 9% –% –% –% -% –% –% –% 12% –% 11% –% 11% –% 7% –% –% –% –% –% –% –% –% –% –% –% 20% –% 16% –% 17% 14% –% 4% 4% 4% 3% –% –% –% –% –% –% –% –% –% The proportion of the cash bonus paid/payable or forfeited is as follows: Name Executive Directors: S Channon Other Key Management Personnel: G Powers A Othen S Zappia N Stankovic Cash bonus paid/payable Cash bonus forfeited 2015 2014 2015 2014 50% 51% 50% 49% 55% 33% 33% 58% 51% 49% 25% –% 45% 67% 67% 42% 49% 51% 75% –% DIRECTORS’ REPORT CONTINUED VIRTUS HEALTH ANNUAL REPORT 2015 25 C. Service agreements Name: Glenn Powers Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Title: Chief Financial Officer and Company Secretary Agreement commenced: 11 June 2013 Term of agreement: No fixed end date Name: Lyndon Hale Title: Executive Director Agreement commenced: 11 June 2013 Term of agreement: No fixed end date Details: The executive may terminate their fertility specialist contract by giving a minimum of six months’ notice or maximum of twelve months’ notice in writing. The company may terminate by giving 12 months’ notice in writing. Upon the termination of the fertility specialist contract, the fertility specialist will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period, or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Name: Susan Channon Title: Chief Executive Officer Agreement commenced: 11 June 2013 Term of agreement: No fixed end date Details: The executive may terminate the employment contract by giving three months’ notice in writing. The company may terminate by giving 12 months’ notice in writing or by making a payment in lieu of notice. In the event of serious misconduct or other specific circumstances warranting summary dismissal, the company may terminate the employment contract immediately by notice in writing and without payment in lieu of notice. Upon the termination of the employment contract, the executive will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period, or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Details: The executive may terminate the employment contract by giving three months’ notice in writing. The company may terminate by giving six months’ notice in writing or by making a payment in lieu of notice. In the event of serious misconduct or other specific circumstances warranting summary dismissal, the company may terminate the employment contract immediately by notice in writing and without payment in lieu of notice. Upon the termination of the employment contract, the executive will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period, or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Other Key Management Personnel Each of the company’s state managing directors, Andrew Othen, Steve Zappia, Nadia Stankovic and Anthony Walsh are employed under individual executive services agreements. These establish: • total compensation including a base salary, superannuation contribution and incentive arrangements; • variable notice and termination provisions of up to six months; • confidentiality provisions; • leave entitlements, as a minimum, as per the National Employment Standard; and • restraint provisions. The company’s state medical directors, Peter Illingworth, David Molloy and William Watkins are contracted under fertility specialist agreements. The Executive may terminate their fertility specialist contract by giving a minimum of six months’ notice or maximum of twelve months’ notice in writing. The company may terminate by giving 12 months’ notice in writing and upon the termination of the fertility specialist contract the fertility specialist will be subject to a restraint of trade period of 12 months. The company may elect to reduce the restraint of trade period, or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Key management personnel have no entitlement to termination payments in the event of removal for misconduct. 26 VIRTUS HEALTH ANNUAL REPORT 2015 D. Share-based compensation Issue of shares There were no shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2015. Options The terms and conditions of each grant of options over ordinary shares affecting remuneration of directors and other key management personnel in this financial year or future reporting year are as follows: Vesting date and exercisable date Expiry date Exercise price Grant date 11 June 2013 11 June 2013 11 June 2016 11 June 2018 27 February 2014 27 January 2017 10 November 2014 10 November 2017 10 November 2024 Fair value per option at grant date $1.26 $1.43 $1.24 $5.68 $5.68 $0.00 Options do not carry any voting or dividend rights. Shares issued or transferred to participants on exercise of an option carry the same rights and entitlements as other issued shares, including dividend and voting rights. Refer to section A of this remuneration report for details of the option plan. The number of options over ordinary shares granted to and vested by directors and other key management personnel as part of compensation during the year ended 30 June 2015 are set out below: Name Susan Channon Glenn Powers Andrew Othen Nadia Stankovic Steve Zappia Anthony Walsh Peter Illingworth Number of options granted during the year 2015 Number of options granted during the year 2014 Number of options vested during the year 2015 Number of options vested during the year 2014 36,472 25,888 16,266 13,118 13,393 5,076 – – 135,397 – – – – 50,000 – – – – – – – – – 135,397 – – – 50,000 Values of options over ordinary shares granted, exercised and lapsed for directors and other key management personnel as part of compensation during the year ended 30 June 2015 are set out below: Name Susan Channon Glenn Powers Andrew Othen Nadia Stankovic Steve Zappia Anthony Walsh Value of options exercised during the year includes options cancelled during the year. Value of options granted during the year $ Value of options exercised during the year $ Value of options lapsed during the year $ 251,657 178,627 112,235 90,514 92,412 35,024 – – – – – – – – – – – – DIRECTORS’ REPORT CONTINUED VIRTUS HEALTH ANNUAL REPORT 2015 27 E. Additional information The earnings of the consolidated entity for the five years to 30 June 2015 are summarised below: Sales revenue EBITDA* EBIT Profit after income tax 2015 $’000 2014 $’000 2013 $’000 2012 $’000 2011 $’000 233,696 201,249 186,581 165,119 127,197 61,355 51,361 30,441 59,404 51,212 30,957 43,429 34,684 10,104 48,708 39,736 19,660 40,510 32,233 15,337 * EBITDA 2013 is stated before deduction of initial public offering costs. The factors that are considered to affect total shareholders return (‘TSR’) are summarised below: Share price at financial year end ($) Total dividends declared (cents per share) Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 2015 5.37 27.00 36.05 35.75 2014 8.16 12.00 38.80 38.48 2013 6.45 133.50 17.78 16.78 2012* 2011* – – 36.73 34.22 – – – – * Share price is not applicable for the years 2011 to 2012 as the company was not a listed entity in these years. F. Additional disclosures relating to key management personnel In accordance with Class Order 14/632, issued by the Australian Securities and Investments Commission, relating to ‘Key management personnel equity instrument disclosures’, the following disclosures relate only to equity instruments in the Company or its subsidiaries. Shareholding The number of shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Ordinary shares Peter Macourt Susan Channon Dennis O’Neill Lyndon Hale Peter Turner Glenn Powers Peter Illingworth David Molloy Sonia Petering Balance at the start of the year Received as part of remuneration Additions Disposals/other 18,485 448,633 50,000 823,694 50,000 114,150 654,023 400,628 – 2,559,613 – – – – – – – – – – – – – – – – – – 2,500 2,500 – – – – – – – – – – Balance at the end of the year 18,485 448,633 50,000 823,694 50,000 114,150 654,023 400,628 2,500 2,562,113 28 VIRTUS HEALTH ANNUAL REPORT 2015 Option holding The number of options over ordinary shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Options over ordinary shares Susan Channon Andrew Othen Glenn Powers Peter Illingworth Nadia Stankovic Steve Zappia Anthony Walsh Balance at the start of the year Granted Exercised/ cancelled Expired/ forfeited/ other Balance at the end of the year 262,500 38,000 150,000 50,000 – – – 36,472 16,266 25,888 – 13,118 13,393 5,076 500,500 110,213 – – – – – – – – – – – – – – – – 298,972 54,266 175,888 50,000 13,118 13,393 5,076 610,713 This concludes the remuneration report, which has been audited. Shares under option Unissued ordinary shares of Virtus Health Limited under option at the date of this report are as follows: Grant date 11 June 2013 28 January 2014* 20 January 2014** 21 January 2014** 21 January 2014** 01 January 2014** 03 October 2014** 10 November 2014 13 May 2015** 13 May 2015** 13 May 2015** 13 May 2015** 13 May 2015** Expiry date 11 June 2018 27 January 2017 20 January 2024 21 January 2024 21 January 2024 01 January 2024 03 October 2024 10 November 2024 13 May 2025 13 May 2025 13 May 2025 13 May 2025 13 May 2025 Exercise or base price Number under option or shares to be issued $5.68 $5.68 $0.00 $8.49 $0.00 $8.69 $8.57 $0.00 $7.16 $7.53 $7.94 $7.96 $8.01 412,500 263,005 45,136 – 96,238 29,073 117,251 85,990 7,372 912 794 343 262 1,058,876 * The consolidated entity agreed to issue 450,000 options to fertility specialists and 174,082 options to management as part of the IPO listing. Rights to these options were confirmed on 11 June 2013, and the options were formally granted 28 January 2014. For compliance with AASB 2 ‘Share- based Payment’ it is assumed that 11 June 2013 is the grant date for these options. ** The consolidated entity grants performance rights to fertility specialists as a dollar value; for the purpose of calculating the estimated number of shares under option, estimates of the share price at the time of vesting are forecast to facilitate an estimate of the number of shares to be issued at vesting. No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the company or of any other body corporate. Shares issued on the exercise of options During the financial year 175,000 ordinary shares were issued on the exercise of options. No share options were cancelled during the financial year. There were no shares of Virtus Health Limited issued on the exercise of options from 1 July 2015 up to and including the date of this report. DIRECTORS’ REPORT CONTINUED VIRTUS HEALTH ANNUAL REPORT 2015 29 Indemnity and insurance of officers The company has indemnified the directors and executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. Officers of the company who are former partners of PricewaterhouseCoopers There are no officers of the company who are former partners of PricewaterhouseCoopers. Rounding of amounts The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 follows this report. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors Peter Macourt Chairman 25 August 2015 Sydney During the financial year, the company paid a premium of $112,000 in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. Indemnity and insurance of auditor The company has not, during or since the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non- audit services provided during the financial year by the auditor are outlined in note 35 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 35 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. 30 VIRTUS HEALTH ANNUAL REPORT 2015 AUDITOR’S INDEPENDENCE DECLARATION Auditor’s Independence Declaration As lead auditor for the audit of Virtus Health Limited for the year ended 30 June 2015, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Virtus Health Limited and the entities it controlled during the period. Eddie Wilkie Partner PricewaterhouseCoopers Sydney 25 August 2015 PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. VIRTUS HEALTH ANNUAL REPORT 2015 31 FINANCIAL REPORT GENERAL INFORMATION The financial report consists of the financial statements, notes to the financial statements and the directors’ declaration. Virtus Health Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 3 176 Pacific Highway Greenwich NSW 2065 A description of the nature of the consolidated entity’s operations and its principal activities are included in the directors’ report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of directors, on 25 August 2015. The directors have the power to amend and reissue the financial statements. CONTENTS STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF FINANCIAL POSITION STATEMENT OF CHANGES IN EQUITY STATEMENT OF CASH FLOWS NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF VIRTUS HEALTH LIMITED 32 33 34 35 36 83 84 32 VIRTUS HEALTH ANNUAL REPORT 2015 Revenue Share of profits of associates accounted for using the equity method Other income Expenses Fertility specialists, consumables and associated costs Employee benefits expense Depreciation and amortisation expense Occupancy expense Advertising and marketing Practice equipment expenses Professional and consulting fees Other expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Net change in the fair value of cash flow hedges taken to equity, net of tax Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit for the year is attributable to: Non-controlling interest Owners of Virtus Health Limited Total comprehensive income for the year is attributable to: Non-controlling interest Owners of Virtus Health Limited Basic earnings per share Diluted earnings per share Consolidated 2015 $’000 2014 $’000 233,696 201,249 563 1,067 (63,718) (75,996) (9,994) (13,657) (3,683) (1,906) (2,603) (12,188) (9,106) 42,475 (12,034) 189 302 (53,854) (61,395) (8,192) (11,376) (2,797) (1,355) (1,542) (9,668) (7,719) 43,842 (12,885) 30,441 30,957 (380) 125 (255) (96) (400) (496) 30,186 30,461 1,007 29,434 30,441 1,007 29,179 30,186 Cents 36.86 36.54 72 30,885 30,957 72 30,389 30,461 Cents 38.80 38.48 Note 4 5 6 7 7 8 28 28 29 46 46 The above statement of comprehensive income should be read in conjunction with the accompanying notes. STATEMENT OF COMPREHENSIVE INCOMEfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 33 Consolidated 2015 $’000 2014 $’000 Note 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 18,371 13,647 278 1,508 33,804 1,489 30,822 21,498 12,478 166 1,371 35,513 1,489 28,207 390,763 356,077 8,064 304 431,442 465,246 8,154 341 394,268 429,781 23,171 23,516 50 4,256 2,908 5,390 62 4,507 2,418 3,634 35,775 34,137 152,246 139,416 676 5,523 24,705 183,150 218,925 137 4,663 11,802 156,018 190,155 246,321 239,626 238,429 237,135 (12,989) 1,995 (1,610) (6,139) 227,435 229,386 18,886 10,240 246,321 239,626 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other Total current assets Non-current assets Investments accounted for using the equity method Property, plant and equipment Intangibles Deferred tax Other Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Income tax Provisions Other Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Provisions Other financial liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits/(accumulated losses) Equity attributable to the owners of Virtus Health Limited Non-controlling interest Total equity The above statement of financial position should be read in conjunction with the accompanying notes. STATEMENT OF FINANCIAL POSITIONas at 30 June 2015 34 VIRTUS HEALTH ANNUAL REPORT 2015 Consolidated Balance at 1 July 2013 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Tax benefit now determined relating to a portion of options adjustments payments made in June 2013 Non-controlling interest on acquisition of subsidiary Share-based payments Dividends paid (note 31) Balance at 30 June 2014 Consolidated Balance at 1 July 2014 Contributions of equity, net of transaction costs (note 27) 1,057 – Put option business combination reserve – (11,756) Issued capital $’000 Reserves $’000 Retained profits $’000 Non- controlling interest $’000 231,981 10,186 (27,578) – – – – (496) (496) 30,885 – 30,885 4,097 – – – – – 456 – 237,135 (1,610) – – – – – (9,446) (6,139) Issued capital $’000 Reserves $’000 Retained profits $’000 Non- controlling interest $’000 Total equity $’000 237,135 (1,610) (6,139) 10,240 239,626 Total equity $’000 214,589 30,957 (496) 30,461 1,057 (11,756) 4,097 10,168 456 (9,446) – 72 – 72 – – – 10,168 – – 10,240 239,626 1,007 – 1,007 – 6,454 1,787 (465) (137) – – – 30,441 (255) 30,186 1,294 6,454 1,787 (465) (137) (12,069) 945 (21,300) 18,886 246,321 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: – – – – (255) (255) 29,434 – 29,434 Contributions of equity, net of transaction costs (note 27) 1,294 Non-controlling interest on acquisition of subsidiary Issue of shares by subsidiary to non-controlling interest Dividends payable by subsidiary to non-controlling interest Non-controlling interest share of reserves Put option business combination reserve Share-based payments Dividends paid (note 31) Balance at 30 June 2015 – – – – – (12,069) 945 – – – – – – – – 238,429 (12,989) – – – – – – – (21,300) 1,995 The above statement of changes in equity should be read in conjunction with the accompanying notes. STATEMENT OF CHANGES IN EQUITYfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 35 Consolidated 2015 $’000 2014 $’000 Note 45 233,070 (173,366) 59,704 367 (7,228) (12,255) 40,588 (25,180) (12,336) 47 220 250 201,699 (137,689) 64,010 302 (6,694) (5,077) 52,541 (22,362) (8,007) – 349 50 (36,999) (29,970) 994 1,787 (21,300) (150) 13,000 – (1,038) (62) (6,769) (3,180) 21,498 53 1,057 – (9,446) – 8,000 (13,000) – (138) (13,527) 9,044 12,485 (31) Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers (inclusive of GST) Other revenue Interest and other finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payments for acquisition of subsidiaries and businesses, net of cash acquired Payments for property, plant and equipment and intangibles Proceeds from disposal of property, plant and equipment Interest received Associate distributions received Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from issue of shares to non-controlling interest Payment of dividends Dividend paid to non-controlling interest in subsidiaries Proceeds from borrowings Repayment of borrowings Payment of fees in relation to refinancing Payment for finance lease facility Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year 9 18,371 21,498 The above statement of cash flows should be read in conjunction with the accompanying notes. STATEMENT OF CASH FLOWSfor the year ended 30 June 2015 36 VIRTUS HEALTH ANNUAL REPORT 2015 NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2015 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Parent entity information The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. In accordance with the Corporations Act 2001, these financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in note 39. New, revised or amending Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the consolidated entity. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of available-for-sale financial assets, financial assets and liabilities at fair value through profit or loss, investment properties and derivative financial instruments. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Virtus Health Limited (‘company’ or ‘parent entity’) as at 30 June 2015 and the results of all subsidiaries for the year then ended. Virtus Health Limited and its subsidiaries together are referred to in these financial statements as the ‘consolidated entity’. Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non- controlling interest acquired is recognised directly in equity attributable to the parent. Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of comprehensive income, statement of financial position and statement of changes in equity of the consolidated entity. Losses incurred by the consolidated entity are attributed to the non-controlling interest in full, even if that results in a deficit balance. VIRTUS HEALTH ANNUAL REPORT 2015 37 Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in Australian dollars, which is Virtus Health Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Rendering of services Revenue from the rendering of services is recognised upon the delivery of the service to a patient or customer. Revenue is recognised on completion of a medical procedure, on supply of drugs, or on completion of an analytical test. If payments received from patients exceed the revenue recognised the difference is disclosed as deferred revenue. Deferred revenue Fees for fertility treatment cycles paid in advance are recognised as deferred revenue until the service has been provided whereupon the fees are recognised as revenue. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Rent Rent revenue from investment properties is recognised on a straight-line basis over the lease term. Lease incentives granted are recognised as part of the rental revenue. Contingent rentals are recognised as income in the period when earned. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Income tax The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. 38 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Inventories Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Current and non-current classification Stock on hand consists of medical supplies used in the diagnostic fertility procedures performed in the consolidated entity’s fertility clinics. Stock on hand is stated at the lower of cost and net realisable value. Cost comprises purchase and delivery costs, net of rebates and discounts received or receivable. 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. Assets and liabilities are presented in the statement of financial position based on current and non-current classification. Derivative financial instruments An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on the expected period of realisation. Cash flow hedges Cash flow hedges are used to cover the consolidated entity’s exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a firm commitment which could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, whilst the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction when the forecast transaction occurs. Cash flow hedges are tested for effectiveness on a regular basis both retrospectively and prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected to occur, the amounts recognised in equity are transferred to profit or loss. If the hedging instrument is sold, terminated, expires, exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast transaction occurs. Associates Associates are entities over which the consolidated entity has significant influence but not control or joint control. Investments in associates are accounted for using the equity method. Under the equity method, the share of the profits or losses of the associate is recognised in profit or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in associates are carried in the statement of financial position at cost plus post-acquisition changes in the consolidated entity’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Dividends received or receivable from associates reduce the carrying amount of the investment. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 39 When the consolidated entity’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivables, the consolidated entity does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The consolidated entity discontinues the use of the equity method upon the loss of significant influence over the associate and recognises any retained investment at its fair value. Any difference between the associate’s carrying amount, fair value of the retained investment and proceeds from disposal is recognised in profit or loss. Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Leasehold improvements Over the life of the lease Furniture and fittings Office equipment Medical equipment 2 to 10 years 2 to 5 years 2 to 5 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested six monthly for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Software Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. Significant costs associated with software are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 3 to 5 years. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Brand names Brand names are amortised on a straight-line basis over the period of their expected benefit, being their finite life of 10 years. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the consolidated entity will obtain ownership at the end of the lease term. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested every six months for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. 40 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Defined contribution superannuation expense Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. Finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred. Provisions Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave where there is no unconditional right to defer settlement of the liability are recognised in current liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using option pricing models that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the consolidated entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the consolidated entity or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 41 Profit sharing and bonus plans Business combinations The consolidated entity recognises a liability and an expense for bonuses and profit sharing based on a formula that takes into consideration the profit attributable to the company’s shareholders after certain adjustments. The consolidated entity recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the company. The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquiree. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. 42 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Virtus Health Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Rounding of amounts The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2015. The consolidated entity’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, are set out below. AASB 9 Financial Instruments This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of AASB 9 and completes the project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. AASB 9 introduces new classification and measurement models for financial assets. New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements will use an ‘expected credit loss’ model to recognise an allowance. The consolidated entity will adopt this standard from 1 July 2018 which is not expected to have a significant impact. IFRS 15 Revenue from Contracts with Customers This standard is currently applicable to annual reporting periods beginning on or after 1 January 2018. The standard provides a single standard for revenue recognition. The core principle of the standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The consolidated entity expects to adopt this standard from 1 July 2018 but the impact of its adoption is yet to be assessed. Other amending accounting standards issued are not considered to have a significant impact on the financial statements of the consolidated entity as their amendments provide either clarification of existing accounting treatment or editorial amendments. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 43 NOTE 2. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Share-based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using option-pricing models taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Provision for impairment of receivables The provision for impairment of receivables assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivables, historical collection rates and specific knowledge of the individual debtors financial position. Goodwill and other indefinite life intangible assets The consolidated entity tests six monthly, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 1. The recoverable amounts of cash- generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The consolidated entity assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Business combinations As discussed in note 1, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the consolidated entity taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. The determination of the liability relating to put options linked to business combinations requires estimations to be made of the future profitability of the acquired entity and the discount rates used. 44 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 3. OPERATING SEGMENTS Segment revenue Identification of reportable operating segments AASB 8 ‘Operating Segments’ requires operating segments to be identified on the basis of internal reports about components of the consolidated entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The consolidated entity currently has five operating segments being New South Wales, Queensland, Victoria, Tasmania and International. The consolidated entity has determined that the disclosure of two segments, being an Australian aggregated healthcare services segment and an International healthcare services segment is most appropriate. Disclosure of an aggregated segment for Australia is considered appropriate due to the similar economic characteristics faced by the operating segments and the similar nature of the products and services being delivered to a similar customer base. Following the acquisition of SIMS Clinic Limited on 30 May 2014, an international segment was created. This segment includes the Asia development costs and the set-up costs relating to the planned Singapore operations. Sales between segments are carried out at arm’s length and are eliminated on consolidation. The revenue from external parties reported to the Board of Directors is measured in a manner consistent with that in the statement of comprehensive income. Revenue from external customers is derived from the provision of healthcare services. A breakdown of revenue and results is provided below: Segment EBITDA Segment performance is assessed on the basis of Segment EBITDA. Segment EBITDA comprises expenses which are incurred in the normal trading activity of the segments and excludes the impact of depreciation, amortisation, interest, share-based payments and other items which are determined to be outside of the control of the respective segments. Corporate costs have been excluded from the segment EBITDA during 2015 and the comparatives have been adjusted accordingly. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 Operating segment information Consolidated – 2015 Revenue Sales to external customers Intersegment sales Total sales revenue Other revenue Interest revenue Total revenue Segment EBITDA Share based payment expense Corporate costs Foreign exchange gain Transaction costs Net gain on acquisition of associate Depreciation and amortisation expense Interest revenue Interest expense Interest on other financial liability – non-cash interest Amortisation of bank facility fee Profit before income tax expense Income tax expense Profit after income tax expense Total assets includes: Investments in associates Acquisition of non-current assets VIRTUS HEALTH ANNUAL REPORT 2015 45 Healthcare services Australia $’000 Healthcare services International $’000 Intersegment eliminations/ unallocated $’000 Total $’000 205,231 2,420 207,651 1,059 201 27,186 – 27,186 – 1 – 232,417 (2,420) (2,420) – 18 – 232,417 1,059 220 208,911 27,187 (2,402) 233,696 68,575 2,402 – 70,977 (945) (8,007) 176 (1,146) 300 (9,994) 220 (7,235) (960) (911) 42,475 (12,034) 30,441 1,489 28,791 – 15,264 – 3,593 1,489 47,648 46 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 3. OPERATING SEGMENTS (continued) Consolidated – 2014 Revenue Sales to external customers Intersegment sales Total sales revenue Other revenue Interest revenue Total revenue Segment EBITDA Share based payment expense Corporate costs Foreign exchange loss Transaction costs Depreciation and amortisation expense Interest revenue Interest expense Interest on other financial liability – non-cash interest Amortisation of bank facility fee Profit before income tax expense Income tax expense Profit after income tax expense Total assets includes: Investments in associates Acquisition of non-current assets NOTE 4. REVENUE Sales revenue Rendering of services Other revenue Interest Rent Revenue Healthcare services Australia $’000 Healthcare services International $’000 Intersegment eliminations/ unallocated $’000 Total $’000 198,484 4,728 203,212 876 314 1,535 – 1,535 5 – – 200,019 (4,728) (4,728) – 35 – 200,019 881 349 204,402 1,540 (4,693) 201,249 67,290 591 – 67,881 (456) (6,742) (311) (968) (8,192) 349 (7,211) (45) (463) 43,842 (12,885) 30,957 1,489 5,723 – – 33,000 2,284 1,489 41,007 Consolidated 2015 $’000 2014 $’000 232,417 200,019 220 1,059 1,279 349 881 1,230 233,696 201,249 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 47 NOTE 5. SHARE OF PROFITS OF ASSOCIATES ACCOUNTED FOR USING THE EQUITY METHOD Share of profits – associates NOTE 6. OTHER INCOME Other income NOTE 7. EXPENSES Profit before income tax includes the following specific expenses: Depreciation Leasehold improvements Plant and equipment under lease Furniture and fittings Office equipment Medical equipment Total depreciation Amortisation Software Brand names Total amortisation Total depreciation and amortisation Finance costs Interest and finance charges paid/payable Interest on other financial liability – non-cash interest Amortisation of bank facility fees Finance costs expensed Rental expense relating to operating leases Minimum lease payments Superannuation expense Consolidated 2015 $’000 563 Consolidated 2015 $’000 1,067 2014 $’000 189 2014 $’000 302 Consolidated 2015 $’000 2014 $’000 3,471 48 289 1,624 2,541 7,973 561 1,460 2,021 9,994 7,235 960 911 9,106 3,239 – 111 290 2,723 6,363 911 918 1,829 8,192 7,211 45 463 7,719 10,289 8,557 Defined contribution superannuation expense 4,992 4,094 Research costs Research costs Share-based payments expense Share-based payments expense – fertility specialists Share-based payments expense – employee benefits Total share-based payments expense 3,544 3,441 642 303 945 283 173 456 48 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 8. INCOME TAX EXPENSE Income tax expense Current tax Deferred tax – origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense Deferred tax included in income tax expense comprises: Decrease/(increase) in deferred tax assets (note 16) Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Share-based payments Research and development Acquisition transaction costs Other Tax losses not recognised Difference in overseas tax rates Adjustment recognised for prior periods Income tax expense Amounts credited directly to equity Deferred tax assets (note 16) Tax losses not recognised Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 17% Consolidated 2015 $’000 2014 $’000 12,675 (45) (596) 12,034 10,947 2,308 (370) 12,885 (45) 2,308 42,475 43,842 12,743 13,153 284 (963) 344 146 393 137 (434) 256 32 92 12,947 13,236 (317) (596) 19 (370) 12,034 12,885 Consolidated 2015 $’000 2014 $’000 (163) (4,138) 2,806 477 526 89 The above potential tax benefit for tax losses has not been recognised in the statement of financial position. These tax losses can be utilised in the future. NOTE 9. CURRENT ASSETS – CASH AND CASH EQUIVALENTS Cash at bank and on hand Consolidated 2015 $’000 2014 $’000 18,371 21,498 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 NOTE 10. CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables Less: Provision for impairment of receivables Other receivables Impairment of receivables VIRTUS HEALTH ANNUAL REPORT 2015 49 Consolidated 2015 $’000 12,807 (1,535) 11,272 2014 $’000 11,748 (1,104) 10,644 2,375 1,834 13,647 12,478 The consolidated entity has recognised a loss of $775,000 (2014: $355,000) in profit or loss in respect of impairment of receivables for the year ended 30 June 2015. The ageing of the impaired receivables provided for above is as follows: 3 to 6 months overdue Over 6 months overdue The nominal value of the impaired receivables is $2,004,000 (2014: $1,565,000). Movements in the provision for impairment of receivables are as follows: Opening balance Additional provisions recognised Additions through business combinations Receivables written off during the year as uncollectable Unused amounts reversed Closing balance Past due but not impaired Consolidated 2015 $’000 470 1,065 1,535 Consolidated 2015 $’000 1,104 835 25 (369) (60) 2014 $’000 461 643 1,104 2014 $’000 1,229 510 192 (672) (155) 1,535 1,104 Customers with balances past due but without provision for impairment of receivables amount to $2,778,000 as at 30 June 2015 ($1,537,000 as at 30 June 2014). The consolidated entity did not consider the credit risk to be material on the aggregate balances after reviewing credit terms of customers based on recent collection practices. The ageing of the past due but not impaired receivables are as follows: 1 to 3 months overdue No collateral is held in relation to the above receivables. Consolidated 2015 $’000 2,778 2014 $’000 1,537 50 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 11. CURRENT ASSETS – INVENTORIES Stock on hand – at cost NOTE 12. CURRENT ASSETS – OTHER Prepayments NOTE 13. NON-CURRENT ASSETS – INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Investment in associates Refer to note 42 for further information on interests in associates. NOTE 14. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Leasehold improvements – at cost Less: Accumulated depreciation Plant and equipment under lease – at cost Less: Accumulated depreciation Furniture and fittings – at cost Less: Accumulated depreciation Office equipment – at cost Less: Accumulated depreciation Medical equipment – at cost Less: Accumulated depreciation Consolidated 2015 $’000 278 Consolidated 2015 $’000 1,508 Consolidated 2015 $’000 1,489 2014 $’000 166 2014 $’000 1,371 2014 $’000 1,489 Consolidated 2015 $’000 33,666 (19,252) 14,414 2,689 (2,475) 214 2,182 (830) 1,352 10,412 (5,149) 5,263 23,020 (13,441) 9,579 2014 $’000 28,732 (14,125) 14,607 1,990 (1,990) – 1,218 (494) 724 3,460 (1,886) 1,574 21,468 (10,166) 11,302 30,822 28,207 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 51 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2013 Additions Additions through business combinations (note 40) Disposals Exchange differences Transfers in/(out) Depreciation expense Balance at 30 June 2014 Additions Additions through business combinations (note 40) Disposals Exchange differences Transfers in/(out) Depreciation expense Balance at 30 June 2015 Leasehold improvements $’000 Plant and equipment under lease $’000 Furniture and fittings $’000 Office equipment $’000 Medical equipment $’000 16,578 1,504 108 (160) (1) (183) (3,239) 14,607 3,123 219 (265) 19 182 (3,471) 14,414 – – – – – – – – 6 256 – – – (48) 214 729 1,107 8,704 4,121 Total $’000 26,579 6,907 – – – 28 (290) 1,574 2,006 65 (27) (2) 3,271 (1,624) 1,227 1,428 (10) (17) – (170) (19) (155) (2,723) (6,363) 11,302 3,755 221 (59) (13) (3,086) (2,541) 28,207 9,848 916 (354) 67 111 (7,973) 568 175 93 – (1) – (111) 724 958 155 (3) 63 (256) (289) 1,352 5,263 9,579 30,822 Property, plant and equipment secured under finance leases Refer to note 37 for further information on property, plant and equipment secured under finance leases. NOTE 15. NON-CURRENT ASSETS – INTANGIBLES Goodwill – at cost Software – at cost Less: Accumulated amortisation Brand names – at cost Less: Accumulated amortisation Consolidated 2015 $’000 2014 $’000 379,168 345,988 14,979 (11,422) 3,557 14,475 (6,437) 8,038 12,347 (10,861) 1,486 13,581 (4,978) 8,603 390,763 356,077 52 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 15. NON-CURRENT ASSETS – INTANGIBLES (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2013 Additions Additions through business combinations (note 40) Exchange differences Transfers in/(out) Amortisation expense Balance at 30 June 2014 Additions Additions through business combinations (note 40) Exchange differences Transfers in/(out) Amortisation expense Balance at 30 June 2015 Impairment tests for goodwill Goodwill $’000 319,029 – 27,291 (332) – – 345,988 – 33,405 (225) – – Software $’000 Brand names $’000 Total $’000 993 1,100 149 – 155 (911) 1,486 2,745 7 (9) (111) (561) 5,038 325,060 – 4,538 (55) – (918) 1,100 31,978 (387) 155 (1,829) 8,603 356,077 – 886 9 – 2,745 34,298 (225) (111) (1,460) (2,021) 379,168 3,557 8,038 390,763 Goodwill is allocated to the group’s cash generating units (‘CGUs’) identified according to operating segment: New South Wales Victoria Queensland Tasmania International Consolidated 2015 $’000 114,881 124,904 80,689 21,999 36,695 2014 $’000 114,881 124,904 79,244 – 26,959 379,168 345,988 The recoverable amount of a CGU is determined based on value in use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a one year period. Cash flows beyond the one year period are extrapolated using the estimated growth rates stated below. The growth rate does not exceed the long term average growth rate for the business. Key assumptions used for value in use calculations Terminal growth rate Pre–tax discount rate New South Wales – 2.5% (2014: 2.5%) New South Wales – 10.9% (2014: 11.5%) Victoria – 2.5% (2014: 2.5%) Queensland – 2.5% (2014: 2.5%) Tasmania – 2.5% (2014: n/a) International – 2.5% (2014: n/a) Victoria – 10.9% (2014: 11.5%) Queensland – 10.9% (2014: 11.5%) Tasmania – 10.9% (2014: n/a) International – 10.9% (2014: n/a) These assumptions have been used for the analysis of each CGU within the business segment. The equity rates of return and therefore discount rates reflect specific risks relating to the relevant segments. In performing the value-in-use calculations for each CGU, the consolidated entity has applied post tax discount rates to discount the forecast future attributable post-tax cash flows. The equivalent pre-tax discount rates are disclosed above. Impact of possible changes in assumptions A reasonable possible change in assumptions would not cause the carrying amount of each CGU to exceed its recoverable amount. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 NOTE 16. NON-CURRENT ASSETS – DEFERRED TAX Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Impairment of receivables Property, plant and equipment Employee benefits Provision for lease make good Accrued expenses Intangible assets Other Amounts recognised in equity: Transaction costs on share issue Deductible option adjustment payments Other Deferred tax assets Amount expected to be recovered within 12 months Amount expected to be recovered after more than 12 months Movements: Opening balance Credited/(charged) to profit or loss (note 8) Credited to equity (note 8) Additions through business combinations (note 40) Closing balance NOTE 17. NON-CURRENT ASSETS – OTHER Security deposits NOTE 18. CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Trade payables Other payables Refer to note 32 for further information on financial risk management. VIRTUS HEALTH ANNUAL REPORT 2015 53 Consolidated 2015 $’000 2014 $’000 395 (239) 2,768 939 703 (1,329) 2,230 5,467 755 1,639 203 2,597 8,064 3,544 4,520 8,064 8,154 45 163 (298) 8,064 331 (262) 2,499 919 253 (1,822) 2,322 4,240 1,415 2,458 41 3,914 8,154 1,760 6,394 8,154 6,877 (2,308) 4,138 (553) 8,154 Consolidated 2015 $’000 304 2014 $’000 341 Consolidated 2015 $’000 10,331 12,840 2014 $’000 10,284 13,232 23,171 23,516 54 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 19. CURRENT LIABILITIES – BORROWINGS Lease liability Refer to note 23 for further information on assets pledged as security and financing arrangements. Refer to note 32 for further information on financial risk management. NOTE 20. CURRENT LIABILITIES – INCOME TAX Provision for income tax NOTE 21. CURRENT LIABILITIES – PROVISIONS Employee benefits – long service leave Amounts not expected to be settled within the next 12 months Consolidated 2015 $’000 50 2014 $’000 62 Consolidated 2015 $’000 4,256 Consolidated 2015 $’000 2,908 2014 $’000 4,507 2014 $’000 2,418 The current provision for long service leave includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the consolidated entity does not have an unconditional right to defer settlement. However, based on past experience, the consolidated entity does not expect all employees to take the full amount of accrued long service leave or require payment within the next 12 months The following amounts reflect leave that is not expected to be taken within the next 12 months: Long service leave obligation expected to be settled after 12 months NOTE 22. CURRENT LIABILITIES – OTHER Deferred revenue Consolidated 2015 $’000 2,082 2014 $’000 1,731 Consolidated 2015 $’000 5,390 2014 $’000 3,634 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 NOTE 23. NON-CURRENT LIABILITIES – BORROWINGS Bank loans (net of borrowing costs) Lease liability Refer to note 32 for further information on financial risk management. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans (net of borrowing costs) Lease liability Assets pledged as security VIRTUS HEALTH ANNUAL REPORT 2015 55 Consolidated 2015 $’000 2014 $’000 152,148 139,281 98 135 152,246 139,416 Consolidated 2015 $’000 2014 $’000 152,148 139,281 148 197 152,296 139,478 The bank loans are secured by guarantees by all group companies and fixed and floating charges over the consolidated entity’s assets. Guarantees are not provided by subsidiaries which are not based in Australia and there are no fixed or floating charges over the assets of the international subsidiaries of the consolidated entity. However the shares representing the ownership interest in the international subsidiaries are included in the charges over the consolidated entity. The lease liabilities are effectively secured as the rights to the leased assets, recognised in the statement of financial position, revert to the lessor in the event of default. The assets of City West Specialist Day Hospital Pty Ltd and Obstetrics & Gynaecological Imaging Australia Pty Limited are excluded from the assets pledged as security. However the units representing the 50% interest are included in the charges over the consolidated entity. The carrying amounts of assets pledged as security for current and non-current borrowings are: Cash and cash equivalents Receivables Inventories Other current assets Investments Plant and equipment Intangible assets (excluding goodwill) Deferred tax assets Other financial assets Consolidated 2015 $’000 16,130 10,835 278 1,158 30,065 24,997 7,135 8,304 76 2014 $’000 18,820 11,052 192 1,251 24,972 26,783 5,606 8,140 141 98,978 96,957 56 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 23. NON-CURRENT LIABILITIES – BORROWINGS (continued) Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank loans* Working capital facilities* Used at the reporting date Bank loans (excluding capitalised borrowing costs) Working capital facilities Unused at the reporting date Bank loans Working capital facilities * Credit facilities expire in September 2019 Consolidated 2015 $’000 2014 $’000 200,000 140,000 10,000 10,000 210,000 150,000 153,000 140,000 3,430 3,366 156,430 143,366 47,000 6,570 53,570 – 6,634 6,634 The consolidated entity has complied with the financial covenants of its borrowing liabilities during the financial year ended 30 June 2015 and 30 June 2014. Working capital facilities utilised consist of $3,430,000 of bank guarantees. NOTE 24. NON-CURRENT LIABILITIES – DERIVATIVE FINANCIAL INSTRUMENTS Interest rate swap contracts – cash flow hedges Refer to note 32 for further information on financial risk management. Refer to note 33 for further information on fair value measurement. NOTE 25. NON-CURRENT LIABILITIES – PROVISIONS Employee benefits – long service leave Lease make good Lease make good Consolidated 2015 $’000 676 2014 $’000 137 Consolidated 2015 $’000 1,761 3,762 5,523 2014 $’000 1,599 3,064 4,663 The provision represents the present value of the estimated costs to make good the premises leased by the consolidated entity at the end of the respective lease terms. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 57 Movements in provisions Movements in each class of provision during the current financial year, other than employee benefits, are set out below: Consolidated – 2015 Carrying amount at the start of the year Additional provisions recognised Unwinding of discount Carrying amount at the end of the year NOTE 26. NON-CURRENT LIABILITIES – OTHER FINANCIAL LIABILITIES Other financial liability Refer to note 33 for other information on financial instruments. Lease make good $’000 3,064 640 58 3,762 Consolidated 2015 $’000 2014 $’000 24,705 11,802 The other financial liability represents the fair value of the consideration to acquire the non-controlling interests in SIMS Clinic Limited and Tas IVF Pty Limited on the assumption that the put options held by the non-controlling interests are exercised. NOTE 27. EQUITY – ISSUED CAPITAL Consolidated 2015 Shares 2014 Shares 2015 $’000 2014 $’000 Ordinary shares – fully paid 79,935,938 79,722,678 238,429 237,135 Date Shares Issue price $’000 1 July 2013 79,536,601 231,981 Movements in ordinary share capital Details Balance Shares issued – exercise of options Shares issued – exercise of options Shares issued – exercise of options Tax benefit now determined relating to a portion of options adjustment payments made in June 2013 7 February 2014 11 March 2014 13 March 2014 50,000 38,680 97,397 – Balance Shares issued – exercise of options 30 June 2014 79,722,678 18 September 2014 125,000 Shares issued – acquisition of IVF Sunshine Coast Pty Limited 31 October 2014 Shares issued – exercise of options 3 March 2015 38,260 50,000 $5.68 $5.68 $5.68 $5.68 $7.84 $5.68 284 220 553 4,097 237,135 710 300 284 Balance 30 June 2015 79,935,938 238,429 58 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 27. EQUITY – ISSUED CAPITAL (continued) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. All shares on issue are fully paid apart from 2,009,880 shares which are partly paid. The 2,009,880 shares were issued at $4.71 per share and are unpaid up to the extent of $2.44 per share at 30 June 2015. Share buy-back There is no current on-market share buy-back. Capital risk management The consolidated entity’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The consolidated entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current parent entity’s share price at the time of the investment. NOTE 28. EQUITY – RESERVES Foreign currency translation reserve Cash flow hedges reserve Share-based payments reserve Put option business combination reserve Foreign currency translation reserve Consolidated 2015 $’000 (275) (476) 11,587 (23,825) 2014 $’000 (400) (96) 10,642 (11,756) (12,989) (1,610) The reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Cash flow hedges reserve The reserve is used to recognise the effective portion of the gain or loss of cash flow hedge instruments that is determined to be an effective hedge. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and directors as part of their remuneration, and other parties as part of their compensation for services. Put option business combination reserve The reserve is used to recognise the impact of the non-controlling interest put options relating to the SIMS Clinic Limited and Tas IVF Pty Limited acquisitions. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 59 Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 July 2013 Revaluation – net Foreign currency translation Option expense Business combination Balance at 30 June 2014 Revaluation – net Foreign currency translation Option expense Business combinations Foreign currency translation reserve $’000 Cash flow hedges reserve $’000 Share-based payments reserve $’000 Put option business combination reserve $’000 – – (400) – – (400) – 125 – – – (96) – – – (96) (380) – – – Total $’000 10,186 (96) (400) 456 – – – – (11,756) (11,756) 10,186 – – 456 – 10,642 (11,756) (1,610) – – 945 – – – – (380) 125 945 (12,069) (12,069) Balance at 30 June 2015 (275) (476) 11,587 (23,825) (12,989) NOTE 29. EQUITY – RETAINED PROFITS/(ACCUMULATED LOSSES) Accumulated losses at the beginning of the financial year Profit after income tax expense for the year Dividends paid (note 31) Consolidated 2015 $’000 (6,139) 29,434 (21,300) 2014 $’000 (27,578) 30,885 (9,446) Retained profits/(accumulated losses) at the end of the financial year 1,995 (6,139) NOTE 30. EQUITY – NON-CONTROLLING INTEREST Issued capital Reserves Retained profits Consolidated 2015 $’000 1,842 15,965 1,079 2014 $’000 55 10,113 72 18,886 10,240 60 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 31. EQUITY – DIVIDENDS Dividends Dividends paid during the financial year were as follows: Interim ordinary dividend for the year ended 30 June 2015 of 13.0 cents (2014: 12.0 cents) per fully paid share paid in April 2015 Final ordinary dividend for the year ended 30 June 2014 of 14.0 cents per fully paid ordinary share paid in October 2014 Consolidated 2015 $’000 10,385 10,915 21,300 2014 $’000 9,446 – 9,446 A final dividend of 14.00 cents per share, fully franked, will be paid on 16 October 2015 to the shareholders on the register at 2 October 2015. Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% Consolidated 2015 $’000 2014 $’000 17,245 13,329 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: • franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date • franking debits that will arise from the payment of dividends recognised as a liability at the reporting date • franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date NOTE 32. FINANCIAL RISK MANAGEMENT Financial risk management objectives The consolidated entity’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The consolidated entity’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the consolidated entity. The consolidated entity uses derivative financial instruments such as forward foreign exchange contracts to hedge certain risk exposures. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative instruments. The consolidated entity uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, ageing analysis for credit risk and beta analysis in respect of investment portfolios to determine market risk. Risk management is carried out by senior finance executives (‘finance’) under policies approved by the Board of Directors (‘the Board’). These policies include identification and analysis of the risk exposure of the consolidated entity and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within the consolidated entity’s operating units. Finance reports to the Board on a monthly basis. Market risk Foreign currency risk The group operates internationally and is exposed to foreign currency risk from various currency exposures, primarily with respect to the Euro. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. The carrying amount of the consolidated entity’s foreign currency denominated financial assets and financial liabilities at the reporting date were not significant. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 61 Price risk The consolidated entity is exposed to changes in Commonwealth Government funding for the healthcare services the consolidated entity provides which may impact patient out-of-pocket expenses and thus demand. Interest rate risk The consolidated entity’s main interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the consolidated entity to interest rate risk. Borrowings issued at fixed rates expose the consolidated entity to fair value interest rate risk. The policy is to maintain approximately 30% of borrowings at fixed rate using interest rate swaps to achieve this when necessary. As at the reporting date, the consolidated entity had the following variable rate borrowings and interest rate swap contracts outstanding: Consolidated Bank loans 2015 2014 Weighted average interest rate % Weighted average interest rate % Balance $’000 Balance $’000 4.10% 153,000 4.65% 140,000 Interest rate swaps (notional principal amount) –% (50,000) –% (50,000) Net exposure to cash flow interest rate risk 103,000 90,000 During the prior year the consolidated entity entered in interest rate swap contracts hedging $50,000,000 of its borrowings. An analysis by remaining contractual maturities is shown in the ‘liquidity and interest rate risk management’ section below. Consolidated – 2015 Bank loans Consolidated – 2014 Bank loans Credit risk Basis points increase Basis points decrease Basis points change Effect on profit after tax Effect on equity Basis points change Effect on profit after tax Effect on equity 100 (721,000) (721,000) (100) 721,000 721,000 Basis points increase Basis points decrease Basis points change Effect on profit after tax Effect on equity Basis points change Effect on profit after tax Effect on equity 100 (630,000) (630,000) (100) 630,000 630,000 Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has a strict code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The consolidated entity obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The consolidated entity does not hold any collateral. Receivables balances and ageing analysis are monitored on an on-going basis. In order to minimise the consolidated entity’s exposure to bad debts, processes are in place to send reminder notices, demands for repayment and ultimately to refer to debt collection agencies. Liquidity risk Vigilant liquidity risk management requires the consolidated entity to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The consolidated entity manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. 62 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 32. FINANCIAL RISK MANAGEMENT (continued) Financing arrangements Unused borrowing facilities at the reporting date: Bank loans* Working capital facilities* * Credit facilities expire in September 2019. Remaining contractual maturities Consolidated 2015 $’000 47,000 6,570 53,570 2014 $’000 – 6,634 6,634 The following tables detail the consolidated entity’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 Consolidated – 2015 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing Bank loans Lease liability Other financial liability Total non-derivatives Derivatives –% –% 10,331 12,840 – – – – 4.10% 7.66% 4.10% 6,273 6,273 167,111 61 – 94 – – 28,451 29,505 6,367 195,562 – – – – – – – – 10,331 12,840 179,657 155 28,451 231,434 676 676 Derivative financial instruments –% Total derivatives – – – – 676 676 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 63 Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 –% –% 10,284 13,232 – – 4.65% 7.66% 4.65% 6,510 146,519 62 – 122 – 30,088 146,641 – – – 33 6,401 6,434 – – – – 7,745 7,745 10,284 13,232 153,029 217 14,146 190,908 Consolidated – 2014 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing Bank loans Lease liability Other financial liability Total non-derivatives Derivatives Derivative financial instruments –% Total derivatives – – 137 137 – – – – 137 137 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. NOTE 33. FAIR VALUE MEASUREMENT Fair value hierarchy The following tables detail the consolidated entity’s assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Consolidated – 2015 Liabilities Derivative financial liabilities Other financial liabilities Total liabilities Consolidated – 2014 Liabilities Derivative financial liabilities Other financial liabilities Total liabilities There were no transfers between levels during the financial year. Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – 676 – 676 – 24,705 24,705 Level 1 $’000 Level 2 $’000 Level 3 $’000 – – – 137 – 137 – 11,802 11,802 676 24,705 25,381 Total $’000 137 11,802 11,939 64 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 33. FAIR VALUE MEASUREMENT (continued) The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of other financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 Derivative financial instruments have been valued using quoted market rates. This valuation technique maximises the use of observable market data where it is available and relies as little as possible on entity specific estimates. Other financial liabilities have been valued using a forecast earnings model, discounted using specific borrowing rates. Level 3 assets and liabilities Movements in level 3 assets and liabilities during the current and previous financial year are set out below: Consolidated Balance at 1 July 2013 Additions Balance at 30 June 2014 Additions Foreign exchange impact Interest on unwinding Balance at 30 June 2015 Other financial liabilities $’000 – Total $’000 – 11,802 11,802 11,802 12,069 (126) 960 11,802 12,069 (126) 960 24,705 24,705 The level 3 assets and liabilities unobservable inputs and sensitivity are as follows: Description Unobservable inputs Sensitivity Other financial liabilities Discount rate a 1% change would increase/decrease the fair value by $615,000/($588,000) EBITDA growth rate a 1% change would increase/decrease the fair value by $606,000/($590,000) NOTE 34. KEY MANAGEMENT PERSONNEL DISCLOSURES Compensation The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated 2015 $ 2014 $ 2,726,880 2,242,064 195,512 32,617 286,240 142,475 40,538 173,092 3,241,249 2,598,169 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 65 NOTE 35. REMUNERATION OF AUDITORS During the financial year the following fees were paid or payable for services provided by PricewaterhouseCoopers, the auditor of the company, and its network firms: Audit services – PricewaterhouseCoopers Audit or review of the financial statements Other services – PricewaterhouseCoopers Due diligence Tax compliance services International tax consulting and tax advice on mergers and acquisitions Non-statutory audits and reviews relating to acquisitions Audit services – network firms Audit or review of the financial statements Other services – network firms Due diligence Tax services Consolidated 2015 $ 2014 $ 525,750 437,775 128,131 62,976 – 120,000 127,240 62,500 101,200 – 311,107 290,940 836,857 728,715 141,954 29,480 – 25,373 83,739 – 83,739 25,373 225,693 54,853 It is the consolidated entity’s policy to utilise appropriate accounting and consulting resource for other services which may include tax advice and due diligence reporting on acquisitions, and it is the consolidated entity’s policy to seek competitive tenders for such assignments as appropriate. NOTE 36. CONTINGENT LIABILITIES Claims The consolidated entity is currently involved in litigations which may result in future liabilities and legal fees up to an insurance excess of $25,000. The consolidated entity has disclaimed liability and is defending the actions. It is not practical to estimate the potential effect of these claims but advice indicates that any liability that may arise in the unlikely event that the claims are successful will not be significant and will be covered by the consolidated entity’s insurance policies. Guarantees Drawdowns of $3,430,000 (2014: $3,366,000) in the form of financial guarantees have been made against the working capital facility. Subject to the continued compliance with debt covenants, the bank facilities may be drawn at any time and have an average maturity of 4 years (2014: 2 years). 66 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 37. COMMITMENTS Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Lease commitments – finance Committed at the reporting date and recognised as liabilities, payable: Within one year One to five years Total commitment Less: Future finance charges Net commitment recognised as liabilities Representing: Lease liability – current (note 19) Lease liability – non-current (note 23) Consolidated 2015 $’000 2014 $’000 8,633 20,102 12,297 6,498 13,966 5,827 41,032 26,291 50 105 155 (7) 148 50 98 148 62 155 217 (20) 197 62 135 197 Operating lease commitments includes contracted amounts for various offices and medical centres under non-cancellable operating leases expiring within 2 to 8 years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Excess office space is sub-let to third parties also under non-cancellable operating leases. These leases have future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases of $702,213 (2014: $295,887). Finance lease commitments includes contracted amounts for various plant and equipment with a written down value of $nil (30 June 2014: $nil) under finance leases expiring within 1 to 4 years. Under the terms of the leases, the consolidated entity has the option to acquire the leased assets for predetermined residual values on the expiry of the leases. NOTE 38. RELATED PARTY TRANSACTIONS Parent entity Virtus Health Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 41. Associates Interests in associates are set out in note 42. Key management personnel Disclosures relating to key management personnel are set out in note 34 and the remuneration report in the directors’ report. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 Transactions with related parties The following transactions occurred with related parties: Other revenue: Rental income Other transactions: Provider fees (i) VIRTUS HEALTH ANNUAL REPORT 2015 67 Consolidated 2015 $ 2014 $ 69,907 84,574 2,813,773 2,468,067 (i) The following key management personnel received provider fees for IVF services delivered to patients: Lyndon Hale, Peter Illingworth, David Molloy and William Watkins (30 June 2014: Lyndon Hale, Peter Illingworth and David Molloy). Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Current receivables: Trade receivables from associates Other receivables Current payables: Other payables Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. NOTE 39. PARENT ENTITY INFORMATION Set out below is the supplementary information about the parent entity. Statement of comprehensive income Profit after income tax Total comprehensive income Consolidated 2015 $ 2014 $ 1,189,450 887,965 6,773 5,396 268,500 159,610 Parent 2015 $’000 2014 $’000 13,349 12,759 13,349 12,759 68 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 39. PARENT ENTITY INFORMATION continued) Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Net assets Equity Issued capital Share-based payments reserve Retained profits Total equity Parent 2015 $’000 1,884 2014 $’000 942 271,072 272,634 2,579 1,306 6,363 1,376 264,709 271,258 238,429 237,135 7,056 19,224 6,948 27,175 264,709 271,258 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2015 and 30 June 2014 apart from being a party to the deed of cross guarantee as detailed in note 43. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2015 and 30 June 2014. Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment at as 30 June 2015 and 30 June 2014. Significant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in note 1, except for the following: • Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. • Investments in associates are accounted for at cost, less any impairment, in the parent entity. • Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 69 NOTE 40. BUSINESS COMBINATIONS Human Assisted Reproduction Ireland (HARI) Limited On 31 December 2014, Sims Clinic Limited (a 70% subsidiary of Virtus Health Limited), formed a new company, Human Assisted Reproduction Ireland (HARI) Limited to acquire the IVF business and assets from The Governors and Guardians of the Hospital For The Relief Of Poor Lying In Women, Dublin (commonly known as the Rotunda Hospital). Total consideration transferred amounted to $9,041,000. The values identified in relation to the acquisition of the business are provisional as at 30 June 2015. Details of the acquisition are as follows: Trade and other receivables Plant and equipment Employee benefits Deferred revenue Net liabilities acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Acquisition costs expensed to profit or loss Fair value $’000 184 259 (45) (549) (151) 9,192 9,041 9,041 522 The acquired business contributed revenues and other income of $3,147,000 and profit before tax of $32,000 (including restructuring and integration costs and excluding the cost of financing the transaction) to the consolidated entity for the period from 31 December 2014 to 30 June 2015. If the acquisition had occurred on 1 July 2014, the full year contributions would have been revenues of $6,294,000 and profit before tax of $64,000 excluding any additional financing costs and including restructuring and integration costs. These amounts have been calculated using the consolidated entity’s accounting policies and by adjusting the results of the subsidiary to reflect the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 July 2014, together with the consequential tax effects. Goodwill is attributable to the workforce and the expected profitability of the acquired entity. Tas IVF Pty Limited On 5 December 2014, Virtus Health Limited, acquired 70% of the issued share capital and units of Tas IVF Pty Ltd. Total consideration transferred amounted to $15,971,000. The values identified in relation to the acquisition of the company are provisional as at 30 June 2015. 70 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 40. BUSINESS COMBINATIONS (continued) Details of the acquisition are as follows: Cash and cash equivalents Trade receivables Plant and equipment Brand names Other intangible assets Trade payables Provision for income tax Deferred tax liability Employee benefits Deferred revenue Short-term debt Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Working capital adjustment receivable Non-controlling interest Acquisition costs expensed to profit or loss Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Add: Short-term debt Less: cash and cash equivalents Working capital adjustment – amount not yet settled Net cash used Fair value $’000 5,756 438 475 886 7 (296) (388) (69) (343) (285) (5,309) 872 21,999 22,871 16,100 (129) 6,900 22,871 227 15,971 5,309 (5,756) 129 15,653 The acquired business contributed revenues and other income of $4,561,000 and profit before tax of $1,593,000 (excluding the cost of financing the transaction) to the consolidated entity for the period from 5 December 2014 to 30 June 2015. If the acquisition had occurred on 1 July 2014, the full year contributions would have been revenues of $7,642,000 and profit before tax of $3,353,000 excluding any additional financing costs. These amounts have been calculated using the consolidated entity’s accounting policies and by adjusting the results of the subsidiary to reflect the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 July 2014, together with the consequential tax effects. Goodwill is attributable to the workforce and the profitability of the acquired entity. IVF Sunshine Coast Pty Limited On 31 October 2014, Queensland Fertility Group Pty Limited, a fully owned subsidiary of Virtus Health Limited, acquired the remaining 80% of the issued share capital and units of IVF Sunshine Coast Pty Limited. Total consideration transferred amounted to $1,340,000. The values identified in relation to the acquisition of the company are provisional as at 30 June 2015. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 Details of the acquisition are as follows: Cash and cash equivalents Trade receivables Income tax refund due Other current assets Plant and equipment Deferred tax asset Trade payables Employee benefits Other provisions Deferred revenue Lease liability Net liabilities acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Virtus Health Limited shares issued to vendor Gain on remeasurement of previously held 20% investment to fair value Working capital movement – amount not yet paid Acquisition costs expensed to profit or loss Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: cash and cash equivalents Less: shares issued by company as part of consideration Working capital adjustment Net cash used VIRTUS HEALTH ANNUAL REPORT 2015 71 Fair value $’000 135 33 22 31 183 45 (54) (12) (133) (182) (173) (105) 1,445 1,340 750 300 300 (10) 1,340 108 1,040 (135) (300) 10 615 The acquired business contributed revenues and other income of $1,265,000 and profit before tax of $137,000 (excluding the cost of financing the transaction) to the Group for the period from 1 November 2014 to 30 June 2015. If the acquisition had occurred on 1 July 2014, the full year contributions would have been revenues of $1,785,000 and profit before tax of $31,000 excluding any additional financing or brand amortisation costs. These amounts have been calculated using the Group’s accounting policies and by adjusting the results of the subsidiary to reflect the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from 1 July 2014, together with the consequential tax effects. Goodwill is attributable to the workforce and the profitability of the acquired entity. 72 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 40. BUSINESS COMBINATIONS (continued) Acquisition of SIMS Clinic On 30 May 2014 Virtus Health Pty Limited, acquired 70% of the issued share capital and units of SIMS Clinic Limited. 2015 Since the date of acquisition there have been changes to the acquired net assets and the working capital adjustment during the year ended 30 June 2015 which have resulted in an increase to goodwill of $769,000. 2014 Details of the acquisition are as follows: Cash and cash equivalents Trade receivables Plant and equipment, and software Brand names Trade payables Deferred tax liability Employee benefits Other provisions Deferred revenue Other payables Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Working capital adjustment receivable Non-controlling interest Fair value $’000 2,002 2,915 1,577 4,538 (1,889) (553) (116) (1,025) (460) (384) 6,605 27,289 33,894 24,364 (638) 10,168 33,894 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 73 NOTE 41. INTERESTS IN SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following wholly-owned subsidiaries in accordance with the accounting policy described in note 1: Name IVF Finance Pty Limited IVFA Sub-Holdings Pty Ltd IVF Australia Pty Ltd Melbourne IVF Holdings Pty Ltd Melbourne I.V.F. Pty. Ltd. The Heptarchy Trust North Shore Specialist Day Hospital Pty Ltd Queensland Fertility Group Pty. Ltd. Spring Hill Specialist Day Hospital Pty Limited The QFG Day Theatres Unit Trust Hunter Fertility Pty Limited Hunter Fertility Unit Trust Bremiera Pty Limited Queensland Fertility Group Gold Coast Pty Ltd Gold Coast Obstetrics & Gynaecology Specialist Services Pty Ltd Mackay Specialist Day Hospital Pty Limited Maroubra Day Surgery Trust City East Specialist Day Hospital Pty Ltd Virtus Health Singapore Pte Ltd Virtus Health Europe Limited Virtus Health Ireland Limited Zentra Labs Limited SIMS Clinic Limited Xentra Pharm Limited SIMS Institute Limited SIMS EDE Limited IVF Sunshine Coast Limited Human Assisted Reproduction Ireland (HARI) Limited TAS IVF Pty Limited Virtus Andrology Laboratory Singapore Pte. Ltd Virtus Fertility Centre Singapore Pte Limited Virtus Health Specialist Diagnostics Pty Limited Principal place of business/Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ownership interest 2015 % 2014 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Singapore 100.00% 100.00% United Kingdom 100.00% 100.00% Ireland Ireland Ireland Ireland Ireland Ireland Australia Ireland Australia Singapore Singapore Australia 100.00% 100.00% 70.00% 70.00% 70.00% 70.00% 70.00% 100.00% 70.00% 70.00% 90.00% 90.00% 100.00% 70.00% 70.00% 70.00% 70.00% 70.00% –% –% –% –% –% –% The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries with non-controlling interests in accordance with the accounting policy described in note 1: Parent Non-controlling interest Name SIMS Clinic Limited TAS IVF Pty Limited Virtus Fertility Centre Singapore Pte Limited Principal place of business/ Country of incorporation Ireland Australia Principal activities Ownership interest 2015 % Ownership interest 2014 % Ownership interest 2015 % provision of healthcare services 70.00% 70.00% provision of healthcare services 70.00% Ownership interest 2014 % 30.00% –% –% 30.00% 30.00% 10.00% –% –% Singapore provision of healthcare services 90.00% 74 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 41. INTERESTS IN SUBSIDIARIES (continued) Summarised financial information Set out below is the summarised financial information of the non-controlling interests that are material to the consolidated entity. The amounts disclosed are before inter-company eliminations. Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Summarised statement of comprehensive income Revenue Expenses Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Total comprehensive income Statement of cash flows Net cash from operating activities Net cash used in investing activities Net cash from financing activities SIMS Clinic Limited 2015 $’000 3,998 12,443 16,441 6,358 502 6,860 2014 $’000 6,449 1,579 8,028 5,152 27 5,179 9,581 2,849 26,343 (22,941) 3,402 (514) 2,888 – 2,888 5,208 (11,207) 4,923 1,539 (1,265) 274 (34) 240 – 240 631 – – Net increase/(decrease) in cash and cash equivalents (1,076) 631 Other financial information Profit attributable to non-controlling interests Dividends payable to non-controlling interests Accumulated non-controlling interests at the end of reporting period Transactions with non-controlling interests Dividends payable to non-controlling interest Capital contribution received from non-controlling interest 866 315 72 – 12,030 10,240 Consolidated 2015 $’000 (315) 1,787 1,472 2014 $’000 – – – NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 75 NOTE 42. INTERESTS IN ASSOCIATES Interests in associates are accounted for using the equity method of accounting. Information relating to associates that are material to the consolidated entity are set out below: Name Principal place of business/ Country of incorporation Obstetrics & Gynaecological Imaging Australia Pty Ltd Provision of medical services City West Specialist Day Hospital Pty Ltd Provision of medical services Ownership interest 2015 % 50.00% 50.00% 2014 % 50.00% 50.00% Summarised financial information Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Total liabilities Net assets Summarised statement of comprehensive income Revenue Expenses Profit before income tax Other comprehensive income Total comprehensive income 2015 $’000 755 1,456 2,211 1,098 1,098 1,113 3,764 (3,201) 563 – 563 2014 $’000 310 1,656 1,966 1,419 1,419 547 2,594 (2,405) 189 – 189 76 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 43. DEED OF CROSS GUARANTEE The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others: Virtus Health Limited IVF Finance Pty Limited IVFA Sub-Holdings Pty Ltd IVF Australia Pty Ltd Melbourne IVF Holdings Pty Ltd Queensland Fertility Group Pty. Ltd. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare financial statements and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission (‘ASIC’). The above companies represent a ‘Closed Group’ for the purposes of the Class Order, and as there are no other parties to the deed of cross guarantee that are controlled by Virtus Health Limited, they also represent the ‘Extended Closed Group’. Set out below is a consolidated statement of comprehensive income and statement of financial position of the ‘Closed Group’. Statement of comprehensive income Revenue Share of profits of associates accounted for using the equity method Trust distributions received Other income Fertility specialists, consumables and associated costs Employee benefits expense Depreciation and amortisation expense Occupancy expense Advertising and marketing Practice equipment expenses Professional and consulting fees Other expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Net change in the fair value of cash flow hedges taken to equity, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Equity – retained profits Retained profits/(accumulated losses) at the beginning of the financial year Profit after income tax expense Dividends paid 2015 $’000 2014 $’000 106,402 103,493 563 21,184 4,794 (28,195) (34,987) (4,906) (6,280) (2,199) (646) (1,505) (6,129) (8,279) 39,817 (11,240) 189 25,334 1,882 (28,548) (32,063) (4,594) (6,235) (1,751) (617) (966) (6,215) (7,590) 42,319 (12,604) 28,577 29,715 (380) (380) (96) (96) 28,197 29,619 2015 $’000 9,058 28,577 (21,300) 2014 $’000 (11,211) 29,715 (9,446) Retained profits at the end of the financial year 16,335 9,058 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 Statement of financial position Current assets Cash and cash equivalents Trade and other receivables Other Non-current assets Investments accounted for using the equity method Other financial assets Property, plant and equipment Intangibles Deferred tax Other Total assets Current liabilities Trade and other payables Income tax Provisions Other Non-current liabilities Borrowings Derivative financial instruments Provisions Other financial liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity VIRTUS HEALTH ANNUAL REPORT 2015 77 2015 $’000 2014 $’000 9,854 38,414 685 48,953 1,489 170,201 14,572 11,902 39,220 762 51,884 1,489 149,928 14,545 200,567 196,396 6,418 76 8,707 141 393,323 371,206 442,276 423,090 14,911 3,060 1,699 2,977 16,072 4,369 1,487 2,450 22,647 24,378 152,120 139,253 676 2,489 7,949 137 2,583 – 163,234 141,973 185,881 166,351 256,395 256,739 238,429 1,631 16,335 237,135 10,546 9,058 256,395 256,739 NOTE 44. EVENTS AFTER THE REPORTING PERIOD No matter or circumstance has arisen since 30 June 2015 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. 78 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 45. RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH FROM OPERATING ACTIVITIES Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Share of profit – associates Share-based payments Amortisation of bank facility fees Interest on finance lease facility Interest income Doubtful debts expense Other non-cash items Net (gain)/loss in disposal of non-current assets Interest on other financial liabilities Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Decrease/(increase) in inventories Decrease in deferred tax assets Increase/(decrease) in trade and other payables Increase/(decrease) in provision for income tax Increase in other provisions Increase in other operating liabilities Net cash from operating activities Consolidated 2015 $’000 2014 $’000 30,441 30,957 9,994 (563) 945 911 13 (220) 775 (86) 307 960 (1,388) (112) 226 (3,589) (251) 1,118 1,107 8,192 (189) 456 463 17 (349) 355 (193) 170 – 1,255 125 2,267 2,478 5,591 929 17 40,588 52,541 NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 79 NOTE 46. EARNINGS PER SHARE Profit after income tax Non-controlling interest Profit after income tax attributable to the owners of Virtus Health Limited Add: interest savings on conversion of options Profit after income tax attributable to the owners of Virtus Health Limited used in calculating diluted earnings per share Consolidated 2015 $’000 30,441 (1,007) 2014 $’000 30,957 (72) 29,434 30,885 140 157 29,574 31,042 Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 79,861,949 79,593,751 Adjustments for calculation of diluted earnings per share: Options over ordinary shares 1,067,866 1,087,109 Weighted average number of ordinary shares used in calculating diluted earnings per share 80,929,815 80,680,860 Basic earnings per share Diluted earnings per share Cents 36.86 36.54 Cents 38.80 38.48 80 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 47. SHARE-BASED PAYMENTS Virtus Health Limited Executive Option Plan and Specialist Option Plan (‘Virtus Health Limited Share Option Plan’) The Virtus Health Limited Share Option Plan was adopted by the Board on 11 June 2013. The Virtus Health Limited Share Option Plan was established to reward, retain and motivate fertility specialists and senior executives. Participation in the Virtus Health Limited Share Option Plan is at the Board’s discretion and no individual has a contracted right to participate in the Virtus Health Limited Share Option Plan or to receive any guaranteed benefits. Further details are provided in the remuneration report. Set out below are summaries of options granted under the plans: 2015 Effective grant date 11/06/2013 01/07/2013 01/07/2013 01/07/2013 01/01/2014 03/10/2014 10/11/2014 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 2014 Expiry date 11/06/2018 27/01/2017 21/01/2024 21/01/2024 01/01/2024 03/10/2024 10/11/2024 13/05/2025 13/05/2025 13/05/2025 13/05/2025 13/05/2025 Grant date Expiry date 11/06/2013 01/07/2013 01/07/2013 01/07/2013 01/07/2013 11/06/2018 27/01/2017 27/01/2017 21/01/2024 21/01/2024 Exercise or base price Balance at the start of the year Granted $5.68 $5.68 $0.00 $0.00 $8.69 $8.57 $7.65 $7.16 $7.53 $7.94 $7.96 $8.01 412,500 438,005 45,136 96,238 – – – – – – – – – – – – 29,073 117,251 85,990 7,372 912 794 343 262 Exercised/ cancelled – (175,000) – – – – – – – – – – 991,879 241,997 (175,000) Expired/ forfeited/ other Balance at the end of the year – – – – – – – – – – – – – 412,500 263,005 45,136 96,238 29,073 117,251 85,990 7,372 912 794 343 262 1,058,876 Exercise or base price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year $5.68 $5.68 $5.68 $0.00 $0.00 412,500 – – – – – – 450,000 (50,000) 174,082 (136,077) 45,136 96,238 – – 412,500 765,456 (186,077) – – – – – – 412,500 400,000 38,005 45,136 96,238 991,879 The weighted average exercise price is $5.50. The weighted average remaining contractual life of options outstanding at the end of the financial year was 4.8 years (2014: 4 years). NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 81 For the options granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price at grant date Exercise price Expected volatility Dividend yield Risk-free interest rate Fair value at grant date 01/01/2014* 03/10/2014 10/11/2014 13/05/2015 13/05/2015 13/05/2015 13/05/2015 13/05/2015 01/01/2024 03/10/2024 10/11/2024 13/05/2025 13/05/2025 13/05/2025 13/05/2025 13/05/2025 $8.74 $7.78 $7.65 $7.34 $7.34 $7.34 $7.34 $7.34 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 25.00% 25.00% 25.00% 20.50% 20.50% 20.50% 20.50% 20.50% 3.30% 3.30% 3.40% 3.50% 3.50% 3.50% 3.50% 3.50% 2.70% 2.87% 2.70% 2.15% 2.15% 2.15% 2.15% 2.15% $1.63 $1.20 $1.24 $0.75 $0.19 $0.09 $0.08 $0.06 * The effective grant date occurred in the prior financial year, however the yearly expense has been reflected in current financial year. Grants of options – fertility specialists Options will be granted on an annual basis to existing fertility specialists who achieve a benchmark level of IVF Cycles above a base or adjusted base number of IVF cycles established in one of the financial years ending after June 2008. In addition, consistent with the practice pre-listing on the ASX, options will also be granted to new fertility specialists upon commencing a contractual relationship with the company post-listing. The initial benchmark level for new fertility specialists is 50 IVF Cycles and subsequent benchmark levels are at each 50 cycle increment thereafter. The key terms and conditions to these option grants are set out below: For existing fertility specialists, options will generally vest equally in three tranches on the third, fourth and fifth anniversary of the grant of the options, conditional upon the fertility specialist performing a number of IVF Cycles in the immediately preceding year not less than 75% of the relevant benchmark in the year pursuant to which the options were awarded. For new fertility specialists who join the company, options will generally vest equally in three tranches on the third, fourth and fifth anniversary of the grant of the options, subject to: • the fertility specialist achieving the relevant benchmark (currently 50 IVF Cycles) in a 12 month period during the two years post commencement of the contractual relationship with Virtus and concurrent grant of options; and • the fertility specialist then achieving a number of IVF Cycles in the year before the relevant vesting date that is not less than 75% of the benchmark number. In addition, an option may not be exercised unless it is “in the money” (i.e. if the share price at the relevant time is greater than the share price at the time of the option grant). Fertility specialists will not need to pay an exercise price to exercise the options. Vesting Conditions Options will vest and become exercisable to the extent that the applicable performance, service, or other vesting conditions specified at the time of the grant are satisfied. Vesting conditions may include conditions relating to continuous employment or service, the individual performance of the participant in the Plan or the company’s performance. The Board has the discretion to set the terms and conditions on which it will offer options under the Plan, including the vesting conditions and different terms and conditions which apply to different participants in the Plan. Upon the satisfaction of the vesting conditions and any other conditions to exercise, each option will be exercisable into a variable number of shares based on the terms of issue of the options. The number of shares to be issued will be calculated by multiplying the applicable component of the offer value of the grant by the amount of the increase in the share price between the share price at vesting compared to the price at grant all divided by the share price at vesting. Fertility specialists will not need to pay an exercise price to exercise the options. 82 VIRTUS HEALTH ANNUAL REPORT 2015 NOTE 47. SHARE-BASED PAYMENTS (continued) High Performance Options – Fertility Specialists The Board has created a new High Performer Share Incentive Scheme to reward Fertility Specialists who consistently deliver more than 400 cycles per annum for a consecutive three year period. The High Performer incentive will have a performance hurdle whereby Fertility Specialists are required to achieve fresh cycle activity at greater than or equal to 400 cycles per annum over a consecutive three year qualifying period. The first incentive period commenced on 1 January 2014 and will run for a three year period ending 31st December 2016; The base price at date of grant will be the average daily closing share price for the month ending 31 December 2013; this has been calculated as $8.69; the base value of the incentive will be $500,000; The first vesting date is 1 January 2017 and vesting is also dependent on the ordinary share price at exercise being higher than the base price set at the time of incentive commencement; • The actual number of vested options awarded will be in accordance with the calculation methodology applied to the Fertility Specialist performance incentive structure; • Performance option grants may still be accrued for incremental performance above 400 cycles; • Once a vesting award is achieved after three years of consecutive high performance, a Fertility Specialist may then commence a new three year high performer incentive period. For example in a six year period a Fertility Specialist may achieve 2 vested awards with a base value of $500,000 each if he/she achieves 400 cycles per annum for a consecutive period of 6 years; • The 2015-2017 high performer share incentive commenced on 1 January 2015 for all eligible Fertility Specialists who did not achieve 400 cycles in calendar year 2014. The base price at date of grant is the average daily closing share price for the month ending 31 December 2014, which was $7.42; and • The high performer share incentive is administered in accordance with the plan rules established in the Virtus Health Limited Specialist Option Plan approved by the Board in June 2013. NOTES TO THE FINANCIAL STATEMENTS CONTINUEDfor the year ended 30 June 2015 VIRTUS HEALTH ANNUAL REPORT 2015 83 DIRECTORS’ DECLARATION In the directors’ opinion: • the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; • the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; • the attached financial statements and notes give a true and fair view of the consolidated entity’s financial position as at 30 June 2015 and of its performance for the financial year ended on that date; • there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and • at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group 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 described in note 43 to the financial statements. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors Peter Macourt Chairman 25 August 2015 Sydney 84 VIRTUS HEALTH ANNUAL REPORT 2015 Independent auditor’s report to the members of Virtus Health Limited Report on the financial report We have audited the accompanying financial report of Virtus Health Limited (the company), which comprises the statement of financial position as at 30 June 2015, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for the Virtus Health Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In note 1, 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 whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the consolidated 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 control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. INDEPENDENT AUDITOR’S REPORT to the members of Virtus Health Limited VIRTUS HEALTH ANNUAL REPORT 2015 85 Auditor’s opinion In our opinion: (a) the financial report of Virtus Health Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity's financial position as at 30 June 2015 and of its performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in note 1. Report on the Remuneration Report We have audited the remuneration report included in pages 17 to 28 of the directors’ report for the year ended 30 June 2015. 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. Auditor’s opinion In our opinion, the remuneration report of Virtus Health Limited for the year ended 30 June 2015 complies with section 300A of the Corporations Act 2001 PricewaterhouseCoopers Eddie Wilkie Partner Sydney 25 August 2015 PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. INDEPENDENT AUDITOR’S REPORT to the members of Virtus Health Limited 86 VIRTUS HEALTH ANNUAL REPORT 2015 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 21 August 2015. DISTRIBUTION OF EQUITABLE SECURITIES Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Number of holders of ordinary shares Number of holders of options over ordinary shares 3,360 2,782 389 222 76 6,829 – 1 – 1 33 9 44 – VIRTUS HEALTH ANNUAL REPORT 2015 87 EQUITY SECURITY HOLDERS Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Ordinary shares Ellerston Capital JCP Investment Partners Antares Equities Celeste Funds Mgt Arnhem Investment Mgt Norges Bank Investment Mgt AMP Capital Investors Pictet Asset Mgt Vanguard Investments Australia Mr & Mrs Michael G Buys Mr Lyndon G Hale Realindex Investments Wilson Asset Mgt State Street Global Advisors Dimensional Fund Advisors BlackRock Investment Mgt – Index F&S Quinn Trust Parametric Portfolio Associates ATI Asset Mgt Skeabost Pty Ltd Unquoted equity securities There are no unquoted equity securities. SUBSTANTIAL HOLDERS Substantial holders in the company are set out below: Ellerston Capital JCP Investment Partners VOTING RIGHTS The voting rights attached to ordinary shares are set out below: ORDINARY SHARES Number held 12,617,651 9,585,223 2,947,419 2,270,129 1,831,994 1,738,888 1,704,383 913,186 869,225 850,000 823,694 795,256 780,329 748,053 743,786 693,896 684,663 683,999 664,434 654,020 % of total shares issued 15.78 11.99 3.69 2.84 2.29 2.18 2.13 1.14 1.09 1.06 1.03 0.99 0.98 0.94 0.93 0.87 0.86 0.86 0.83 0.82 42,600,228 53.30 Ordinary shares Number held 12,617,651 9,585,223 % of total shares issued 15.78 11.99 On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. CORPORATE GOVERNANCE STATEMENT The Corporate Governance Statement was approved by the Board of Directors on 21 August 2015 and can be found at http://virtushealth.com.au/corporategovernance 88 VIRTUS HEALTH ANNUAL REPORT 2015 CORPORATE DIRECTORY Directors Peter Macourt – Chairman Susan Channon Dennis O’Neill Lyndon Hale Peter Turner Sonia Petering Company secretary Glenn Powers Notice of annual general meeting The details of the annual general meeting of Virtus Health Limited are: Wednesday 28 October 2015 at the Hilton Sydney at 2pm 488 George St, Sydney NSW 2000 Registered office Level 3, 176 Pacific Highway Greenwich NSW 2065 Phone: (02) 9425 1722 Fax: (02) 9425 1633 Principal place of business Level 3, 176 Pacific Highway Greenwich NSW 2065 Share register Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Phone: 1300 554 474 Auditor PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 1171 Solicitors Minter Ellison Aurora Place 88 Phillip Street Sydney NSW 2000 Bankers Australia and New Zealand Banking Group 242 Pitt Street Sydney NSW 2000 Westpac Banking Corporation Level 3, 275 Kent Street Sydney NSW 2000 Commonwealth Bank of Australia Ground floor, Tower 1 201 Sussex Street Sydney NSW 2000 Siemens Financial Services Inc 170 Wood Avenue, South Iselin New Jersey 08830, New Jersey 08830, United States of America National Australia Bank Level 19, NAB House 255 George Street Sydney NSW 2000 Stock exchange listing Virtus Health Limited shares are listed on the Australian Securities Exchange (ASX code: VRT) Website www.virtushealth.com.au Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 21 August 2015 and can be found at http://virtushealth.com.au/corporategovernance VIRTUS HEALTH ANNUAL REPORT 2015