for personal use only - asx · on 30 september 2015. i note that a special pre-ipo dividend of 8.5...

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CGL

A proven and preferred supplier of

technology and education services

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Statutory Financial results for the full-year ended 30 June 2015

relative to Previous Corresponding Period (PCP)

$72.97m total revenue

46%

$10.11m EBITDA

66%

$8.57m profit before income tax

62%

$6.53m net profit

58%

16.1¢ earnings per share

(note 7)

30%

23.5¢/share dividends paid

(note 28)

57%

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TECHNOLOGY + EDUCATION

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contents

Chairman’s report .......................................................................................................... 6

Operating and financial review ...................................................................................... 8

Board of directors ......................................................................................................... 17

Key management personnel ........................................................................................ 20

Corporate governance statement ................................................................................. 21

People and values ......................................................................................................... 27

Directors’ report ...........................................................................................................28

Remuneration report (audited) ................................................................................... 33

Auditor’s independence declaration ............................................................................ 44

Corporate directory ...................................................................................................... 45

Annual financial report ................................................................................................ 46

Notes to the financial statements ................................................................................. 53

Directors’ declaration ................................................................................................. 102

Auditor’s report .......................................................................................................... 103

Shareholder information ............................................................................................ 105

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Chairman’s report

PERFORMANCE

Dear Shareholder,

Following a successful Initial Public Offering (IPO) in November 2014 and the appointment of a new Board of Directors, I am pleased to report a strong financial performance by the Group in FY2015:

Statutory total revenues were $72.97 million compared with $49.93 million in FY2014;

Gross margins have remained stable or have increased in all subsidiaries;

Strong cost management has contributed to a profit before income tax of $8.57 million, compared with $5.30 million in FY2014;

Net Profit After Tax (NPAT) of $6.53 million compared with a FY2014 result of $4.13 million;

Cash and cash equivalent reserves remain strong at $37.22 million up from $19.26 million in FY2014; and,

An increase in the balance sheet by $31.70 million with net assets of $56.99 million compared to $25.28 million at 30 June 2014.

The strong result enabled the Board to approve 5.8 cents per share fully franked in dividend payments payable on 30 September 2015.

I note that a special pre-IPO dividend of 8.5 cents per share fully franked in October 2014 was paid to pre IPO shareholders.

In June 2015, the Group acquired PJA Solutions, a leading provider of managed technology services to the Australian health sector, for total consideration of approximately $45.4 million (or approximately 5x FY15 sustainable EBITDA). This acquisition expands Citadel’s position in the e-health sector and creates a broader platform to continue the growth of its managed service offerings. On a full year basis, Citadel expects the transaction to add greater than 80% at the EBITDA level, which is equivalent to an additional $9.5 million per annum. The transaction was immediately EPS accretive (approximately 40% in FY16), excluding any synergies.

Other highlights for the year were:

Continued moves to service-related revenues and to longer term recurring services contracts;

The Group continued to have a low operating debt position; and,

Cash reserves were strong.

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It has been a pleasure to work with my Board colleagues:

Dr Miles Jakeman, our Managing Director; Lieutenant General Peter Leahy, AC (retired); Ms Deena Shiff; Mr Mark McConnell, our Head of Strategy; and, the broader Citadel management team.

Yours sincerely,

Mr Kevin McCann, AM

Chairman

Canberra

24 August 2015

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Operating and financial review

I am very pleased to present this first full year Operating and Financial Review for Citadel as an ASX-listed company.

OVERVIEW OF THE BUSINESS

Citadel is a leader in the development and delivery of Technology and Education solutions to state and federal government departments and the private sector. For these clients, Citadel specialises in integrating know-how, systems and people to provide information on an anywhere-anytime basis.

The majority of Citadel’s revenues are derived from long term managed services, software-as-a-service, and high quality nationally accredited education and training, which are managed through two business segments, these being ‘Technology’ and ‘Education’.

Technology

The Technology segment sells professional and managed services to government agencies and corporations. During the period, the Group has successfully delivered against all of our managed services contracts and has also secured a number of new contracts. In addition, our contracts associated with the new Royal Adelaide Hospital and the Department of Defence continue to progress in line with budgets and forecasts.

Education

The Education segment focuses on the delivery of a range of nationally-accredited business qualifications (up to and including Advanced Diploma level) that enable students to articulate into second year university or to gain practical skills for employment. The Education segment continues to operate under its Registered Training Organisation (RTO), Commonwealth Register of Institutions and Courses for Overseas Students (CRICOS) and VET FEE-HELP licences.

OPERATIONAL HIGHLIGHTS

Following a very successful FY2014, I am again pleased to advise that, on almost every measure, it has been another excellent year for Citadel:

In November 2014, the Group successfully undertook an IPO on the ASX. This is a major achievement in the life of the Group and I would personally like to thank management and my fellow directors for their strong leadership and direction during recent years enabling us to be in such an honoured position;

In June 2015, the Group completed the acquisition of PJA Solutions (PJAS), a leading provider of managed technology services to the Australian health sector. PJAS, which was founded in 1984, is responsible for managing upwards of 30% of all data transactions associated with public laboratory pathology testing in Australia. PJAS provides services to laboratories/hospitals throughout Victoria, NSW and Queensland

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(where it is the dominant player in the public laboratory data management market), and is well positioned to extend both its offerings and reach into new markets across Australia and the region;

With specific reference to the Technology segment:

contracts associated with the new Royal Adelaide Hospital (nRAH), the Department of Defence and other key government agencies continue to progress well,

the contract with Charles Sturt University (CSU) to provide a new education and communications network supporting up to 25,000 students, faculty, and staff communicating face-to-face in real-time was successfully completed, and

the Group opened a new office in Melbourne’s eastern suburbs to cater for growing client demand in that region;

With specific reference to the Education segment:

the Group successfully expanded its education operations to two new sites in Penrith NSW and Ashfield NSW, which will allow it to deliver education services to a greater number of students. These two new campuses each have approximately a 150-student per annum capacity,

our registered training organisation, the Australian Business Academy, was shortlisted as one of three finalists for the NSW Small Training Organisation of the Year awards, which will be announced in September. This is a great follow-on achievement to its winning of the ACT Small Training Award in 2014 and speaks volumes as to the calibre and quality of its training operations, and

the Group applied for registration as a Higher Education Provider (HEP) which, if endorsed by the Tertiary Education Quality and Standards Agency (TEQSA), will enable it to deliver Bachelor-level programs to students.

PROFORMA PROSPECTUS RESULTS

The following tables set out the adjustments to the statutory results to provide a comparison between the Proforma Prospectus Actual and IPO Budget. The adjustment drivers are the:

results of the acquisition of PJA Solutions Pty Ltd and associated transaction costs; and,

one-off costs associated with the IPO.

Statutory results are 6.6% over the 2015 Proforma Prospectus (budget). This has resulted in over- achievement in both Proforma Prospectus NPAT and EBITDA, up 12.7% and 7.4% respectively. Details of the operational success are outlined in the Statutory Results section following the tables.

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Statutory Income Statement to Proforma Prospectus Reconciliation (EBITDA)

Proforma Prospectus

(Actual) 2015

$m

Proforma Prospectus

(Budget) 2015

$m Change

$m

Change (%)

Statutory NPAT 6.5 6.1 0.4 6.6%

Depreciation and amortisation 1.2 0.9 0.3 33.3%

Net interest adjustments 0.3 0.2 0.1 50.0%

Tax expense 2.1 2.0 0.1 5.0%

EBITDA 10.1 9.2 0.9 9.8%

Impact of PJAS acquisition (0.6) - (0.6) -

Impact of business combination transaction costs 0.3 - 0.3 -

Adjusted EBITDA net of Business Combinations 9.8 9.2 0.6 6.5%

Public company costs (0.2) (0.2) (0.0) (0.0)%

Transaction costs and one-off costs (IPO) 1.7 1.5 0.2 13.3%

Net interest adjustments 0.3 0.3 - -

Proforma Prospectus EBITDA 11.6 10.8 0.8 7.4%

Statutory Income Statement to Proforma Prospectus Reconciliation (NPAT)

Proforma Prospectus

(Actual) 2015

$m

Proforma Prospectus

(Budget) 2015

$m Change

$m

Change (%)

Statutory NPAT 6.5 6.1 0.4 6.6%

Impact of PJAS acquisition net of tax (0.2) - (0.2) -

Impact of business combination transaction costs net of tax 0.4 - 0.4 -

Adjusted Statutory NPAT net of Business Combinations 6.7 6.1 0.6 9.8%

Public company costs (0.2) (0.2) (0.0) (0.0)%

Transaction costs and one-off costs (IPO) 1.7 1.4 0.3 21.4%

Net interest adjustments 0.3 0.3 - -

Tax effect of pro forma adjustments (0.5) (0.5) - -

Proforma Prospectus NPAT 8.0 7.1 0.9 12.7%

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STATUTORY RESULTS

Statutory Group Results Summary

Citadel achieved revenues from the sale of goods and rendering of services of $72.3m for the 2015 financial year up from $49.6m in 2014. The increase was derived in both the Education and Technology sectors through a combination of internal growth strategies, mergers and acquisition activities and expansion of the nRAH Construction Contract. The Technology segment contributed $21.0m and the Education segment contributed $1.9m of the increase.

Cost management continued to remain a focus across all segments in FY2015 (continuing trends from interim accounts) in order to maintain strong gross profit margins. The acquisition of PJA Solutions Pty Limited further improved gross profit margins from June 2015 due to synergies and shared resourcing.

Administrative expenses showed an increase of $3.0m or 120.0% primarily driven by costs associated with listing on the Australian Stock Exchange through direct Governance and Audit costs ($2.0m increase); the remaining $1.0m movement relates to increased costs of administration such as sales and marketing, occupancy and travelling costs which are associated with general growth in the business (for example, additional spend in marketing for additional education campuses, increased warehouse costs due to an additional location in Australia). This growth has also resulted in an increase in employment expenses ($2.2m increase).

Depreciation and amortisation in FY2015 was $1.2m compared with $0.9m in 2014 (an increase of 33.3%) reflecting the continued capital investment in new Education campus facilities, development of learning curriculums, ICT investments, and amortisation of assets associated with the PJA Solutions Pty Limited acquisition.

Capital Expenditure

Furniture & office

equipment

Plant & equipment

Computer equipment

Leasehold improvements

Motor vehicles

Make good

ICT Software

Total

($m) ($m) ($m) ($m) ($m) ($m) ($m) ($m)

2014 Additions 0.0 0.6 0.1 0.4 0.0 0.1 0.1 1.3

2015 Additions 0.1 0.0 0.1 0.8 0.1 0.1 0.3 1.5

2015 2014 Variance Variance

($m) ($m) ($m) (%)

Sale of goods and rendering of services 72.3 49.6 22.7 45.8%

Cost of Sales Expenses (49.9) (35.8) (14.1) 39.4%

Gross Profit 22.4 13.8 8.6 62.3%

Other Income 2.4 1.8 0.6 33.3%

Employment Expenses (9.2) (7.0) (2.2) 31.4%

Aggregate Administrative Expenses (5.5) (2.5) (3.0) 120.0%

EBITDA 10.1 6.1 4.0 65.6%

NPAT 6.5 4.1 2.4 58.5%

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Group capital expenditure on Property, Plant and Equipment increased during the year to $1.5m from $1.3m; this represents a narrowing of variances from interim results (Dec 2014: $0.71m, Dec 2013: $0.53m).

Capital is related to expenditure on campus fit-outs, demonstration equipment, and IT requirements (in support of both internal and client requirements). In particular, Leasehold Improvements primarily consisted of fitting out new education campuses in Ashfield and Penrith. A new facility was also opened for ServicePoint Australia Pty Ltd in Victoria and minor capital works were undertaken in the ABA (Australian Business Academy Pty Ltd) Parramatta campus. ICT Software included purchases for whole of group ICT Infrastructure consolidation, investments in transitioning to a single group Financial Management Information System and corporate reporting platform.

Reconciliation of Net Operating Profit to Operating Cashflow

The $6.9m operating net cash inflow movement is characterised by a number of significant working capital movements resulting from existing business arrangements combined with the impacts of the acquisition of PJA Solutions Pty Limited. Whilst NPAT ($6.5m) and non-cash adjustments ($1.7m) are the primary impacts on net cash inflow from operations, other net movements in working capital requirements across the group are presently offsetting (-$1.3m). These include:

High levels of construction contract works completed over the last two months of the financial year resulting in an increase of $5.4m in Trade Debtors as receivables from the nRAH construction contract. All amounts owing on construction contracts have been received within 45 days of invoice date;

Increased customer demand for medium-scale Technology Integrated Product Solutions works from ServicePoint Australia Pty Ltd in the last two months of the financial year currently within Trade Debtors;

The acquisition of PJA Solutions Pty Limited which included $0.8m in Trade Debtors from existing clients;

Increases in Trade Creditors within the Technology segment associated with purchases for the delivery of the nRAH Construction Contract and Integrated Product Solutions ($2.5m); and,

Large Employee Liability Provisions associated with long term staff within PJA Solutions Pty Limited combined with payroll liabilities assumed as part of the acquisition of PJA Solutions Pty Limited ($1.1m).

Net Profit After Tax (NPAT) Movement

($m)

Net Profit After Tax (NPAT) 6.5

Non-Cash Adjustments 1.7

Trade Debtors (10.4)

Inventory (0.4)

Income Accruals (1.4)

Tax Accounts 0.5

Trade Creditors 2.0

Other Working Capital Movements 8.4

Net Cash from Operations 6.9

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Statutory Technology Segment Summary


($m) ($m) ($m) (%)



Gross Profit 15.4 8.1 7.3 90.1%

Other Income 2.0 1.7 0.3 17.6%



EBITDA 10.6 5.2 5.4 103.8%

NPAT 7.6 3.8 3.8 100.0%

Revenues within the Technology segment increased by $21.0m and 51.9% compared to FY2014. The increase is primarily represented by:

$10.8m from the continued execution of the nRAH project moving in to the construction phase;

$1.6m increase in People & Advisory through the expansion of the employees and contractors sub-contracted, including sub-contractors to filosoph-e;

$3.5m from incremental Integrated Product Solution delivery; and,

Revenues from PJA Solutions Pty Limited post acquisition of $0.9m.

As a result of the 51.9% expansion in segment revenues, cost of sales expenses increased by $13.7m driven predominately by the construction costs for the nRAH contract, incremental product costs for Integrated Product Sales and increased costs of contractors in both the People & Advisory and Knowledge Management divisions. These increases include:

$7.3m incremental nRAH cost of sales including allocation of risk provisions;

$1.6m increase in product-only costs of integrated solutions which increased by 45.7% ($5.1m in 2015); and,

Direct labour cost increases resulting from revised employment agreements and new hires.

Employee costs (administrative employees) show an increase of $1.0m or 27.0% due to average effect on payroll increase of 2.2% and the introduction of new positions in the People and Advisory division.

Other administrative expenses show an increase of $1.2m or 133.3%, driven by:

Legal costs ($0.07m) and bank fees on security deposits required for the nRAH project ($0.06m);

$0.23m increase in office related expenses due to opening a new office location in Mount Waverly Victoria targeting specific technology opportunities, and movement of the Technology Canberra Warehouse to larger, more functional, premises;

Increased bonus payments ($0.36m in FY 2015) within the ServicePoint Australia subsidiary resulting from the $3.5m in additional Integrated Product Sales revenues; and,

$0.12m in additional non billable sales travel, driven by geographical expansion into Queensland and Victorian markets.

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Statutory Education Segment Summary


($m) ($m) ($m) (%)



Gross Profit 7.1 5.6 1.5 26.8%

Other Income 0.0 0.0 (0.0) (0.0)%



EBITDA 4.1 3.7 0.4 10.8%

NPAT 2.7 2.4 0.3 12.5%

The Education segment’s revenue increased by $1.9m (20.4%) in FY2015. The increase was primarily driven by:

$1.0m for the full year impact of the Liverpool Campus ($0.6m in FY2014);

An additional $0.3m from opening new campuses in Penrith and Ashfield; and,

Expanding the existing Online Campus student intakes throughout the 2015 financial year.

Additionally, ABA Course Advisors actively marketed expanded learning offerings through double diplomas. This increased the potential sales per student from $17,950 to between $21,540 and $25,130.

Cost of sales expenses increased by $0.4m (10.8%) which was driven by a number of factors including:

The full year impact of the Liverpool Campus including all staffing, ICT and physical infrastructure;

Opening additional campuses in Penrith and Ashfield. Cost of sales for the additional campuses include rent, learning facilitators and campus staff, and operating leases for student ICT equipment. These costs typically commence before campus facilities open, thus impacting cost of sales and relative gross profit margins; and,

Additional costs for campuses were partially offset by productivity generated through improved scheduling of classes. This resulted in learning facilitator costs rising to $1.7m from $1.4m (21.4%).

Employee costs show an increase of $0.8m or 57.1% due to average head count increasing during the year. This growth in headcount resulted from opening additional campuses, increased corporate governance resourcing and expanding corporate positions to position future expansion opportunities.

Other costs show an increase of $0.3m or 60.0%, driven by an expansion in marketing costs, primarily through electronic means, across all campuses including online. This resulted in aggregate marketing spends increasing to $0.5m from $0.3m (an increase of $0.2m or 66.7%).

Depreciation and amortisation was $0.3m in FY2015 compared with $0.2m in FY2014. The increase of 50.0% was due to the depreciation of fit out associated with Penrith and Ashfield campuses and the full year impact of amortisation of the make good requirements for Liverpool.

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BUSINESS STRATEGY AND PROSPECTS

Going forward, the strategy of Citadel remains to assist its clients with managing complexity through harnessing the power of information. It will prosecute this strategy via a mix of organic and acquisitive opportunities.

The Technology segment’s growth strategies include deeper market penetration and expansion in to adjacencies via:

Executing existing contracts;

Deepening relationships with Australian Government and State Government agencies that use secure communications;

Extending its consulting-led offering into disrupted sectors including health and education, where the Group has the opportunity to leverage its skills into greenfield developments;

Increasing the number of managed service contracts; and,

Making acquisitions into aligned and adjacent markets.

Our strategy for the Education segment remains extant, this being:

Opening further campuses in the next 12 to 18 months;

Extending the range of nationally accredited courses;

Marketing additional courses via online delivery platforms;

Securing HEP status so we are able to offer Bachelor-level courses; and,

Making acquisitions to add geographic diversity to the current course offerings.

Coupled with our expanding footprint in the health ICT sector, we may also look to rebrand or reposition some of Citadel’s core offerings to reflect the higher percentage of work flowing from health managed services and software-as-a-service contracts, and our ability to deepen our customer offerings.

RISK MANAGEMENT

In accordance with board policies, Citadel manages risk at both the segment and group level. The major risk events, together with possible reasons for their occurrence, are identified and recorded in risk registers in accordance with AS/NZS ISO31000:2009. Those rated as unacceptable, plus what is being done to manage these, are reported to the Board on a regular basis. Principle 7 of The Corporate Governance Statement (pages 25 to 26) outlines the process of managing risk and the engagement of the Audit, Risk and Compliance committee.

As required by Section 299A(1) of the Corporations Act 2001,and in accordance with ASIC Regulatory Guide 247 Effective Disclosure in an Operating and Financial Review (RG 247) issued in March 2013, material business risks that could adversely affect financial performance include:

Loss of key contracts or failure to win new contracts;

Claims for indemnities or damages which may arise in connection with Citadel's key contracts;

Breach of legislative framework and regulatory requirements;

Changes in Government funding for the VET sector and/or Citadel;

Disruption through technological advances or product failures;

Issues with the new Royal Adelaide Hospital (NRAH) Contract; and,

Loss of key personnel & management and/or an inability to attract new talent in line with the increase in operational scale.

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REGULATORY AND ENVIRONMENTAL MATTERS

The Group is required to carry out its activities in accordance with applicable regulations in each of the jurisdictions in which it undertakes its professional and managed services, such as with its education and training licenses and with work, health and safety at the nRAH. The Group is not aware of any matter that requires disclosure with respect to any significant regulations in respect of its operating activities, with no issues of non-compliance during the period.

Citadel operations are subject to a range of environmental regulations under the law of the Commonwealth of Australia and its States and Territories. The Group is also subject to various Local Government requirements, and may be subject to environmental and town planning regulations incidental to the operation of it education and training campuses. The Group has not incurred any liabilities under any environmental legislation.

OUR PEOPLE

At Citadel, we recognise that our people are an integral component of our ongoing service delivery, clients’ satisfaction and growth prospects. Indeed, Citadel’s successes are intimately linked with the quality and performance of our people. We therefore look after our people in a variety of ways, such as through close engagement and consultation, above-industry remuneration, opportunities to participate in share ownership, promotion of continuous learning opportunities, and cross-subsidiary work and development activities amongst others.

In closing, I would like to thank the whole Citadel team and its shareholders for the great successes achieved during the past 12 months and to note that FY2016 looks equally as exciting.

Yours sincerely,

Dr Miles Jakeman

Managing Director

Canberra

24 August 2015

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Board of directors

The Directors bring to the Board relevant experience and skills, including industry and business knowledge, financial management and corporate governance.

DIRECTOR AND POSITION EXPERIENCE

Mr H Kevin McCann, AM

Independent non-executive Chairman and Director

Kevin is Chairman of Macquarie Group Limited and Macquarie Bank Limited (a global Investment Bank), and the Sydney Harbour Federation Trust, an Australian Government agency. He is a director of Evans and Partners Pty Ltd, is a Fellow of the Senate of the University of Sydney, and Co-Vice Chair of the New Colombo Plan Reference Group. He is a former Chairman of ASX listed companies including Origin Energy Limited, ING Management Limited and Healthscope Limited.

Kevin practiced as a commercial lawyer as a partner of Allens Arthur Robinson from 1970 to 2004 and was Chairman of Partners from 1995 to 2004.

Kevin has a Bachelor of Arts and Law (Honours) from Sydney University and a Master of Law from Harvard University. Kevin is also a Fellow of the Australian Institute of Company Directors.

He was made a Member of the Order of Australia for services to the Law, Business and the Community in 2005.

Dr Miles Jakeman Managing Director

Miles is the Managing Director of Citadel. For over 27 years, he has advised senior business leaders and Government officials, including representing countries in ministerial level forums. He has been Citadel’s Managing Director since the Company’s inception.

His key skills cover business strategy, program management, security risk management and staff development. Miles has significant overseas working experience with multinational companies in sales, marketing and business development capacities with full profit and loss responsibilities.

Miles has a Bachelor of Science (Hons), a Graduate Diploma in Asian Studies, a Doctorate of Philosophy (PhD) in Asian Studies and a PhD in Business Leadership. He has also completed the AICD Advanced Diploma Mastering the Boardroom and the AICD Diploma of International Company Directors, plus holds an Advanced Diploma Project Management.

Miles is a visiting Fellow at the Australian National University, a member of the Australian Institute of Company Directors. He is also a member of the not-for-profit Kokoda Foundation, and Director of Midnight Basketball Australia and ACT Capital Angels. F

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Ms Deena Shiff

Independent non-executive Director

Deena has extensive executive experience in the communications industry. She served as a Group Managing Director at Telstra Corporation Limited between 2005 and 2013, during which time she led the Wholesale Division, established Telstra’s Business Division dedicated to small to medium enterprises, and established Telstra’s corporate venture capital arm. Deena was previously a partner of Mallesons Stephen Jaques, in-house corporate counsel at Telstra, and has served as a senior executive and advisor on legal and social policy reforms for the Australian Government.

Deena is currently Chair of Paloma Mobile Ltd, a Non-Executive Director at Appen Ltd, and a Non-Executive Director for the Alertness CRC Ltd. She is also Chair of the Sydney Writers’ Festival. In May 2015, Deena was appointed by the Minister of Communications to Chair the Regional Telecommunications Independent Review Committee.

Deena holds a Bachelor of Science (Economics) from the London School of Economics and Political Science and a Masters of Arts (Law) from the University of Cambridge. She is also a Fellow of the Australian Institute of Company Directors.

Lieutenant General Professor

Peter Leahy, AC (Retd) Independent non-executive

Director

Peter retired from the Army in July 2008 after a 37 year career as a soldier. He concluded his career in the Army with the rank of Lieutenant General after a six year appointment as the Chief of Army. He commanded the Australian Army during a period of unprecedented operational activity, challenge, tempo and change and wrote and spoke extensively on the changing nature of warfare and the need to counter new threats.

Since leaving the Army, Peter has joined the University of Canberra as a Professor and the foundation Director of the National Security Institute where he teaches and continues to write and commentate on defence and security matters. He is a member of the Australian Institute of Company Directors and has been appointed to the Boards of Codan Limited and Electro Optic Systems Holdings Limited. He supports the Government of South Australia as a member of the Defence South Australia Advisory Board. He is also involved in charities as the Chairman of both Soldier On and the Salvation Army Red Shield Appeal Committee for the Australian Capital Territory and as a Trustee of the Prince’s Charities Australia.

Peter was awarded the Companion of the Order of Australia in 2007 for eminent service to the Australian Defence Force in command of the Australian Army and strategic staff appointments.

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Mr Mark McConnell Executive Director

Mark is an Executive Director of Citadel. After serving as an officer in the Royal Australian Air Force for 8 years, Mark moved into the corporate world and has spent the last 17 years in a range of executive roles in the fields of aviation, technology and investment finance. He has been a director of Citadel since its formation in 2007.

His skills cover areas of business strategy, investor relations, capital raising and innovation. Mark has founded several private companies and has been recognised with a number of entrepreneurial awards. Since 2007, he has been the Managing Director of New Territories Investments, a private equity fund that has assisted the growth strategies of multiple technology businesses in Australia, including Citadel.

Mark has a Bachelor of Science, a Graduate Diploma of Employment Relations, a Graduate Diploma of Logistics Management, and a Masters of Business Administration. He is also a Fellow of the Australian Institute of Company Directors (FAICD). Mark was awarded the ACT Young Entrepreneur of the Year in 2003 and 2006.

Mark is the Chairman or Director of several private companies, and recently joined the board of the GWS Giants Foundation. He formerly served on the boards of listed mining companies including Kagara Limited and Mungana Goldmines Limited, as a nominee of Guangdong Guangxin Holdings Group (GGHG), a State Owned Enterprise controlled by the Guangdong Provincial Government.

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Key management personnel

NAME AND POSITION EXPERIENCE

Dr Miles Jakeman

Managing Director

Please refer to profile under the Board of Directors Section.

Mr Mark McConnell Executive Director

Please refer to profile under the Board of Directors Section.

Mr Robert (Andrew) Burns

Chief Financial Officer

Andrew has been the CFO and Citadel Company Secretary since January 2008. Prior to joining Citadel, Andrew spent 10 years with General Electric in various senior leadership roles including Finance Manager of GE Healthcare ANZ and Six Sigma Quality Leader for GE Healthcare Financial Services globally.

Andrew is a proven leader of change with technically strong competencies in financial management, accounting, and process improvement techniques.

Andrew is a Chartered Accountant, graduate of the AICD, as well as a Six Sigma Master Black Belt and an alumni member of Australian Graduate School of Management’s MBA Program.

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Corporate governance statement

Overview

The Board of Directors of CGL is committed to attaining and implementing the highest standards of corporate governance. The Board has reviewed the Group’s corporate governance practices against the ASX Corporate Governance Principles and Recommendations (3rd edition), and a description of the Group’s main corporate governance practices is set out below. The 2015 Corporate governance statement is dated 30 June 2015, and reflects the corporate governance practices of the Group since listing in November 2014. Unless stated otherwise, all of the following practices have been in place since CGL’s listing in November 2014.

Principle 1: Lay solid foundations for management oversight

The Board of Directors, the members of which are detailed on page 17, is responsible for the overall governance of the Group, setting the Group’s future direction and annual operating and capital expenditure budgets, providing strategic leadership, and is ultimately responsible to shareholders for the oversight and performance of the Group.

To do this, the Board’s responsibility includes (but not limited to):

Approval of the corporate strategy;

Approving financial statements and any significant changes in accounting policies;

Oversight of fraud, risk, control and accountability systems through promoting systemic awareness of the control environment and risk issues;

Oversight of the management team and their operational programs;

Appointing and removing members of the CGL senior management team, as well as

monitoring and evaluating their performance;

Determining executive remuneration;

Reviewing succession planning, HR recruitment/retention and management development arrangements; and,

Reviewing CGL’s capital structure through the issue or buy-back of shares, options, equity instruments or other securities.

The board has delegated management of the company to the Managing Director

The Board Charter, which details the responsibilities of the Board, the Chairperson, managing director, individual directors, company secretary and management is available on the Group’s website.

Board processes and reviews

The Board has established the following committees to assist it in fulfilling its role: the Nomination and Remuneration Committee, the Audit Risk and Compliance Committee, the Merger and Acquisition Committee; and the Disclosure Committee.

The full Board meets in accordance with the Constitution of the Company, but no less than quarterly.

The Board and Committees undertake annual performance reviews as follows:

Board as a whole – each director completes an evaluation form of the Board using set evaluation criteria, the Board then discusses its ability to meet its objectives and makes recommendations. The results are processed by an independent expert or the Nomination Committee and any issues are put before the Board for resolution.

Individual directors – each director performs a self-assessment using pre-determined ratings and evaluation

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criteria. The other directors will then provide feedback on the performance of the director in question and a meeting is held between the director and the Nomination Committee to discuss any issues that arise.

Board Committees – the Committee completes a self-assessment form using set evaluation criteria. The Committee will then discuss its ability to meet its objectives and makes recommendations; any issues that need to be resolved will be put before the Board.

Key management personnel (KMP) – the board reviews the performance of the KMP on an annual basis. Individuals perform self-assessments using pre-determined ratings and evaluation criteria. The relevant supervisor(s) of the individual will then provide feedback on that person’s performance using the same form. A meeting is then held between the individual and the Nomination Committee to discuss issues raised and any discrepancies between the self-assessment and peer review.

The most recent performance reviews for all of the above were undertaken in August 2014.

Director and executive education

Once the Board has decided to appoint a new candidate, it will provide a letter of appointment which covers the terms of appointment, remuneration including superannuation entitlements, an obligation to disclose relevant interests that may affect independence, other directorships and commitments, and details of director induction.

An induction process is in place for new directors and executives which ensures that the new director/executives familiarise themselves with Group, the Board, and the business.

Directors and executives are provided training when required.

Independent professional advice and access to company information

The Board, an individual Board member or a Committee established at the Board’s direction may engage an independent external advisor in relation to any Board matter at the expense of the Company. Before the external advice is sought, consent needs to be obtained from the Chairperson (or Committee Chairperson where

applicable). A copy of any advice received is to be made available to all members of the Board.

Diversity Policy

The Group also maintains a diversity policy to promote a balanced workforce and encourage selection from a diverse pool of candidates. A copy of the policy is available on the Group’s website.

The Nomination and Remuneration Committee will assist in ensuring that, as the Group develops and expands, opportunities created to further improve diversity are managed in accordance with the Diversity Policy.

At present, the gender distribution within the Group objectives is as follows:

30 June 2015

Gender representation Female % Male %

Board representation 20% 80%

Executive and senior management representation

15% 85%

Group representation 39% 61%

Note: Executive and senior management representation includes the Managing Director, all direct reports and the shared services managers.

Principle 2: Structure the board to add value

Nominations and Remuneration Committee

The Nomination and Remuneration Committee (NRC) assists the Board in fulfilling its responsibilities to shareholders in ensuring that the Board is comprised of individuals who are best able to discharge the responsibilities of directors having regard to the law and the highest standards of governance.

Their responsibilities include:

Assessing the skills and competencies desired and required on the Board;

From time to time assessing the extent to which the required skills are represented on the Board and set a transparent process to review whether those requirements are being met;

Considering and recommending to the Board nomination, selection and induction of non-executive directors;

Considering and recommending to the Board succession plans for non-executive directors;

Establishing and monitoring strategies on gender diversity for the Group as they relate to the Board and its Committees;

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Establishing and disclosing a skills matrix for the Board, setting out the mix of skills and diversity that the Board has or is looking to achieve;

Establishing processes for the review of the performance of individual directors and the Board as a whole;

Establishing processes for the identification of suitable candidates for appointment to the Board including performing checks on the candidate’s character, experience, education, criminal record and bankruptcy history (and providing this information to shareholders); and,

Recommending the appointment and removal of directors.

The NRC comprises Lieutenant General Professor Peter Leahy AC (Retd) (Chairman), Mr Kevin McCann AM, and Ms Deena Shiff, who are all considered to be Independent Non-Executive Directors.

The NRC’s charter is available on the Group’s website. Refer to pages 17 to 19 for details on the skills and expertise of the Directors.

Principle 3: Act ethically and responsibly

The Group’s reputation is one of its most valuable assets and, if damaged, can be one of its most difficult to restore. As such, a Code of Conduct (the Code) has been established which sets out the moral and ethical standards that all directors, senior executives and employees must adhere to in performing their duties to ensure the Group maintains its reputation as an exemplary corporate citizen.

A copy of the Code is available on the Group’s website and covers the following guiding principle (unless otherwise stated, applies to directors, senior executives and employees):

To act honestly and in good faith, performing their duties with a degree of care and diligence such that they serve the best interests of the members of the Group as a whole.

Related party transactions

The Group’s Related Party Transactions Policy & Procedures document sets out who is considered a related party, and their obligations for disclosing potential related party transactions (as defined in the policy). The ARCC is responsible for performing an assessment of the transaction and

whether shareholder approval is required. Their assessment is provided to the Board, who is responsible for deciding what action to take.

A copy of this policy is available on the Group’s website.

Insider Trading

The Group also has a Securities Trading Policy which sets out the policies and procedures for trading in CGL’s securities by its directors, senior executives and employees. This includes detailing the periods in which directors, senior executives and employees cannot trade in CGL securities.

A copy of this policy is available on the Group’s website.

Principle 4: Safeguard integrity in corporate reporting

The Audit, Risk and Compliance Committee (ARCC) has a number of responsibilities relating to the financial statement and external audit processes including, but not limited to:

Understanding current areas which pose the greatest financial risk and the controls management has in place to adequately safeguard against them;

Reviewing significant accounting, legal and reporting issues and understand their impact on the financial statements;

Reviewing and approving financial information prior to market release;

Reviewing the interim financial statements and disclosures;

Reviewing the annual financial statements, focusing on judgemental areas such as the valuation of assets and liabilities, depreciation and amortisation rates etc;

Recommending the selection, appointment and removal, and remuneration of the external auditor, including the rotation of the external lead audit partner;

Reviewing the external auditor’s proposed audit scope, plan and approach;

Considering the independence of the external auditor taking into account non-audit services provided to the Group; and,

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Reviewing the external auditor’s effectiveness, quality of services provided and resources at least once a year.

The ARCC is also responsible for overseeing the internal audit function which includes the following:

Recommending to the Board the appointment of the internal auditor;

Reviewing and approving the strategic and annual internal audit plans, scope and approach, and ensuring no unjustified limitations have been placed on the scope, and appraising the audit activity against the annual plan;

Ensuring an appropriate interface exists between external audit, internal audit and risk management;

Ensuring internal audit review independently, adequately, effectively and comprehensively the internal control systems;

Reviewing reports from internal audit and where major deficiencies or breakdowns in controls and/or procedures have been identified, monitoring that appropriate and prompt remedial action is taken by management; and,

Reviewing the internal auditor’s effectiveness, quality of services provided and resources at least once a year.

Refer to Principle 7 below for further information on the ARCC and its committee members.

Before it approves the entity’s financial statements for a financial period, the Board receive from its MD and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively.

The Group’s external auditor attends the AGM to respond to any questions from security holders relevant to the audit.

Principle 5: Make timely and balanced disclosure

The Group has in place a Continuous Disclosure and Communications Policy which details its

policies and procedures for complying with ASX continuous disclosure requirements.

In summary, the Group’s Continuous Disclosure and Communications Policy sets out:

The roles and responsibilities of the Board and the Disclosure Committee;

The procedures to be followed to assess potentially price sensitive information so that announcements are balanced, factual and accurate;

Procedures for responding to the media, and dealing with analyst, shareholder and investor queries; and,

How the Group is to respond to analyst reports, rumours, leaks and forecasts.

The Disclosure Committee’s responsibilities include liaising with the ASX, ensuring the Group’s disclosure system is operating effectively, overseeing and coordinating the disclosure of information, keeping records, periodically reviewing the disclosure procedures, educating officers and employees of the continuous disclosure policy and procedures, and regularly preparing disclosure reports to the Board.

Principle 6: Respect the rights of security holders

The Group is committed to ensuring the rights of its investors are protected and therefore has a dedicated section of its website for investors. Within this section, corporate governance information is readily available including access to the CGL Board Charter, the various committees’ charters and CGL’s policies and procedures.

The Group also provides information on its Board of Directors and Management Team to give investors some biographical information on the individuals responsible for managing the Group.

To facilitate information flows, the Group also maintains on its website copies of annual reports and financial statements, ASX announcements and other media releases.

The Chairman, managing director and the executive officers meet with shareholders and corporate governance advisors on at least an annual basis, as well as where there have been major events such as acquisitions.

The Group encourages active participation from its investors, engaging with them at AGMs, meeting with them upon request and responding to any enquiries they may make.

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Principle 7: Recognise and manage risk

Risk management

The key negative business risks to the Group include the following:

Education Technology

- Changes to Government funding for the VET sector

- Loss of any or all of the regulatory licences through breach/non-compliance

- Early termination or failure to renew campus leases

- Loss of key contracts or failure to win new contracts

- Early termination of existing contracts or renegotiation resulting in scope reductions

- Loss of key personnel & management and/or an inability to attract new talent in line with the increase in operational scale

- Claims for indemnities or damages in connection with key contracts

- Loss of registrations and/or licences

- Technological advances resulting in service offerings becoming obsolete

The Board is responsible for reviewing the Group’s policies on risk oversight and management, and for satisfying itself that management has developed and implemented a sound system of risk management and internal control.

The Directors and Senior Leadership Team are responsible for designing and implementing risk management and internal control systems to manage each company’s material business risks and reporting to the Board whether those risks are being managed effectively.

As required by the Board, the Directors and Senior Leadership Team report on the effectiveness of the company’s management of its material business risks.

The major risk events, together with possible reasons for their occurrence, are identified and recorded in each company’s risk register in accordance with AS/NZS ISO 31000:2009 Risk Management Standard, but those rated as unacceptable are brought to the Board’s attention along with the strategies being implemented to manage them. In this international standard, risk is defined as “the effect of uncertainty on objectives”. This effect may be positive, negative, or a deviation from the expected.

The Board receives assurances from the Managing Director and the CFO that the declarations provided in accordance with section 295A of the

Corporations act 2001 are founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

The Board uses a sophisticated risk management process, which includes assessment of both positive and negative risks associated with decisions against its pre-established risk appetite. Any risk that crosses this threshold is elevated to the Board for its consideration, review or action as necessary.

Audit, Risk and Compliance Committee

As part of the Board’s plans to fulfil its obligations to manage risk, the Audit, Risk and Compliance Committee (ARCC) is responsible for:

Reviewing and monitoring the effectiveness, comprehensiveness, integrity and quality of the risk identification, assessment and management process, and the risk management strategies;

Ensuring risk management is integrated into all major business processes;

Reviewing the annual insurance policy to ensure appropriate coverage is in place;

Ensuring proper risk management accountability, governance structure, reporting system and compliance with risk management policies;

Ensuring all strategic and major operational risks are brought to the attention of the Board in a timely manner and are adequately managed;

Reviewing and making recommendations to the Board in relation to the Group’s insurance program, having regard to the Group’s business and the insurable risks associated with its business; and,

Reviewing the Group’s risk management framework at least annually to satisfy itself that it continues to be sound, and disclose, in relation to each reporting period, whether such a review has taken place.

The ARCC provides advice to the Board and reports on the status and management of the risks to the Group. The purpose of the ARCC’s risk management process is to assist the Board in relation to risk management policies, procedures and systems and ensure that risks are identified, assessed and appropriately managed.

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The ARCC comprises Ms Deena Shiff (Chair), Mr Kevin McCann AM and Lieutenant General Professor Peter Leahy AC (Retd). The Charter of the ARCC is available on the Group’s website.

Refer to the Directors’ report which details the number of times the committee met during the period and who was in attendance.

Internal audit

The Group has an internal audit function whereby internal control audits/reviews are completed on the risk areas of the business. Focus is on high risk areas as identified through consultation between Internal Audit, management, and the ARCC. An internal audit plan is developed each year which identifies the areas subject to audit and review during the year; the plan is required to be signed off by the ARCC. The internal audit function reports directly to the ARCC.

Principle 8 Remunerate fairly and responsibly

Nominations and Remuneration Committee

The role of the Nominations and Remuneration Committee (NRC) is to review and make recommendations to the Board on remuneration packages and policies related to the Directors and senior executives and to ensure that the remuneration policies and practices are consistent with the Group’s strategic goals and human resources objectives. The NRC is also responsible for reviewing and making recommendations in relation to the composition and performance of the Board and its committees and ensuring that adequate succession plans are in place (including for the recruitment and appointment of Directors and senior management). Independent advice will be sought where appropriate.

The NRC comprises Lieutenant General Professor Peter Leahy AC (Retd) (Chairman), Mr Kevin McCann AM, and Ms Deena Shiff.

The NRC’s charter is available on the Group’s website. Refer to the Directors report for details on the number of times the committee met during the period and who was in attendance.

Refer to the Audited Remuneration Report on page 33 for details of the remuneration policies and practices regarding the remuneration of non-executive and executive directors and other senior executives, including equity-based remuneration schemes.

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People and values

CORE VALUES

The Group recognises the importance of its role as a good corporate citizen and espouses the following core values through a range of supporting activities:

Behaving with integrity

Our Code of Conduct has been established to guide employees on ethical behaviour, with the management team demonstrating the ‘tone from the top’.

We are members of the Australian Institute of Company Directors, which aims to uphold the highest level of professionalism in directorship and to empower company directors and boards to attain excellence in performing their duties and responsibilities.

Valuing and trusting our people

We provide staff training at all levels to motivate staff and drive career development.

We respect the cultures of our clients and the rights of our staff.

We promote the exchange of ideas between staff and management, encouraging dialogue through a range of communication systems.

Respecting our communities

We deliver services to a range of different communities and cultures with different languages, ethnic and religious bases.

We always consult stakeholders about community affairs and environmental programmes because our business can touch local communities and successful interaction with the community is vital to success.

We have a long-term commitment to return a percentage of profits back to communities in which we operate in.

We value our responsibilities as corporate

citizens, and we champion diversity through our

team.

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Directors’ report

DIRECTORS’ REPORT

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Directors’ report

Your Directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of CGL and the entities it controlled at the end of, or during the year ended 30 June 2015, these being Jakeman Business Solutions Pty Ltd (JBS), Frontier Group Australia Pty Ltd (FGA), ServicePoint Australia Pty Ltd (SAPL), The Australian Business Academy Pty Ltd (ABA), and PJA Solutions Pty Ltd (PJAS).

CONSOLIDATED RESULTS AND REVIEW OF THE OPERATIONS

The Group’s statutory performance remains strong with total revenue increasing to $73.0 million (2014: $49.9 million) and achieving net profit before income tax of $8.6 million (2014: $5.3 million).

A review of the operations of the consolidated entity and its principle businesses during the financial period and the results of the operations are set out in the Chairman’s Report and the Operational and Financial Review by the Managing Director from pages 8 to 16 inclusive.

DIVIDENDS

The amounts set out below have been paid by the Group during the financial period, or have been declared by the Directors of the Group, by way of the dividend, but not paid during the financial period up to the date of this report. All dividends were fully franked at the tax rate indicated:

Franking tax rate %

Dividend cents per

share

Total paid / payable

$m

Dividend paid 28 August 2014 30 15.0 1.2

Special dividend paid 31 October 2014 30 8.5 2.8

Dividend payable 30 September 2015 30 5.8 2.7

PRINCIPAL ACTIVITIES

During the year the principal continuing activities of the Group consisted of professional and managed services provision in the technology and education sectors throughout Australia.

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DIRECTORS

The following persons were Directors of CGL during the whole of the financial year and up to the date of this report unless noted: Mr Kevin McCann (appointed 3 October 2014) Dr Miles Jakeman; Ms Deena Shiff (appointed 18 September 2014) Lieutenant General Peter Leahy AC (Retd) Mr Mark McConnell; Mr Ken Moore (resigned 16 July 2014); Mrs Le-Anne Jakeman (resigned 17 July 2014); and, Mr Gary Lui (resigned 1 July 2014).

DIRECTORS’ MEETINGS

The number of directors’ meetings of the company, and of meetings of the board committees held, and the number of those meetings attended by each of the directors of the company during the financial year are:

Board meetings Audit, Risk and Compliance

Committee Nominations and

Remuneration Committee

Director A B A B A B

Mr K McCann AM 6 6 3 3 2 2

Dr M Jakeman 8 8 - - - -

Ms D Shiff 7 7 3 3 2 2

LtGen Peter Leahy AC (Retd) 8 8 3 3 2 2

Mr M McConnell 8 8 - - - -

Mr K Moore (resigned 16 Jul 14) 1 1 - - - -

Mrs L Jakeman (resigned 17 Jul 14) 1 1 - - - -

Mr G Lui (resigned 1 Jul 14) 1 1 - - - -

A – Number of meetings attended B – Number of meetings held during the time the director held office during the year

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

Significant changes in the state of affairs of the Group during the financial period are as follows:

Share Split September 2014: In preparation of listing existing shares were split at a ratio of 1:3.915 resulting in the issuance of 24.8 million additional ordinary shares;

Initial Public Offering (IPO) November 2014: the Group successfully undertook an Initial Public Offering (IPO) listing the consolidated entity on the Australian Stock Exchange;

Share Issue November 2014: as part of the IPO the Group raised $23.5 million, net of transaction costs and income tax, with 11.1 million additional shares issued. The issue price for the IPO was set at $2.25 per share

Material Acquisition June 2015: the Group acquired PJA Solutions Pty Ltd, for a consideration of $45.36 million of cash and shares payable over 30 months to September 2017; and,

Share Issue May 2015: as part of the acquisition of PJA Solutions Pty Ltd 2.17 million shares were issued as part of the consideration at a share price of $2.30.

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MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR

In the opinion of the Directors, no matter or circumstance has arisen since 30 June 2015 that has significantly affected, or may significantly affect the:

Group’s operations in future financial years; or Results of those operations in future financial years; or, Group’s state of affairs in future financial years.

COMPLIANCE WITH REGULATIONS AND ENVIRONMENTAL MATTERS

Given its client base, compliance with legislative and regulatory matters is critical for Citadel and is managed closely. As noted in the Operational and Financial Review by the Managing Director from pages 8 to 16 inclusive, the Group is not aware of any matter that requires disclosure with respect to its operating activities and there have been no issues of non-compliance during the period.

DIRECTORS’ AND OFFICERS’ INDEMNITY/INSURANCE

The Constitution of the Company provides that the Company may indemnify (to the maximum extent permitted by law) in favour of each Director of the Company, the Company Secretary, directors and secretaries of related bodies corporate of the Company, and previous directors and secretaries of the Company and its related bodies corporate (“Officers”), against any liability to third parties (other than related Citadel Group companies) incurred by such Officers unless the liability arises out of conduct involving a lack of good faith. The indemnity includes costs or expenses incurred by an Officer in successfully defending proceedings or in connection with an application in which the court grants relief to the specified persons under the Corporations Act 2001.

Each Director has entered into a Deed of Indemnity and Access which provides for indemnity against liability as a Director, except to the extent of indemnity under an insurance policy or where prohibited by statute. The Deed also entitles the Director to access Company documents and records, subject to undertakings as to confidentiality.

During or since the end of the financial period, the Company has paid or agreed to pay a premium in respect of a contract of insurance insuring Officers (and any persons who are Officers in the future and employees of the Company or its subsidiaries) against certain liabilities incurred in that capacity. Disclosure of the total amount of the premiums and the nature of the liabilities in respect of such insurance is prohibited by the contract of insurance.

COMPANY SECRETARY

The Company Secretary and Group CFO is Mr Robert (Andrew) Burns. Mr Burns was appointed to the position of Company Secretary in 2008.

NON-AUDIT SERVICES

The Group may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the subsidiary companies and/or the Group are important and there is no conflict of interest.

Details of the amounts paid or payable to the auditor, PricewaterhouseCoopers (PwC), for audit services provided during the year are set out in note 38 in the financial statements.

If non-audit services by the auditor are required, the CGL Board of Directors considers the position and ensures they are satisfied that the provision of the non-audit services is compatible with the general standard of

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independence for auditors imposed by the Corporations Act 2001. During the financial year ended 30 June 20155 the Group did engage other PwC staff (separate to those of the PwC audit team) to provide non-audit services, including the provision of taxation advice (2014 Nil).The Directors are satisfied that the provision of these non-audit services by PwC did not compromise the auditor independence requirements of the Corporations Act 2001 based on the following:

All non-audit services were reviewed by the Board to ensure they did not impact the impartiality and objectivity of the auditor in accordance with APES 110 Code of Ethics for Professional Accountants); 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.

AUDITOR’S INDEPENDENCE DECLARATION

A copy of the auditors’ independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 44.

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Remuneration report (audited)

Your Directors present The Citadel Group Limited 2015 remuneration report outlining key aspects of our remuneration policy and framework, and remuneration awarded this year.

During the financial period the Nominations and Remuneration Committee (NRC) engaged external remuneration consultants and benchmarked the remuneration policy and incentive plans of proxy companies to ensure alignment of the key management personnel (KMP) remuneration packages to the performance of the company and the interests of the shareholders.

The report is structured as follows:

a) KMP covered in this report

b) Remuneration policy and link to performance

c) Elements of remuneration

d) Link between remuneration and performance

e) Remuneration expenses for executive KMP

f) Contractual arrangements for executive KMP

g) Non-executive director arrangements

h) Other statutory information.

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a) Key management personnel covered in this report

Name Position

H K McCann (appointed 3 Oct 2014)

M Jakeman

D Shiff (appointed 18 Sep 2014)

P Leahy

M McConnell

R Burns

K Moore (resigned 16 Jul 2014)

L Jakeman (resigned 17 Jul 2014)

G Lui (resigned 1 Jul 2014)

Chairman

Managing Director

Non-executive Director

Non-executive Director

Executive Director

Chief Financial Officer

Former Chairman

Former Non-executive Director

Former Non-executive Director

b) Remuneration policy and link to performance

Citadel’s executive remuneration philosophy is to align executive remuneration with shareholder interests by:

providing levels of fixed and incentive pay sufficient to attract and retain individuals with the skills and experience required to build on and execute our business strategy;

focusing executives on what is important by ensuring incentive remuneration is contingent on outcomes that grow and/or protect Shareholder value, and can be directly influenced by executive action;

balancing the mix of STI and LTI to ensure any focus on annual results does not offset the need to invest and nurture the business for longer term success as a sustainable and growing business;

managing risk by deferring a proportion of incentive payments and reserving the right to exercise discretion in the event that excessive risk taking or inappropriate outcomes are discovered after performance has initially been assessed;

aligning the interests of executives and Shareholders by ensuring a suitable proportion of remuneration is received as a Share-based payment; and,

using a combination of earnings growth performance targets and share-based payments inclusive of dividends that balances the desire of the Group for both sustainable growth and yield.

Our Nominations and Remuneration Committee (NRC) is made up of independent non-executive directors. The committee reviews and makes recommendations to the Board on remuneration packages and policies related to the Directors, KMPs and senior executives, and to ensure that the remuneration policies and practices are consistent with the Group’s strategic goals and human resources objectives. Based on Citadel’s philosophy and benchmarking with proxy companies, the remuneration program is practically applied as follows:

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Element Purpose Performance metrics Potential value Changes in FY2016

Fixed Remuneration (FR)

Provide competitive market salary including superannuation

Nil Positioned at median market rate

Reviewed in line with market positioning

STI (short term incentives) all at risk

Achieving prospectus forecasts

Budgeted Group EBITDA and budgeted divisional EBITDA, and non-financial measures. The relevant split for determining STIs is:

EBITDA: 50%

Customer satisfaction: 25%

Employee satisfaction: 25%

MD: 40% of FR

CFO: 30% of FR

Exec director: 30% of FR

Financial measures have been adjusted to the FY16 budget.

Non-financial measures have been set in line with continuous improvement objectives.

LTI (long term incentive) arrangements will commence in FY2016 pending approval by shareholders at the Annual General Meeting as they relate to executive directors. The Group’s aim in establishing LTIs is to motivate, retain and reward eligible employees and eligible directors and to align their interests with those of shareholders, with a number of performance, service or other vesting conditions to be included.

Balancing short-term and long-term performance

Both short-term and long-term incentives plans annual incentives are set at a maximum of 40% of fixed remuneration for the MD and 30% of fixed remuneration for the executive director and CFO in order to drive performance without encouraging excessive risk-taking.

Both short-term and long-term incentives plans incorporate vesting periods of 2 and 3 years respectively, to align employees’ interests with shareholders with a focus on long-term performance, and to retain talented employees. The target remuneration mix for FY2016 is shown in the following table; for FY2015 no LTI scheme was in place.

Assessing performance

Directors and key management personnel are subject to self-assessment and peer performance reviews (relevant supervisors for key management personnel or the Nominations and Remuneration Committee for directors). The Nominations and Remuneration Committee is then responsible for assessing the results including open discussions with the individual. The result of this review process will determine the STI and LTI to be paid.

56%

56%

45%

22%

22%

28%

22%

22%

28%

0% 20% 40% 60% 80% 100%

CFO

Exec Director

MD

Fixed remuneration

STI

LTI

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In the event of serious misconduct, excessive risk taking or a material misstatement in the Group’s financial statements, the remuneration committee can cancel or defer performance-based remuneration.

c) Elements of remuneration

(i) Fixed annual remuneration (FR)

Executives may receive their fixed remuneration as cash, or cash with non-monetary benefits such as car allowances. FR is reviewed annually, or on promotion. It is benchmarked against market data for comparable roles in companies in a similar industry and with similar market capitalisation. This ensures that executives are fairly remunerated while taking into account their experience and performance. Superannuation is included in FR.

In FY2015, fixed remuneration was increased for those executives who had been in office for FY2014, with an average increase of 12%. This was done to remunerate executives in line with the market at the time of listing as a public company.

(ii) Short-term incentives (STI)

Participants in the STI Plan have a target cash payment which is set as a percentage of their FR. Actual STI payments in any given year may be at, above, or below target depending on the achievement of financial and non-financial criteria as set by the Board, in accordance with the terms of the STI Plan, which may be varied from time-to-time by the Board. The current STI Plan provides for financial and non-financial components of the incentive, each weighted at 50%.

There are three separate STI performance conditions, with 50% of the STI tested against an EBITDA performance condition, 25% tested against a customer satisfaction performance condition, and 25% tested against an employee satisfaction performance condition. These measures have been selected as a reasonable representation of a balanced scorecard approach for the KMP and management teams after consultation with external remuneration experts.

These measures are tested annually after the end of the relevant financial year.

Payments under the STI Plan are phased evenly over two years, with payments made after the release of full year financial results to the ASX. Half of all STI payments are deferred for 12 months and subject to a final review by the Nominations and Remuneration Committee and the Board, which retains the right to exercise discretion to forfeit some or all payments if the employee has not remained in service, a financial restatement is required, results were obtained with excessive risk taking, or in cases of employee misconduct.

All payments under the STI Plan are determined by the Nominations and Remuneration Committee and the Board, in their absolute discretion.

(ii) Long-term incentives (LTI) No LTI Plan was in place during FY2015. The LTI Plan will commence in FY2016. The LTI will consist of a share rights plan which will be provided to key management personnel and eligible senior leadership members; certain vesting conditions will be attached to the rights. It is the company’s intention to introduce annual grants of LTI with:

An initial performance period of three years; and, Vesting contingent upon specified performance requirements, such as total shareholder return and

earnings per share.

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Key terms of the share rights plan are as follows:

Award A share right will vest and become exercisable to the extent that the applicable performance conditions detailed below are satisfied at the end of the relevant performance period (being 1 July 2015 to 30 June 2018 for the Relative TSR Performance Condition and 1 July 2015 to 30 June 2018 for the EPS Performance Condition).

Performance conditions

The Share Rights are subject to the following Performance Conditions:

50% of the total Share Rights granted will be tested based on growth in Citadel’s relative total shareholder return (Relative TSR Performance Condition); and,

50% of the total Share Rights granted will be tested based on growth in Citadel’s earnings per share (EPS Performance Condition).

The Relative TSR Performance Condition and the EPS Performance Condition are independent of each other and will be assessed separately.

The NRC believes the Relative TSR and EPS Performance Conditions are the best measures to align the KMP and senior management to the long term goals of the shareholders in the current growth environment. This position was reinforced through consultation with the external remuneration expert.

Each Performance Condition will be tested after the end of the relevant Performance Period (likely to be at the Board meeting following the relevant annual results announcement, so that final audited numbers are available for the EPS Performance Condition)

Relative TSR Performance Condition

Fifty percent of the Share Rights in the FY2016 LTI grant will be tested against the Relative TSR Performance Condition. The Relative TSR Performance Condition measures Citadel’s total shareholder return performance over the period 1 October 2015 to 30 September 2018 (the TSR Performance Period).

Total shareholder return is the growth in share price plus dividends, assuming dividends are reinvested. To minimise the impact of any short-term share price volatility, Citadel’s TSR will be calculated using the average closing share price over the 10 trading days prior to the start of the TSR Performance Period and the end of the TSR Performance Period, respectively.

The TSR performance condition is measured on a sliding scale of success relative to movements in the ASX Small Ordinaries Accumulation Index:

No Share Rights will be awarded for a performance that is less than the TSR calculated for the ASX Small Ordinaries Accumulation Index.

50% of Share Rights will be awarded of a performance that is equal to the TSR calculated for the ASX Small Ordinaries Accumulation Index.

100% of Share Rights will be awarded for a performance that is 25% or

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greater than the TSR calculated for the ASX Small Ordinaries Accumulation Index.

EPS Performance Condition

Fifty percent of the Share Rights in the FY2016 LTI grant will be tested against the EPS Performance Condition.

The EPS Performance Condition requires the compound annual growth rate (CAGR) in Citadel’s basic EPS over the period 1 July 2015 to 30 June 2018 (the EPS Performance Period) to exceed 15% before any of the share rights subject to the condition vest.

The EPS Performance Condition is measured on a sliding scale of success relative targets set by the NRC:

No Share Rights will be awarded for an EPS CAGR of less than 15%.

50% of Share Rights will be awarded for an EPS CAGR of 15%.

100% of Share Rights will be awarded for an EPS CAGR of 25% or greater.

Share Rights Upon satisfaction of any performance and vesting conditions, each Share Right will, at the Company’s election, convert to a share on a one-for-one basis or entitle the participant to receive cash to the value of a share. Each vested share right also entitles a participant to receive a cash amount equivalent to the value of any dividend or distribution paid on a share on or after the date of grant. Share rights do not carry any voting rights.

Shares Shares issued under the plan will rank equally with the other issued shares. Depending on the terms of issue, the shares may be subject to disposal restrictions, which means the shares may not be disposed of or dealt with for a period of time. Shares allocated on vesting or exercise of a share right carry the same rights and entitlements as other issued shares, including dividend and voting rights.

Restrictions Under the FY2016 LTI offer, Shares allocated on vesting of share rights will not be subject to any further dealing restrictions. Therefore, participants may immediately deal with shares allocated, subject to complying with the Citadel Share Trading Policy.

Dilution Any new shares issued on vesting of share rights will be restricted to a maximum of 5% of total issued shares over the previous five years.

Amendments To the extent permitted by the ASX Listing Rules, the Board retains the discretion to vary the terms and conditions of the share rights plan. This includes varying the number of shares rights or the number of shares to which a participant is entitled upon a reorganisation of capital of Citadel.

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d) Link between remuneration and performance

The Group has performed well since listing on the ASX in November 2014 with management delivering an EBITDA result of $10.1m. As a result, the Board awarded key management personnel 93% of the maximum short term incentives. As detailed in the STI plan 50% of the award will be paid in cash and 50% will be deferred for 12 months and subject to a final review by the Nominations and Remuneration Committee.

In addition to the STI a one off IPO listing cash bonus was awarded to the Chief Financial Officer in relation to the successful completion of the IPO process totalling $0.13 million with 100% vesting on 13 November 2015.

Metric Target Performance Impact on incentive award

EBITDA Budgeted EBITDA $10.1m Above target

Customer Satisfaction 5% or below dissatisfaction

1.83% dissatisfaction Above target

Employee Satisfaction 85% 87% Above target

IPO Listing Successful Listing Successful Listing 100% granted (non-vested)

Statutory performance indicators

We aim to align our executive remuneration to our strategic and business objectives and the creation of shareholder wealth. The table below shows measures of the group’s financial performance over the last five years as required by the Corporations Act 2001. However, these are not necessarily consistent with the measures used in determining the variable amounts of remuneration to be awarded to KMPs. As a consequence, there may not always be a direct correlation between the statutory key performance measures and the variable remuneration awarded.

Metric 2015 2014 2013 2012 2011

Revenue ($’000) 72,970 49,927 50,278 53,802 59,047

Net profit before tax ($’000) 8,570 5,302 4,312 2,091 1,283

Dividends paid ($’000) 4,110 1,277 1,277 1,702 426

Basic earnings per share (cents) 16.1 12.4 10.3 5.1 4.0

The increase/decrease in share price has not been included as this is the first year in which the company is operating as a listed entity. As at 30 June 2015, the closing share price was $3.88/share which is an increase of 72.4% from the share price at floatation of $2.25/share.

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e) Remuneration expenses for non-executive and executive KMPs

The following table shows details of the remuneration expense recognised for the group’s executive key management personnel for the current and previous financial year measured in accordance with the requirements of the accounting standards.

Name Year Short-term employee benefits Post-employment

benefits

Long-term employee benefits

Share-based

payments

Total

Cash Salary &

Fees

Cash bonus Other Super Long service leave

Options & Rights

Non-executive directors

K McCann

(from 3/10/14)

2015 109,589 - 20,000 10,411 - 21,969 161,969

2014 - - - - - - -

D Shiff

(from 18/9/14)

2015 66,000 - - - - 10,985 76,985

2014 - - - - - - -

P Leahy 2015 66,000 - - - - 10,985 76,985

2014 - - - - - - -

K Moore (1/7/14 – 16/7/14)

2015 - - - - - - -

2014 78,615 - - - - - 78,615

L Jakeman (1/7/14-17/7/14)

2015 - - - - - - -

2014 61,158 - - - - - 61,158

G Lui (1/7/14 – 1/7/14)

2015 - - - - - - -

2014 51,570 - - 4,805 - - 56,375

Executive directors

M Jakeman 2015 387,500 222,507 - - - - 610,007

2014 327,200 159,899 - - - - 487,099

M McConnell 2015 86,571 55,627 3,413 9,661 198 - 155,470

2014 56,375 - - - - - 56,375

Other key management personnel

R Burns 2015 238,904 218,509 3,413 40,608 12,411 110,883 624,728

2014 231,320 146,026 6,145 34,112 6,998 - 424,601

Total KMP remuneration expensed

2015 954,564 496,643 26,826 60,680 12,609 154,822 1,706,144

2014 806,238 305,925 6,145 38,917 6,998 - 1,164,223

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f) Contractual arrangements for non-executive and executive KMPs

All KMPs noted above in section (e) are bound by their employment or contractor agreement. An arrangement has been established with the managing director as detailed below. This contractual arrangement has been factored into the table above.

Managing director

The company has entered into an ongoing contract with the Jakeman Family Trust (JFT) for the provision of services by Dr Miles Jakeman. The agreement provides for:

An entitlement for JFT to receive fixed annual payments of $400,000;

Eligibility to participate in any STI plan;

Eligibility to participate in any LTI plan

Either party may terminate the agreement by giving six month’s written notice of its intention to do so. The company may require JFT not to provide services during the notice period; and,

Upon any termination of the contract, JFT will be subject to a restraint period of six months. Citadel 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.

Non-executive Directors

All non-executive directors enter into a letter of appointment, which includes fees for chairing or participating on board committees as detailed below. The letter summarises the board policies and terms, including remuneration, relevant to the office of director with the company.

The maximum annual aggregate non-executive directors’ fee pool is $0.3m (2014: $0.3m).

From 1 July 2014 to 30 June 2015

$’0000

Base fees (per position)

Chair 120,000

Other non-executive directors 66,000

The Board has resolved to increase the Chair fee to $132,000 and award the Chair of the ARCC and NRC $10,000 based on external benchmarks.

h) Other statutory information

(i) Relative proportions of fixed vs variable remuneration expense Fixed remuneration Remuneration linked to performance

Name 2015 2014 2015 2014

Non-executive directors

K McCann 100% - - -

D Shiff 100% - - -

P Leahy 100% - - -

K Moore - 100% - -

L Jakeman - 100% - -

G Lui - 100% - -

Executive directors

M Jakeman 62% 67% 38% 33%

M McConnell 62% 100% 38% -

Other key management personnel

R Burns 65% 67% 35% 33%

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(ii) Share-based payments granted as incentive compensation Share Options As an incentive to join the Board, share options were issued to non-executive directors on 1 November 2014 (grant date). The award of options was a one off incentive and there are no plans for future grants to be included in on going remuneration. These options have a fair value at grant date of $2.25 per share option and an exercise price of $2.70 per share. The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. One-sixth of these options will become exercisable on 1 November 2016 with the remaining five-sixths becoming exercisable on 1 November 2017. Each option will convert to one share when exercised.

As at 30 June 2015, there were no vested options, and no lapsed or forfeited options. Refer below for details on the number of share options held by non-executive directors.

Share options

Kevin McCann 1 November 2014

300,000

Deena Shiff 1 November 2014

150,000

Peter Leahy AC 1 November 2014

150,000

Share rights

During the year, share rights were issued for no consideration totalling $0.3 million with one third vesting on 1 November 2015 and the remaining vesting on 1 November 2016. The purpose of the grant was to retain key senior managers in the short- to medium-term, with the first issue of share rights made to R Burns.

If the participant is not employed by the Group on a particular vesting date due to the participant either having been summarily dismissed or having terminated his or her employment agreement otherwise than in accordance with the terms of that agreement then any unvested share rights held on or after the date of termination will lapse. As at 30 June 2015, all share rights remain unvested. Details of KMPs who received share rights are detailed below.

Share rights

R Burns 133,333

(iii) Key management personnel equity holdings

2015 Name

Balance at the start of the year

Issued during the year

Other changes during the year1

Balance at the end of the year

K McCann - 100,000 - 100,000

D Shiff - - - -

P Leahy - - - -

M Jakeman 3,029,874 - 5,279,135 8,309,009

M McConnell 2,416,281 - 4,210,025 6,626,306

R Burns 12,860 - 37,488 50,348

Footnote: 1

The changes during the year reflect the share split that occurred prior to the IPO. More detail regarding the share split is available in note 25.

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DIRECTORS’ DECLARATION

This report is made in accordance with a resolution of Directors.

Mr Kevin McCann, AM

Chairman

Canberra

24 August 2015

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Auditor’s independence declaration

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Corporate directory

DIRECTORS Mr Kevin McCann, AM (Chairman)

Dr Miles Jakeman

Ms Deena Shiff

Lieutenant General Professor Peter Leahy, AC (Retd)

Mr Mark McConnell

SECRETARY Mr Robert Andrew Burns

PRINCIPAL PLACE OF BUSINESS

11 Faulding Street

SYMONSTON ACT 2609 AUSTRALIA

Telephone: (02) 6124 0800

Fax: (02) 6201 0550

REGISTERED OFFICE 11 Faulding Street


Telephone: (02) 6124 0800

Fax: (02) 6201 0550

STOCK EXCHANGE LISTING Australian Securities Exchange

SHARE REGISTRY Link Market Services Limited

Level 12, 680 George Street

SYDNEY NSW 2000 AUSTRALIA

Telephone: 1300 554 474

AUDITOR PricewaterhouseCoopers

28 Sydney Ave

FORREST ACT 2603 AUSTRALIA

Telephone: (02) 6271 3000

WEBSITE ADDRESS www.citadelgroup.com.au

The company is limited by shares, incorporated and domiciled in Australia.

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Annual financial report

ANNUAL FINANCIAL REPORT YEAR ENDED 30 JUNE 2015

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Annual financial report

The Citadel Group Limited (CGL) statements are the consolidated statements for the Group consisting of CGL and its subsidiaries.

The financial report is presented in Australian Dollars and all values are rounded to the nearest thousand dollars ($,000) unless otherwise stated.

CGL is a company limited by shares, incorporated and domiciled in Australia. Its registered office is:

11 Faulding Street


Telephone: (02) 6124 0800

Fax: (02) 6201 0550

A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ report on page 29, which is not part of this financial report.

The financial statements were authorised for issue by the Directors on 24 August 2015. The Directors have the power to amend and reissue the financial statements.

Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally at minimum cost to the Group. All press releases and other information are available on our website: www.citadelgroup.com.au

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contents Consolidated statement of profit or loss and other comprehensive income ........................................... 49

Consolidated Statement of financial position ........................................................................................... 50

Consolidated Statement of changes in equity ............................................................................................ 51

Consolidated statement of cashflows ........................................................................................................ 52

Notes to the financial statements .............................................................................................................. 53

Note 1 – Significant accounting policies ................................................................................................... 53

Note 2 – Segment information ...................................................................................................................67

Note 3 - Revenues ....................................................................................................................................... 70

Note 4 – Individually significant items ..................................................................................................... 70

Note 5 – Expense items ............................................................................................................................... 71

Note 6 – Income tax expense ...................................................................................................................... 72

Note 7 – Earnings per share .......................................................................................................................74

Note 8 – Cash and cash equivalents ........................................................................................................... 75

Note 9 – Trade & Other Receivables .......................................................................................................... 75

Note 10 – Inventories ..................................................................................................................................76

Note 11 – Other current assets ....................................................................................................................76

Note 12 – Plant & equipment ...................................................................................................................... 77

Note 13 – Intangible Assets........................................................................................................................ 78

Note 14 – Subsidiaries ................................................................................................................................ 80

Note 15 – Associates ................................................................................................................................... 80

Note 16 – Amounts due from (to) customers under construction contracts ........................................... 81

Note 17 – Trade & other payables ............................................................................................................... 81

Note 18 – Other payables: non current ..................................................................................................... 82

Note 19 – Interest bearing liability: current ............................................................................................. 82

Note 20 – Interest bearing liability: non current ..................................................................................... 82

Note 21 – Obligations under finance leases .............................................................................................. 83

Note 22 – Provisions .................................................................................................................................. 83

Note 23 – Make good provision ................................................................................................................. 84

Note 24 – Other liabilities: current ........................................................................................................... 84

Note 25 – Contributed equity .................................................................................................................... 84

Note 26 – Rerserves (net of income tax) ................................................................................................... 85

Note 27 – Retained earnings ...................................................................................................................... 85

Note 28 – Dividends ................................................................................................................................... 86

Note 29 – Capital management ................................................................................................................. 86

Note 30 – Financial risk management ...................................................................................................... 87

Note 31 – Share-based payments .............................................................................................................. 92

Note 32 – Key management personnel compensation ............................................................................. 94

Note 33 – Related party transactions ........................................................................................................ 95

Note 34 – Business combinations ............................................................................................................. 96

Note 35 – Reconciliation of the net profit after tax to the net cash flow from operations ..................... 99

Note 36 – Operating lease arrangements ................................................................................................. 99

Note 37 – Commitments and contingencies ........................................................................................... 100

Note 38 – Remuneration of auditors ...................................................................................................... 100

Note 39 – Parent entity financial information......................................................................................... 101

Note 40 – Events occurring after the balance sheet date ........................................................................ 101

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CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

NOTES 2015

$,000

2014

$,000

Sale of goods and rendering of services 3(a) 72,314 49,563

Other income 3(b) 656 364

72,970 49,927

Cost of sale of goods and rendering of services (49,860) (35,762)

Distribution, sales and marketing (3,734) (3,409)

Occupancy (843) (669)

Administration (11,212) (6,078)

Finance costs 5(b) (510) (116)

Share of net profit of associates accounted for using the equity method

1,759 1,409

Profit before income tax 8,570 5,302

Income tax expense 6 (2,045) (1,168)

Net profit for the year 6,525 4,134

Other comprehensive income, net of tax - -

Total Comprehensive Income for the year attributable to ordinary equity holders of the parent entity

6,525 4,134

Earnings per share for profit attributable to the ordinary equity holders of the parent entity:

Notes Cents Cents

Basic earnings per share 7 16.1 12.4

Diluted earnings per share 7 16.0 12.4

The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION

NOTES 2015

$,000 2014

$,000

ASSETS

Current assets

Cash and cash equivalents 8(a) 37,222 19,260

Trade and other receivables 9 21,291 12,086

Inventories 10 1,832 1,470

Other current assets 11 3,133 494

TOTAL CURRENT ASSETS 63,478 33,310

Non – current assets

Plant and equipment 12 2,637 1,682

Other non-current assets 622 -

Intangible assets 13 59,949 13,672

Deferred tax assets 6(e) - 669

Investments at cost 14 14

Investments in associates accounted using the equity method 15 17 4

TOTAL NON – CURRENT ASSETS 63,239 16,041

TOTAL ASSETS 126,717 49,351

LIABILITIES

Current liabilities

Trade and other payables 17 21,913 14,398

Interest bearing liabilities 19 923 390

Provisions 22 2,778 1,579

Other current liabilities 24 16,910 7,073

TOTAL CURRENT LIABILITIES 42,524 23,440

Non – current liabilities

Other payables 18 24,417 104

Interest bearing liabilities 20 534 146

Deferred tax liabilities 6(e) 1,898 -

Provisions 22 357 377

TOTAL NON – CURRENT LIABILITIES 27,206 627

TOTAL LIABILITIES 69,730 24,067

NET ASSETS 56,987 25,284

EQUITY Equity attributable to owners of the parent entity

Contributed equity 25 47,849 19,210

Equity compensation reserve 26 649 -

Retained earnings 27 8,489 6,074

TOTAL EQUITY 56,987 25,284

The above consolidated statement of financial position should be read in conjunction with the accompanying notes.

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

Notes

Contributed Equity

Equity Compensation

Reserve

Retained Earnings

Total Equity

$,000 $,000 $,000 $,000

Balance at 1 July 2013 19,210 - 3,217 22,427

Total comprehensive income for the year - - 4,134 4,134

Dividends paid 28 - - (1,277) (1,277)

Balance at 30 June 2014 19,210 - 6,074 25,284

Total comprehensive income for the year - - 6,525 6,525

Transactions with owners in their capacity as owners, net of income tax:

Contributions of equity, net of transaction costs

25 28,639 - - 28,639

Dividends paid 28 - - (4,110) (4,110)

Share based payments 26 - 649 - 649

Balance at 30 June 2015 47,849 649 8,489 56,987

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CONSOLIDATED STATEMENT OF CASHFLOWS

NOTES 2015

$,000

2014

$,000

Cash flows from operating activities

Receipts from customers 67,531 53,319

Payments to suppliers and employees (59,473) (45,896)

Income taxes paid (1,767) (1,088)

Interest & borrowing costs paid (48) (42)

Interest & other income received 639 323

Net cash inflow from operating activities 35 6,882 6,616

Cash flows from investing activities

Payments for plant & equipment (756) (1,355)

Investments in short-term deposits (1,554) -

Dividends received 1,512 1,581

Payment for acquisition of subsidiary, net of cash acquired 34(d) (9,055) -

Payments for capitalised development costs (885) (208)

Net cash (outflow)/inflow from investing activities (10,738) 18

Cash flows from financing activities

Proceeds from issuance of shares 25,000 -

Payments of transaction costs for issuance of shares (2,956) -

Dividends paid (4,110) (1,277)

Proceeds from loans 3,500 959

Repayment of lease liabilities (52) 175

Net cash inflow/(outflow) from financing activities 21,382 (143)

Net increase in cash and cash equivalents 17,526 6,491

Cash and cash equivalents at the beginning of financial year 18,902 12,411

Cash and cash equivalents at the end of the year 8(b) 36,428 18,902

The above consolidated statement of cashflows should be read in conjunction with the accompanying notes.

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Notes to the financial statements

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board, and comply with other requirements of the law.

The financial statements comprise the consolidated financial statements of The Citadel Group Limited (the “Group” or “CGL”). For the purposes of preparing the consolidated financial statements, The Citadel Group Limited is a for-profit entity.

The financial statements were authorised for issue by the directors on 24 August 2015.

(b) Basis of preparation

The consolidated financial statements have been prepared on the basis of historical cost, except for certain financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. All amounts are presented in Australian dollars, unless otherwise noted.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of AASB 2 Share-based payments, leasing transactions that are within the scope of AASB 117 Leases, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in AASB 2 or value in use in AASB 136.

The Group is a company of the kind referred to in ASIC Class Order 98/100, dated 10 July 1998, and in accordance with that Class Order amounts in the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated.

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(c) New, revised or amending Accounting Standards and Interpretations adopted

The Group 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 period as detailed below:

AASB 2013-3 Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets

AASB 2014-1 Amendments to Australian Accounting Standards

The adoption of these accounting standards and interpretations only affected the disclosures in the notes to the financial statements.

(d) Standards and Interpretations in issue not yet adopted

At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective.

Standard/Interpretation Effective for annual reporting periods beginning on or after

Expected to be initially applied in the financial year ending

AASB 9 Financial Instruments, and the relevant amending standards

1 January 2018 30 June 2019

AASB 15 Revenue from Contracts with Customers

1 January 2018 30 June 2019

AASB 9 issued in December 2009, introduced new requirements for the classification and measurement of financial assets. AASB 9 was amended in December 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition. The Group does not expect any impact from the requirements of the amended standard as there are currently no hedges in place, and the changes are not expected to impact other financial assets and liabilities held by the Group.

AASB 15 is a new standard for the recognition of revenue and will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The standard permits a modified retrospective approach for the adoption.

The adoption of these Standards and Interpretations in issue but not yet effective is not expected to have a significant impact on the Group’s accounting policies however it may result in changes to information currently disclosed. An assessment will be required over the coming 12 months to determine any potential impact. The Group does not intend to adopt any of these pronouncements before their effective dates. There are no other standards that are not yet effective and that would be expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions.

(e) Principles of consolidation

(i) Subsidiaries

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group 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 Group. They are deconsolidated from the date that control ceases.

The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(f)).

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Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(ii) Associates

Associates are all entities over which the Group has significant influence but not control or joint control. This is generally the case where the Group holds between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting (see (iii) below), after initially being recognised at cost.

(iii) Equity method

Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint ventures are recognised as a reduction in the carrying amount of the investment.

When the Group’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interests in these entities. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group.

(f) Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group and the equity instruments issued by the Group in exchange for control of the acquire. Acquisition-related costs are recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, with the exception of deferred tax liabilities which are measured in line with AASB 112.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interests in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in profit or loss as a bargain purchase.

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Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such re-measurement are recognised in profit or loss.

(g) Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.

The board of CGL has appointed a strategic steering committee which assesses the financial performance and position of the Group, and makes strategic decisions.

The steering committee, which has been identified as being the chief operating decision maker, consists of the managing director and the chief financial officer.

(h) Foreign currency translation

(i) Functional and presentation currency

Items included in the consolidated financial statements of each of the Group’s entities are measured using Australian dollars $A (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is CGL’s functional and presentation currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency 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 year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of profit or loss and other comprehensive income.

(i) Revenue recognition

The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and duties and taxes paid.

Generally, the Group records the full gross amount of sale proceeds as revenue. However, if the Group is acting as an agent, revenue is recorded on a net basis (being the gross amount billed less the amount paid to the supplier acting as a principal in the arrangement).

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(i) Sale of technological products

In addition to the recognition criteria noted above, revenue from the sale of goods is recognised when:

The Group has passed the risk and rewards of ownership in the goods to the buyer;

The Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; and,

The costs incurred or to be incurred in respect of the transaction can be measured reliably.

(ii) Rendering of services

Educational and training services

Revenue from education and training services is recognised in the accounting period in which the delivery of the programme occurs. The recognition of revenue is based on a number of teaching days completed in relation to the total teaching days for the programme.

Technology consulting and integration services

The revenue of time and material contracts is recognised at the contractual rates as labour hours are delivered and direct expenses are incurred.

For fixed services contracts, revenue is recognised on a straight line basis over the contractual term of the contract.

For fixed price contracts, revenue is recognised under the percentage of completion method, based on actual service provided as a proportion of the total services to be provided. Where a loss is expected to occur, it is recognised immediately in the statement of profit or loss and other comprehensive income. If circumstances arise that may change the original estimate of the revenue, costs or extent of progress towards completion, the estimates are revised. These revisions may result in increases or decreases in revenue and costs and are reflected in the period in which the circumstances that give rise to the revision became known by management.

Software development

The revenue recognition policy for software development services is the same as noted above for fixed price contracts.

Construction of technology infrastructure

The Group’s policy for recognition of revenue from construction contracts is described in note 1(j) below.

(iii) Licence fees

Revenue from licence fees for use of developed software is recognised on a straight line basis over the term of the licence.

(iv) Dividends

Dividends are recognised as revenue when the right to receive payment is established.

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(v) Interest revenue

Interest revenue is recognised as it accrues, taking into account the effective yield on the financial asset, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.

(j) Construction contracts

When the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the end of the reporting period, measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that the amount can be measured reliably and its receipt is considered probable.

When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that it is probable will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

When contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is shown as amounts due from customers for contract work. For contracts where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is shown as the amounts due to customers from contract work. Amounts received before the related work is performed are included in the consolidated statement of financial position as income in advance. Amounts billed for work performed but not yet paid by the customer are included in the consolidated statement of financial position under trade and other receivables.

(k) Income tax

Income tax expense represents the sum of the tax currently payable and deferred tax.

(i) Current tax

The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

(ii) Deferred tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.

However the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

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.

Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the

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reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.

CGL and its wholly owned Australian controlled entities implemented the tax consolidation legislation as of 1 July 2005. The head entity, CGL and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the consolidated group.

In addition to its own current and deferred tax amounts, CGL also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from the controlled entities in the tax consolidation group.

Assets or liabilities arising under the tax funding agreements with the tax consolidated entities are recognised as amounts receivable or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly owned tax consolidation entities.

(l) Impairment of non financial assets other than goodwill and indefinite life intangibles

Non financial assets other than goodwill and intangible assets that have an indefinite useful life are tested 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. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

(m) 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 and bank overdrafts.

Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position.

(n) Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less an impairment provision. Trade receivables are generally due for settlement between 30 to 60 days from the date of invoice.

Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. An impairment provision is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision 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. The amount of the provision is recognised in the income statement.

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(o) Inventories

Work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials and direct labour. Costs are assigned to individual items of inventory on the basis of weighted average costs. Costs of purchased inventory are determined after deducting rebates and discounts. 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.

(p) Plant and equipment

All plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation on assets is calculated using the straight line method to allocate their cost, net of their residual values, over their estimated useful lives, as follows:

Furniture and office equipment 3-8 years Plant and equipment 5-10 years

Computer equipment 3-5 years ICT Software 2-5 years

Motor vehicles 3-5 years Leasehold improvements Term of lease

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing sales proceeds with carrying amount. These are included in the statement of profit or loss and other comprehensive income.

An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset.

(q) Intangible assets

Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in profit or loss in the year which the expenditure is incurred.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over their useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset.

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Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level consistent with the methodology outlined for goodwill below. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportive. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis.

Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised.

(i) Goodwill

Goodwill acquired in a business combination is initially measured at cost of the business combination being the excess of the consideration transferred over the fair value of the Group’s net identifiable assets acquired and liabilities assumed. If this consideration transferred is lower than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. If the recoverable amount of the cash-generating unit to which goodwill has been allocated is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods.

(ii) Research and development costs

Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development.

Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project.

The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use, or more frequently, when an indication of impairment arises during the reporting period.

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A summary of the policies applied to the Group’s intangible assets is as follows:

Goodwill Business process, software and

product development

Trademarks & other rights

Patents & licences

Customer contracts acquired

Useful lives Indefinite 3 – 10 years Indefinite Indefinite 10 years

Impairment testing

Annually Annually Annually Annually Annually

(iii) Patents and licences

The patents and licences have been granted for a minimum of 10 years by the relevant government agency with the option of renewal without significant cost at the end of this period provided that the Group meets certain predetermined targets. The fact that patents and licences have previously been renewed and that the evidence supports the meeting of these targets have allowed the Group to determine that there is no foreseeable limit to the period over which the assets are expected to generate net cash inflows for the Group. Thus, the assets have indefinite useful lives. Costs capitalised include external direct costs of materials and service in acquiring the patents or licences.

(iv) Trademarks and other rights

Costs capitalised include external direct costs of materials and service in acquiring the trademarks and other rights.

During the year, the Group acquired customer contracts as part of a business combination. The amount capitalised reflects the fair value of the contracts as determined through a discounted cash flow model. Refer to note 1(dd)(ii) for further detail.

(v) IT development and software

Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software and systems. Costs capitalised include external direct costs of materials and service, direct payroll and payroll related costs of employees’ time spent on the project.

IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where the Group has an intention and ability to use the asset.

During the year, the Group acquired software as part of a business combination. The amount capitalised to the balance sheet reflects the fair value of the software as determined through a discounted cash flow model. Refer to note 1(dd)(ii) for further detail.

(vi) Curriculum development

Costs incurred in developing the learning curriculum that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to product development. Costs capitalised include external direct costs of materials and service, direct payroll and payroll related costs of employees’ time spent on the project.

Curriculum development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where the Group has an intention and ability to use the asset.

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(r) Trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. These amounts are carried at amortised cost and due to their short term nature they are not discounted. These amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period.

(s) Interest bearing liabilities

Interest bearing liabilities are initially recognised at fair value, net of transaction costs incurred. Interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the statement of comprehensive income over the period of the liability using the effective interest method. Fees paid on the establishment of loan facilities, which are not an incremental cost relating to the actual draw-down of the facility, are recognised as prepayments and amortised on a straight-line basis over the term of the facility.

Interest bearing liabilities are removed from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income or other expenses.

Interest bearing liabilities are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

(t) Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are initially recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss. Contingent rentals are recognised as expenses in the periods in which they are incurred.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

(u) Employee benefits

A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave, and vesting personal leave when it is probable that settlement will be required and they are capable of being measured reliably.

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Liabilities recognised in respect of short-term employee benefits are measured at their nominal values using the remuneration rate expected to apply at the time of settlement and are recognised in other payables where the liability is expected to be settled within 12 months. Expenses for non-vesting personal leave are recognised when the leave is taken and are measured at the rates paid or payable.

Liabilities recognised in respect of long term employee benefits, including annual leave and long service leave not expected to be settled within 12 months, are measured as the present value of the estimated future cashflows to be made by the Group in respect of services provided by employees up to reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. Re-measurements as a result of experience adjustments and changes in assumptions are recognised in profit or loss.

(v) Provisions

Provisions for make good obligations are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense.

(w) Share-based payments arrangements

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 31.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimate, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve.

(x) Deferred income

A deferred income balance is recognised as a liability when the Group either received payment or raised an invoice in advance of delivering contracted goods and services. The balance of the deferred income account is amortised to revenue in the period when the goods are delivered or the services rendered.

(y) Contributed equity

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration.

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(z) Earnings per share

(i) Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Group, 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 year.

(ii) 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.

(aa) Goods and services tax

Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of 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 taxation authority is included with other receivables or payables in the balance sheet.

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 taxation authority, are presented as operating cash flow.

(bb) Parent entity financial information

The financial information for the parent entity, The Citadel Group Limited, disclosed in note 39 has been prepared on the same basis as the consolidated financial statements, except as set out below.

(i) Investments in subsidiaries and associates

Investments in subsidiaries are accounted for at cost. Such investments include both investments in shares issued by the subsidiary and other parent entity interests that in substance form part of the parent entity’s investment in the subsidiary. These include investments in the form of interest-free loans which have no fixed repayment terms and which have been provided to subsidiaries as an additional source of long term capital.

Trade amounts receivable from subsidiaries in the normal course of business and other amounts advanced on commercial terms and conditions are included in receivables.

(cc) Dividends

Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date.

(dd) Critical accounting judgements and key sources of estimation uncertainty

(i) Significant accounting judgements

The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies.

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This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Detailed information about each of these estimates and judgements is included below with information about the basis of calculation for each affected line item in the financial statements.

Percentage of completion

The Group recognises revenue according to the percentage of completion of the individual fixed price contract. The percentage of completion is determined by the aggregated cost of effort for the individual contract incurred at the end of the reporting period compared with the estimated budgeted effort. Management’s estimation of the cost incurred to date and the budgeted cost are primarily based on the labour effort employed in the contract. Corresponding revenue from contract work is also estimated by management based on the percentage of completion and budgeted revenue. The Group regularly reviews and revises the estimation of both contract revenue and contract cost in the budget prepared for each contract as these contract progresses.

(ii) Significant assumptions

Fair value of acquired intangibles

The fair value of intangible assets acquired in a business combination has been determined using a discounted cash flow approach. This methodology requires significant assumptions regarding the future revenue streams, EBITDA results, the proportion of EBITDA attributable to software versus customer contracts, and the discount rate.

Future revenue streams and EBITDA results are determined using budget estimates and forecasts taking into consideration the expected revenue arising from contracts and the costs associated with delivering those contracts. The level of risk associated with the software was also considered when calculating the discount rate. The Group amortises the acquired intangibles in line with the useful lives detailed in note 1(q), and will perform impairment testing on an annual basis.

Impairment of goodwill and intangibles with indefinite useful lives

The Group tests for impairment of goodwill and intangibles with indefinite useful lives on at least on an annual basis. This requires estimates of the recoverable amount of the cash generating units using a value-in-use discounted cash flow methodology, to which the goodwill and intangibles with indefinite useful lives are allocated.

Discount rates for employee benefit liabilities

Recent research concluded that there is a sufficiently observable, deep and liquid market in high quality corporate bonds in Australia. As a result, it is no longer appropriate to use a government bond rate to discount employee benefit liabilities and a corporate bond rate should be used to satisfy the requirements of AASB 119 Employee benefits. As a consequence of the change of estimate, the leave obligations liabilities have been measured at the corporate bond rate as at 30 June 2015.

Fair value of share options issued to employees

The Group uses the Black-Scholes model for determining the fair value of share options issued. As such, this requires estimates for the inputs to the model. Refer to note 31(a) for further detail on the assumptions used.

Fair value of consideration on acquisition

In order to comply with accounting policy note 1(f), the Group adopted a number of assumptions relating to the appropriate discount rate to apply to future tranches to determine present value and the expected future performance of the acquired entity.

Future performance was based on budget estimates and forecasts taking into consideration the expected revenue arising from contracts and the costs associated with delivering those contracts. The discount rate was determined using the Group’s existing cost of debt and equity. The Group obtained the assistance of valuation experts in this process.

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NOTE 2 – SEGMENT INFORMATION

(a) Description of segments

The Group’s strategic steering committee, consisting of the Managing Director and the Chief Financial Officer, examines the Group’s performance from a product perspective and has identified two reportable segments:

Education segment: The Group provides vocational education and training to empower learners (typically 17-24 year olds) to achieve their individual education or employment goals.

Technology segment: The Group provides a range of professional and managed service solutions to public sector agencies and large corporates. Within this segment, we offer a number of specialist capabilities:

People & Advisory – The Group provides strategic advice, program management, acquisition support and quality assurance services via consulting, contracting and placement mechanisms;

Knowledge Management – The Group helps organisations capture, share and use their corporate knowledge such that the right person can find the right information anywhere-anytime; and,

Technology & Integration – The Group brings together disparate organisational information using collaboration and presentation systems, unified communications, telemedicine and video conferencing.

(b) Segment results

The segment information provided to the strategic steering committee for the reportable segments is as follows:

(a) Included in the “Other” segment are corporate assets such as investments in subsidiaries.

For the year ended 30 June 2015 EDUCATION TECHNOLOGY OTHERa

TOTAL

$,000 $,000 $,000 $,000

Total segment revenue 11,228 61,459 - 72,687

Inter-segment revenue - (373) - (373)

Revenue from external customers 11,228 61,086 - 72,314

Adjusted Earnings before interest, taxes, depreciation and amortisation (EBITDA)

4,146 10,681 752 15,579

Depreciation and amortisation expense 327 453 92 872

Income tax expense/(benefit) 1,141 2,408 628 4,177

Share of profit from associates - 1,759 - 1,759

Total segment assets 10,517 55,977 66,782 133,276

Total assets includes:

Investment in associates - 17 - 17

Additions to non-current assets (other than financial assets & deferred tax)

1,034 1,076 262 2,372

Total segment liabilities 9,252 37,957 26,702 73,911

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(c) Understanding the segment results

(i) Segment revenue

Sales between segments are carried out at arm’s length and are eliminated on consolidation. The revenue from external parties is measured in the same way as in the statement of profit or loss and other comprehensive income. Revenues from external customers come from the sale of professional and managed services and provision of education and training. Revenues for the year of approximately $34.0m (2014: $17.7m) are derived from two external customers. These revenues are attributed to the Technology segment. The entity is domiciled in Australia and all external customers are located in Australia.

Segment revenue reconciles to total revenue as follows:

For the year ended 30 June 2014 EDUCATION TECHNOLOGY OTHER TOTAL

$,000 $,000 $,000 $,000

Total segment revenue 9,332 40,526 - 49,858

Inter-segment revenue (3) (292) - (295)

Revenue from external customers 9,329 40,234 - 49,563

Adjusted Earnings before interest, taxes, depreciation and amortisation (EBITDA)

3,736 5,456 (3,036) 6,156

Depreciation and amortisation expense 226 491 26 743

Income tax expense/(benefit) 1,060 1,029 (921) 1,168

Share of profit from associates - 1,409 - 1,409

Total segment assets 8,805 28,388 16,560 53,753

Total assets includes:

Investment in associates - 4 - 4

Additions to non-current assets (other than financial assets & deferred tax)

529 437 393 1,359

Total segment liabilities 7,488 16,915 2,925 27,328

2015 2014

$,000 $,000

Total segment revenue 72,687 49,858

Inter-segment eliminations (373) (295)

Finance revenue – Note 3(b) 647 323

Other income 9 41

Total revenue (note 3) 72,970 49,927

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(ii) Adjusted Earnings Before Interest, Taxes, Depreciation And Amortisation (EBITDA)

The strategic steering committee uses an Adjusted EBITDA measure to assess the performance of the segments. This excludes the effects of individually significant expenditure, such as restructuring costs, legal expenses, and goodwill impairments when the impairment is the result of an isolated, non-recurring event. It also excludes unrealised gains or losses on financial instruments.

Interest income and expenditure are allocated to segments. Adjusted EBITDA reconciles to operating profit before income tax as follows:

(iii) Segment assets

Segment assets are measured in the same way as in the financial statements. These assets are allocated based on the operations of the segment. All segment assets are located in Australia. Reportable segments’ assets are reconciled to total assets as follows:

(iv) Segment liabilities

Segment liabilities are measured in the same way as in the financial statements. These liabilities are allocated based on the operations of the segment. The Group’s borrowings are not considered to be segment liabilities but are managed by the treasury function. Reportable segments’ liabilities are reconciled to total liabilities as follows:

2015 2014

$,000 $,000

Adjusted EBITDA 15,579 6,156

Inter-segment eliminations (3,355) 5

Finance costs (510) (116)

Depreciation and amortisation expense (1,194) (743)

IPO listing costs (1,553) -

Acquisition-related costs (397) -

Profit before income tax 8,570 5,302

2015 2014

$,000 $,000

Segment assets 133,276 53,753

Inter-segment eliminations (6,559) (5,071)

Unallocated: Deferred tax assets - 669

Total assets as per the consolidated statement of financial position 126,717 49,351

2015 2014

$,000 $,000

Segment liabilities 73,911 27,328

Inter-segment eliminations (6,079) (3,261)

Unallocated: Deferred tax liability 1,898 -

Total liabilities as per the consolidated statement of financial position 69,730 24,067

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NOTE 3 – REVENUES

NOTE 4 – INDIVIDUALLY SIGNIFICANT ITEMS

(a) On 13 November 2014, CGL completed the initial public offering (IPO) of the Group on the ASX. The IPO raised $25.0m in incremental capital through the issue of 11.1m new shares (note 25); $1.5m of costs (net of tax) were incurred being directly associated with the IPO.

(b) On 1 June 2015, CGL acquired PJA Solutions Pty Ltd (PJA) to expand its capabilities in the technology segment. Costs associated with the acquisition totalled $0.4m. Refer to Note 34 for further detail on the acquisition.

2015 2014

$,000 $,000

(a) Sale of goods and rendering of services

Rendering of services 52,005 43,718

Sale of goods 6,630 3,647

Construction contract revenue 13,012 2,198

Licence fees 667 -

72,314 49,563

(b) Other Income

Finance revenue 647 323

Net foreign exchange (16) 2

Other income 25 39

656 364

Total revenue 72,970 49,927

2015 2014

$,000 $,000

IPO listing costs (a) 1,553 -

Acquisition-related costs (b) 397 -

1,950 -

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NOTE 5 – EXPENSE ITEMS

2015 2014

$,000 $,000

(a) Breakdown of expenses by nature

Changes in inventory of finished goods and work in progress 5,090 3,782

Employee benefits expenses 16,960 12,703

Depreciation 872 571

Amortisation 322 292

(b) Finance costs

Finance charges payable under invoice financing & trade facility 98 56

Finance charges payable under finance leases 13 -

Overdraft charges & bank fees 167 60

Liabilities: unwinding of discount 232 -

Total finance costs expensed 510 116

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NOTE 6 – INCOME TAX EXPENSE

2015 2014

$,000 $,000

(a) Income Tax Expense relating to continuing operations

Current Tax

2,263 1,256

Deferred Tax

(256) (88)

Deferred Tax – adjustment to prior year 38 -

2,045 1,168

Deferred income tax (revenue) expense included in income tax expense comprises:

(Increase) in deferred tax assets (not including any increase through business combinations)

(433) (72)

Increase/(Decrease) in deferred tax liabilities (not including any increase through business combinations)

177 (15)

(256) (87)

(b) Numerical reconciliation of income tax expense to prima facie tax payable

Profit from continuing operations before income tax expense 8,570 5,302

At the Group’s statutory income tax rate of 30 % (2014: 30%) 2,571 1,591

Entertainment 1 3

Research & development credit (70) (34)

Dividends (104) 50

Imputation credits (423) (474)

Unwinding of discount 70 -

Sundry items - 32

Income tax expense recognised in profit or loss (relating to continuing operations)

2,045 1,168

(c) Amounts recognised directly in equity

Current tax (share issue costs) 485 -

485 -

(d) Current tax liabilities

Provision for income tax 22 1,194 797

1,194 797

(e) Deferred tax balances are presented in the statement of financial position as follows:

Deferred tax assets - 669

Deferred tax liabilities 1,898 -

Net deferred tax (liability)/asset (1,898) 669

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Refer to note 1(k) for details on the Group’s tax funding arrangement as a tax consolidated group. Movements in and closing balances of deferred tax during the year are summarised below:

2015

Opening balance

Recognised in profit or loss

Recognised in other

comprehensive income

Closing balance

$,000 $,000 $,000 $,000

Temporary differences

Provisions 422 179 - 601

Inventory obsolescence 174 (127) - 47

Doubtful debts 65 (48) - 17

Prepayments - (7) - (7)

Blackhole expenditure – IPO costs - 276 485 761

Blackhole expenditure – legal fees - 5 - 5

Accrued expenses 196 33 - 229

R & D - (209) - (209)

Accrued revenue (157) 78 - (79)

Share based payments - 49 - 49

Intangible assets (7) (63) - (70)

Other liabilities - 38 - 38

Property, plant and equipment (24) 24 - -

Amortisation - 28 - 28

669 256 485 1,410

Deferred tax liability assumed on acquisition (3,308)

Net deferred tax assets expected to be recovered after more than 12 months

(1,898)

Net deferred tax assets / (liabilities) (1,898)

2014 $,000 $,000 $,000 $,000

Temporary differences

Provisions 331 91 - 422

Inventory obsolescence 167 7 - 174

Doubtful debts 102 (37) - 65

Accrued expenses 185 11 - 196

Accrued revenue (102) (55) - (157)

Intangible assets (98) 91 - (7)

Property, plant and equipment (4) (20) - (24)

581 88 - 669

Net deferred tax assets expected to be recovered within 12 months

569

Net deferred tax assets expected to be recovered after more than 12 months

100

Net deferred tax assets / (liabilities) 669

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NOTE 7 – EARNINGS PER SHARE

(a) Employee share rights

Share rights granted to employees are considered to be potential ordinary shares. They have been included in the determination of diluted earnings per share as the participants still remain employed by the Group. They have not been included in the determination of basic earnings per share. Details relating to the rights are set out in note 31(b).

(b) Director share options

Options granted to directors are not considered potential ordinary shares as they were not dilutive for the year ended 30 June 2015. Details relating to the options are set out in note 31(a).

(c) Contingently issuable shares on business combinations

As part of the consideration for the acquisition of PJA Solutions Pty Ltd, the Group has the option to satisfy the remaining tranches with shares in the Group to a maximum of $5m. The potential dilutive effect of these shares has been factored in from the date of acquisition, 1 June 2015.

2015 2014

Cents per share Cents per share

Basic earnings per share 16.1 12.4

Diluted earnings per share 16.0 12.4

$’000 $’000

(a) Basic earnings per share

The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:

Profit for the year attributable to owners of the Group 6,525 4,134

Earnings used in the calculation of basic earnings per share 6,525 4,134

Weighted average number of ordinary shares for the purposes of basic earnings per share

40,498 33,333

$’000 $’000

(b) Diluted earnings per share

The earnings used in the calculation of diluted earnings per share are as follows:

Earnings used in the calculation of basic earnings per share 6,525 4,134

Earnings used in the calculation of diluted earnings per share 6,525 4,134

Weighted average number of ordinary shares used in the calculation of basic earnings per share

40,498 33,333

Shares deemed to be issued for no consideration in respect of:

Employee share rights 107 -

Contingently issuable shares on business combinations 102 -

Weighted average number of ordinary shares used in the calculation of diluted earnings per share

40,707 33,333

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NOTE 8 – CASH AND CASH EQUIVALENTS

NOTE 9 – TRADE & OTHER RECEIVABLES

(a) Cash and cash equivalents per the statement of financial position 2015 2014

$,000 $,000

Cash at bank and in hand 22,535 6,031

Short-term deposit 14,687 13,229

37,222 19,260

(b) Cash and cash equivalents reconciliation for cashflow purposes

2015 2014

$,000 $,000

Cash at bank and in hand 22,535 6,031

Short-term deposit 14,687 13,229

Short-term bank facilities (note 19) (794) (358)

36,428 18,902

2015 2014

$,000 $,000

Trade receivables 13,811 9,024

Provision for doubtful debts (57) (215)

Other receivables 1,750 1,511

Amounts due from customers under construction contracts (note 16) 5,787 351

Dividends declared and receivable - 1,415

21,291 12,086

As at 30 June, the aging analysis of trade receivables is as follows:

Past due but not impaired

Total Neither Past Due nor impaired 30 to 60 days 60 to 90 days >90 days

$,000 $,000 $,000 $,000 $,000

30-Jun-15 13,811 12,074 1,085 35 617

30-Jun-14 9,024 8,403 365 12 244

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NOTE 10 – INVENTORIES

(i) Assigning costs to inventories

The costs of individual items of inventory are determined using the weighted average costs.

(ii) Amounts recognised in profit and loss

There was also a reversal of write-down that was recognised in the current year for $0.4m (2014: nil) due to obsolete stock that the Group was able to sell. Overall, a loss was incurred on the sale which has been recognised in the statement of profit or loss and other comprehensive income; the reversal of write-down was recognised in cost of sales.

NOTE 11 – OTHER CURRENT ASSETS

2015 2014

$,000 $,000

Finished goods 505 1,687

Provision for obsolescence (158) (579)

Work in progress 1,485 362

1,832 1,470

2015 2014

$,000 $,000

Prepayments 337 198

Income accrual 1,244 296

Short-term deposits 1,552 -

3,133 494

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NOTE 12 – PLANT & EQUIPMENT

Furniture & office

equipment

Plant & equipment

Computer equipment

Leasehold improvements

Motor vehicles

Make good assets

ICT Software Total

$,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000

Cost

Balance at 1 July 2013 1,466 841 1,028 480 274 155 717 4,961

Additions 24 576 110 445 3 77 124 1,359

Disposals - - (4) - (53) - - (57)

Total Cost at 30 June 2014 1,490 1,417 1,134 925 224 232 841 6,263

Additions 108 35 104 824 67 100 250 1,488

Additions through business combinations 34 - 321 26 - - - 381

Disposals (1,193) (1,254) (432) (413) (87) - (88) (3,467)

Total Cost at 30 June 2015 439 198 1,127 1,362 204 332 1,003 4,665

Accumulated depreciation

Balance at 1 July 2013 (1,219) (1,201) (468) (399) (258) (180) (343) (4,068)

Depreciation for the year (50) (80) (49) (137) (4) (29) (220) (569)

Eliminated on disposals of assets - - 3 - 53 - - 56

Total Accumulated Depreciation at 30 June 2014 (1,269) (1,281) (514) (536) (209) (209) (563) (4,581)

Depreciation for the year (91) (66) (266) (204) (15) (35) (198) (875)

Eliminated on disposals of assets 1,159 1,251 430 413 87 - 88 3,428

Total Accumulated Depreciation at 30 June 2015 (201) (96) (350) (327) (137) (244) (673) (2,028)

Net book value

30 June 2015 238 102 777 1,035 67 88 330 2,637

30 June 2014 221 136 620 389 15 23 278 1,682

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NOTE 13 – INTANGIBLE ASSETS

Goodwill Business process,

software and product

development

Trademarks & other rights

Patents & licences

Customer contracts

Total

$,000 $,000 $,000 $,000 $,000

Cost

Balance at 1 July 2013 19,231 961 50 121 - 20,363

Additions – capitalised development costs

- 209 - - - 209

Total Cost at 30 June 2014 19,231 1,170 50 121 - 20,572

Additions – capitalised development costs

- 884 - - - 884

Additions – acquired through business combinations

7,189 27,609 4 - 11,026 45,828

Total Cost at 30 June 2015 26,420 29,663 54 121 11,026 67,284

Accumulated amortisation and impairment

Balance at 1 July 2013 (5,995) (613) - - - (6,608)

Amortisation expense - (292) - - - (292)

Total Accumulated Amortisation at 30 June 2014

(5,995) (905) - - - (6,900)

Amortisation expense - (343) - - (92) (435)

Total Accumulated Amortisation at 30 June 2015

(5,995) (1,248) - - (92) (7,335)

Net book value

30 June 2015 20,425 28,415 54 121 10,934 59,949

30 June 2014 13,236 265 50 121 - 13,672

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Goodwill and other intangible assets with indefinite useful lives have been allocated for impairment testing purposes to the following cash-generating units:

Goodwill Trademarks & other rights

Patents & Licences

Total

$,000 $,000 $,000 $,000

Australian Business Academy Pty Ltd - - 121 121

Frontier Group Australia Pty Ltd 2,111 50 - 2,161

Jakeman Business Solutions Pty Ltd 2,800 - - 2,800

ServicePoint Australia Pty Ltd 8,325 - - 8,325

PJA Solutions Pty Ltd 7,189 4 - 7,193

2015 Total 20,425 54 121 20,600

Australian Business Academy Pty Ltd - - 121 121

Frontier Group Australia Pty Ltd 2,111 50 - 2,161

Jakeman Business Solutions Pty Ltd 2,800 - - 2,800

ServicePoint Australia Pty Ltd 8,325 - - 8,325

2014 Total 13,236 50 121 13,407

The Group tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of a cash generating unit (CGU) is determined based on value-in-use calculations which require the use of assumptions, which are detailed below. The calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. These growth rates do not exceed the long-term average growth rates for the industry in which each CGU operates.

Revenue Compound

Annual Growth Rates

Discount Rate Terminal Rate

% % %

Frontier Group Australia Pty Ltd 16.21 16.49 1.00

Jakeman Business Solutions Pty Ltd 16.49 19.30 1.00

ServicePoint Australia Pty Ltd 3.70 18.57 1.00

These assumptions have been used for the analysis of each CGU within an operating segment. Management determined budgeted gross margin based on past performance and its expectations for the future. The compound annual growth rates used are based on past performance and planned strategic initiatives approved by management. The discount rates used reflect specific risks relating to the relevant CGU segments and the markets in which they operate.

Were the assumptions to significantly change, the analysis would remain the same with no impairment losses being incurred.

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NOTE 14 – SUBSIDIARIES

Details of the Group’s material subsidiaries at the end of the reporting period are as follows:

Name of subsidiary Principal activity Place of incorporation and operation

Proportion of ownership interest and voting power held by the Group

2015 2014

Australian Business Academy Pty Ltd (ABA)

Education provider Australia 100% 100%

Frontier Group Australia Pty Ltd (FGA)

Specialist consulting and HR solutions provider

Australia 100% 100%

ServicePoint Australia Pty Ltd (SAPL)

Technology and integration services

Australia 100% 100%

Jakeman Business Group Pty Ltd (JBS)

Knowledge management and advisory services

Australia 100% 100%

PJA Solutions Pty Ltd (PJAS) (i)

Technology and managed services

Australia 100% -

(i) PJA Solutions Pty Ltd was acquired by The Citadel Group Limited on 1 June 2015 (refer to note 34).

NOTE 15 – ASSOCIATES

Details of each of the Group’s material associates at the end of the reporting period are as follows:

Name of associate Principal activity Place of incorporation and operation

Proportion of ownership interest and voting power held by the Group

2015 2014

filosoph-e Pty Ltd

Information and Communications Technology managed services provider

Australia 25% 25%

Summarised financial information in respect of the Group’s material associates is set out below, which represents amounts shown in the associate’s financial statements prepared in accordance with AASBs adjusted by the Group for equity accounting purposes.

2015 2014

$,000 $,000

Investment in associates accounted for using the equity method 17 4

17 4

Filosoph-e Pty Ltd 2015 2014

$,000 $,000

Total current assets 1,236 8,907

Total Non-current assets - 8

Total current liabilities 1,042 8,861

Total Non-current liabilities 40 40

Net assets 154 14

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NOTE 16 – AMOUNTS DUE FROM (TO) CUSTOMERS UNDER CONSTRUCTION CONTRACTS

At 30 June 2015 and 2014, there were no retentions held by customers for contract work or advances received from customers for contract work.

NOTE 17 – TRADE & OTHER PAYABLES

2015 2014

$,000 $,000

Trade creditors 4,950 2,955

Other payables 2,976 881

GST payable 1,570 219

Accrued expenses 12,417 10,343

21,913 14,398

Trade payables are unsecured and are usually paid within 30 days of recognition.

2015 2014

$,000 $,000

Profit (loss) for the year 7,124 5,661

Total comprehensive income for the year 7,124 5,661

Dividends received or receivable from the associate during the year 1,746 1,467

2015 2014

$,000 $,000

Contracts in progress

Construction costs incurred plus recognised profits less recognised losses to date (year to date)

15,727 2,658

Less: progress billings (9,940) (2,307)

5,787 351

Recognised and included in the consolidated financial statements as amounts due:

- from customers under construction contracts (note 9) 5,787 351

5,787 351

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NOTE 18 – OTHER PAYABLES: NON CURRENT

2015 2014

$,000 $,000

Bonus Accrual - 104

Lease liability 125 -

Consideration Liabilities 24,292 -

24,417 104

NOTE 19 – INTEREST BEARING LIABILITY: CURRENT

2015 2014

$,000 $,000

Short Term Bank Facilities (a) 794 357

Finance lease Liability (note 21) 129 33

923 390

(a) The short term bank facilities are issued by ANZ Bank. The debt facilities are held by the legal parent The Citadel Group Limited and are secured by a fixed and floating charge over the Group’s assets. Each subsidiary of the Group has agreed to a cross collateral mortgage debenture securing the parent entity’s debt facility. The current average effective interest rate on the bills is 3.9% per annum (2014: 4.5% per annum). The carrying amount of the current and non-current borrowings approximates their fair value.

NOTE 20 – INTEREST BEARING LIABILITY: NON CURRENT

2015 2014

$,000 $,000

Finance lease liability (note 21) 534 146

534 146

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NOTE 21 – OBLIGATIONS UNDER FINANCE LEASES

The Group leased certain of its equipment under finance leases. The average lease term is 5 years (2014: 5 years). The Group has options to purchase the equipment for a nominal amount at the end of the lease terms. The Group’s obligations under finance leases are secured by the lessor’s title to the leased assets.

Interest rates underlying all obligations under finance leases are fixed at respective contract dates ranging from 5.0% to 7.8% (2014: 7.5% to 7.8%) per annum.

Minimum lease payments Present value of minimum

lease payments

2015 $’000

2014 $’000

2015 $’000

2014 $’000

Not later than one year 164 48 129 33

Later than one year and not later than five years 591 164 534 146

Later than five years - - - -

755 212 663 179

Less future finance charges (92) (33) - -

Present value of minimum lease payments 663 179 663 179

Included in the consolidated statement of financial position (note 19 and 20)

- current interest bearing liabilities 129 33

- noncurrent interest bearing liabilities 534 146

663 179

NOTE 22 – PROVISIONS

2015 2014

$,000 $,000

Employee benefits (a) 1,609 927

Make good provision (note 23) 332 232

Provision for income tax (note 6) 1,194 797

3,135 1,956

Current 2,778 1,579

Non-current 357 377

3,135 1,956

(a) The provision for employee benefits relates to the Group’s liability for long service leave and annual leave.

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NOTE 23 – MAKE GOOD PROVISION

2015 2014

$,000 $,000

Opening amount as at 1 July 232 235

Additional make good provision accrued 100 77

Make good provision paid - (80)

Closing amount as at 30 June 332 232

Current provision 284 -

Non current provision 48 232

Total make good provision 332 232

Provisions are considered current if they are expected to crystallise in the next 12 months.

The Group is required to restore all leased premises to their original condition with the exception of the principle place of business in Symonston ACT. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease of the useful life of the assets.

NOTE 24 – OTHER LIABILITIES - CURRENT

2015 2014

$,000 $,000

Deferred income 11,543 6,114

Short term vendor facilities 3,500 959

Unsecured loan (current) 1,867 -

16,910 7,073

NOTE 25 – CONTRIBUTED EQUITY

2015 2014 2015 2014

Shares Shares $’000 $’000

Fully paid ordinary shares issued 46,651,234 8,514,184 47,849 19,210

Details Number of

shares $,000

Opening balance 1 July 2013 8,514,184 19,210

Balance 30 June 2014 8,514,184 19,210

Share split of 3.915 (a) 24,819,169 -

Fully paid ordinary shares issued under IPO, net of transaction costs (b) 11,111,112 23,942

Employee share offer (c) 32,856 -

Fully paid ordinary shares issued as part of PJA Solutions acquisition (note 34) 2,173,913 4,697

Closing balance 30 June 2015 46,651,234 47,849

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(a) Prior to the IPO, existing shares were split at a ratio of 1:3.915 which resulted in the issuance of 24.8 million additional ordinary shares.

(b) The IPO raised $22.0 million, net of transaction costs and income tax, with 11.1 million additional shares issued. The issue price for the IPO was set at $2.25 per share.

(c) As part of the initial public offering, eligible employees were offered a maximum of $1,000 worth of shares at no cost. Employees cannot deal in these shares until the earlier of three years from the date of acquisition and cessation of employment with the Group. These shares hold the same rights as fully paid ordinary shares.

(a) Ordinary shares

Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Group in proportion to the number of and amounts paid on the shares held.

On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote.

Ordinary shares have no par value and the Group does not have a limited amount of authorised capital.

NOTE 26 – RESERVES (NET OF INCOME TAX)

2015 2014

$,000 $,000

Equity-settled employee benefits 649 -

649 -

Balance at beginning of year - -

Arising on grant of share options and rights to employees (note 31(d)) 162 -

Arising on the issuance of rights as consideration for PJAS (note 34(a)) 487 -

Balance at end of year 649 -

NOTE 27 – RETAINED EARNINGS

2015 2014

$,000 $,000

Retained earnings 8,489 6,074

Balance at beginning of year 6,074 3,217

Profit attributable to owners of the Group 6,525 4,134

Payment of dividends (note 28) (4,110) (1,277)

Balance at end of year 8,489 6,074

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NOTE 28 – DIVIDENDS

2015 2014

$,000 $,000

(a) Dividend Paid

Dividend paid 28 August 2014: 15 cents per share fully franked based on tax paid at 30% (Year ended 30 June 2013: dividends of 15 cents fully franked based on tax paid at 30%).

1,277

1,277

Special dividend paid 31 October 2014: 8.5 cents per share fully franked dividend based on tax paid at 30% (2014: nil). 2,833 -

Total dividend paid 4,110 1,277

(b) Dividends not recognised at the end of the reporting period

Since year end the directors have recommended the payment of a dividend of 5.8 cents fully franked based on tax paid at 30% (2014: 15 cents fully franked).

2,706

1,277

NOTE 29 – CAPITAL MANAGEMENT

The Group's objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistently with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including 'interest bearing liabilities' as shown in the consolidated statement of financial position) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated statement of financial position plus net debt.

During 2015, the Group's strategy has maintained a net asset gearing ratio of (0.11) (2014: (0.70) net asset position) due to strong cash balances at 29% of total assets (2014: 39%) the majority of which resulted from the IPO. This is considered appropriate for the current conditions.

The gearing ratio at 30 June 2015 and 30 June 2014 were as follows:

2015 2014

$,000 $,000

Net debt/(asset) (6,106) (17,765)

Total equity 56,502 25,284

Net debt to equity ratio (0.11) (0.70)

As at 30 June 2015 and 30 June 2014, the Group held more cash and cash equivalents than debt.

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NOTE 30 – FINANCIAL RISK MANAGEMENT

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, and interest rate risk), credit risk and liquidity risk. The Group'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 Group.

Risk management is carried out by the CGL corporate centre (Group Treasury) and reported to the Board. Group Treasury identifies and evaluates financial risks in close co-operation with the Group’s operating units.

The Group’s principal financial instruments are summarised below:

2015 2014

$,000 $,000

Financial assets

Cash and bank balances (including short term investments > 3 months) 38,776 19,260

Loans and receivables 21,291 12,086

Financial liabilities

Amortised cost (trade and other payables , finance leases, and vendor facilities) 26,076 14,577

Bank loans 794 358

Unsecured loan (current) 1,867 -

Consideration liabilities 24,292 -

(a) Market risk

(i) Currency risk

The Group sources goods and services internationally and are exposed to foreign exchange risk arising from currency exposures with respect to the US dollar and UK pound.

To date the foreign exchange risk exposure through international sourcing of services has been considered immaterial with no specific management strategies adopted.

The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows:

2015 2014

$,000 $,000

USD Trade receivables 2 -

USD Trade payables 134 12

During the year, the following foreign-exchange related amounts were recognised in the statement of profit or loss and other comprehensive income:

2015 2014

$,000 $,000

Net foreign exchange (loss)/gain included in other income/(other expenses) (16) 2

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The Group’s exposure to foreign currency risk is considered immaterial and therefore, movements in the US dollar are not considered to have a material impact on post-tax profit or other components of equity.

(ii) Cash flow and fair value interest rate risk

The Group's main interest rate risk arises from long-term borrowings as well as working capital facilities including overdrafts and invoice financing. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The risk is managed by the Group by regularly monitoring cash flow requirements.

As at the reporting date, the Group had the following variable rate borrowings outstanding:

2015 2014

Average interest rate

%

$,000 Average interest rate

%

$,000

Short term interest bearing investments (interest revenue) 4.0 16,241 2.4 13,229

Short term bank facilities (interest expense) 3.9 794 4.5 357

At 30 June 2015, if interest rates had changed by -/+ 100 basis points from the year-end rates with all other variables held constant, post-tax profit for the year would have been:

2015 2014

Outstanding at year end

$’000

Sensitivity (after tax)

-/+ 100 bps $

Outstanding at year end

$’000

Sensitivity (after tax)

-/+ 100 bps $

Short term interest bearing investments 16,241 (45,287)/45,287 13,229 (70,552)/70,552

Short term bank facilities (794) 2,211/(2,211) (357) 2,500/(2,500)

68,052/(68,052)

(b) Credit risk

Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, and deposits with banks, financial institutions and employees, as well as credit exposures to government and wholesale customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of 'A' are accepted. Government customers are classified as Commonwealth, State and Local. The Group has not separately assessed the credit risk for a government customer. If there is no independent rating for wholesale customers, finance assesses the credit quality of the customer, taking into account its financial position, past experience and other factors.

Sales to wholesale customers are required to be settled in cash, cheque or EFT, mitigating credit risk. Credit risk for deposits (loans) outstanding with employees is assessed by taking into account the individuals’ position and time in the Group, past experience and other factors. All employees make payments through the payroll system.

The Group trades only with recognised, credit worthy third parties and, as such, collateral is not requested nor is it the Group’s policy to securitise its trade and other receivables.

In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s experience of bad debts has not been significant.

The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised following.

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2015 2014

$,000 $,000

Financial assets

Petty cash 2 1

Cash at bank

Australian Banks Rating of A or Better 22,533 6,030

Short term deposits

Australian Banks Rating of A or Better 16,241 13,229

Total cash and cash equivalents 38,776 19,260

Total receivables

Commonwealth government 4,280 6,426

State government 1,602 178

Local government 141 -

Customers independently rated B or above 4,119 943

Wholesale customers 2,986 1,149

Related parties and associates 683 328

Total trade receivables 13,811 9,024

Financial assets

Associated entities 1,750 1,415

Wholesale customers 5,787 1,545

Commonwealth government - 96

State government - 7

Employees - 2

Customers independently rated B or above - 212

Total other receivables and employee loans 7,537 3,277

Total financial assets 60,124 31,561

The Group has decreased the provision against trade receivables by $0.2m during the year.

(c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

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(i) Maturities of financial assets and liabilities

The amounts disclosed below in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.

0 – 12 months 12 – 24 months 24 – 48 months 48 + months

$,000 $,000 $’000 $’000

Financial assets

Cash and cash equivalents 37,222 - - -

Short-term deposits 1,554 - - -

Trade and other receivables 21,291 - - -

Financial assets 60,067 - - -


Short-term banking facilities 794 - - -

Trade payables (non-interest bearing) 4,950 - - -

Other payables (non-interest bearing) 4,547 - - -

Accrued liabilities (non-interest bearing) 12,417 - - -

Unsecured loan (current) 1,867 - - -

Consideration liabilities - - 14,008 10,284

Finance lease liability 129 129 129 276

Short term vendor facilities (interest bearing - fixed)

3,500 - - -

Financial liabilities 28,204 129 14,137 10,560

Net financial assets/(liabilities) 31,863 (129) (14,137) (10,560)

The directors consider that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values.

(d) Recognised fair value measurements

(i) Fair value hierarchy

This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial instruments. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level follows underneath the table.

Level 1 Level 2 Level 3 Total

As at 30 June 2015 Notes $,000 $,000 $’000 $’000


Consideration Liabilities – Non current 34 - - 24,292 24,292

Total financial liabilities - - 24,292 24,292

There were no financial assets or liabilities recognised at fair value as at 30 June 2014.

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There were no transfers between levels during the year.

Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1.

Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

Level 3: If one or more of the significant inputs is not based on observable data, the instrument is included in level 3. This is the case for consideration liabilities.

(ii) Valuation techniques used to determine fair values

Specific valuation techniques used to value financial instruments include:

Discounting of budget and forecast cash flow results, using a discount rate that is reflective of the risk associated with the instrument.

The above methodology has been used to determine the fair value of consideration liabilities.

(iii) Fair value measurements using significant unobservable inputs (level 3)

The following table presents the changes in level 3 items for the period ended 30 June 2015:

Consideration Liabilities

Total

$’000 $’000

Opening balance as at 1 July 2014 - -

Acquisitions 24,062 24,062

Recognised in other comprehensive income – unwinding of discount 230 230

Total financial liabilities 24,292 24,292

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(v) Valuation inputs and relationships to fair value

The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements.

Fair value as at 30

June 2015

Unobservable inputs

Range of inputs

Relationship of unobservable inputs to fair value

Description $,000 2015

Consideration Liabilities 24,292 Risk-adjusted discount rate

7-18% A change in the discount rate by 100 bps would

increase/decrease the fair value by $0.2m

Expected average EBITDA

$7.5m - $13m If expected average EBITDA were 10% higher or

lower, the FV would increase/decrease by $1.0m

(vi) Valuation processes

For the purposes of determining the fair value of consideration paid to acquire a business, the Group uses the services of external valuation experts. The fair value is reassessed by the finance team at least once every six months, in line with the Group’s half-yearly reporting periods. The main level 3 inputs used by the Group are derived and evaluated as follows:

Discount rates for financial liabilities are determined using a capital asset pricing model to calculate a rate that reflects current market assessments of the time value of money and the risk specific to the liability; and,

Expected average EBITDA is estimated based on the entity’s knowledge of the business and how the current economic environment is likely to impact it.

NOTE 31 – SHARE-BASED PAYMENTS

(a) Non-executive director share option plan

The Group issued share options to non-executive directors in order to provide long-term incentives for non-executive directors. Under the plan, the directors were granted options which convert into one share on exercise of the option. One-sixth of the options granted vest of the second anniversary of date of listing (1 November 2016) on the ASX and the remaining five-sixths will become exercisable on the third anniversary of the date of listing (1 November 2017).

If a non-executive director ceases to be a director, any option issued to that director which have not become exercisable automatically lapse. The options do not carry any participation rights in new share issues.

Set out below is a summary of the options granted under the plan:

2015 2014

Average exercise price per share

option

Number of options

Average exercise price per share

option

Number of options

As at 1 July - - -

Granted during the year $2.70 600,000 - -

As at 30 June $2.70 600,000 - -

Vested and exercisable at 30 June - - - -

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The share options were granted on 14 November 2014. The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option.

The inputs into the model were as follows:

i. Grant date share price: $2.25 ii. Exercise price: $2.70

iii. Expected volatility: 40.00% iv. Option life: one-sixth of options granted – 2 years; five-sixth of options granted – 3 years v. Dividend yield: 5.00%

vi. Risk-free rate: 2.91%

(b) Employee share rights plan

The purpose of the share rights plan is to retain key senior managers. The first grant made under this plan to participants was on 14 November 2014 for $0.3 million worth of shares rights. The vesting dates for these are 1 November 2015 for $0.1 million of share rights and 1 November 2016 for $0.2 million of Share Rights. Another grant of share rights was made on 1 May 2015 for $0.7m worth of share rights. The vesting date for these rights is 1 July 2017 and vest on a pro-rata basis.

Any shares issued or transferred to a participant upon vesting of any share rights will be subject to restrictions on disposal from the date of issue (or transfer) of the shares until the release of Citadel’s financial results for either the half or full-year period immediately following the date of issue (or transfer, as applicable).

If the participant is not employed by Citadel on a particular vesting date due to the participant either:

Having been summarily dismissed; or

Having terminated his or her employment agreement otherwise than in accordance with the terms of that agreement,

Then any unvested share rights held on or after the date of termination will lapse, unless specifically stipulated in the share right grant agreement that rights vest on a pro-rata basis.

If the participant is not employed by Citadel on a particular Vesting Date:

And the Group has terminated the participant’s employment agreement (other than summarily) and his/her salary is being paid out in lieu of notice, then the only unvested share rights that will lapse are those that would ordinarily have vested after the end of the later of the notice period and any other date nominated in the terms of grant; or

The participant has validly terminated his or her employment agreement and the Group has elected to pay the participant his/her salary in lieu of notice, then the only unvested share rights that will lapse are those that would ordinarily have vested after the end of the notice period.

There is no obligation on the Group to make any further grants under the share rights plan, excepting in the form of the executive LTI (note that the scheme does not come into effect until FY2016) with vesting contingent on 3-year performance and service requirements. These may be made on an annual basis, and will be consistent with market practice. Other grants of share rights under the share rights plan may be made by Citadel as part of Citadel’s ordinary remuneration practices.

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2015 2014

Number of rights to deferred shares granted on 14 November 2014 133,333 -

Weighted average fair value of rights at grant date: 14 November 2014 $2.25 -

Number of rights to deferred shares granted on 1 May 2015 293,478 -

Weighted average fair value of rights at grant date: 1 May 2015 $2.30 -

(c) Employee share offer

As part of the initial public offering, eligible employees were offered a maximum of $1,000 worth of shares at no cost. Employees cannot deal in these shares until the earlier of three years from the date of acquisition and cessation of employment with the Group. These shares hold the same rights as fully paid ordinary shares. A total of 32,856 shares were issued.

(d) Expenses arising from share-based payment transactions

Total expenses arising from share-based payment transactions recognised during the year as part of employee benefit expense were as follows:

2015 2014

$,000 $,000

Options issued 43 -

Share rights granted 119 -

Shares issued under employee share offer 74 -

236 -

NOTE 32 – KEY MANAGEMENT PERSONNEL COMPENSATION

The aggregate compensation made to directors and other members of key management personnel of the Group and the Group is set out below:

2015 2014

$,000 $,000

Short-term employee benefits 1,478 1,118

Post-employment benefits 61 39

Long-term employee benefits 12 7

Share-based payment 155 -

1,706 1,164

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NOTE 33 – RELATED PARTY TRANSACTIONS

(a) Trading transactions

During the year, group entities entered into the following trading transactions with associates and other related parties:

2015 2014

$,000 $,000

Sales of goods and services –associates and other related parties 4,063 4,251

Purchases of goods or services – associates and other related parties 14,630 16,353

Dividend revenue from associates 1,746 1,409

Rent for Unit 1 / 10 Kennedy Street, ACT paid at market rates or below to ETS Unit Trust. ETS Unit Trust is controlled by M Jakeman

- 28

Sale of goods and services to related parties were made at the Group’s usual list prices. Purchases were made at market price.

The following balances were outstanding at the end of the reporting period:

2015 2014

$,000 $,000

Trade receivables and other debtors 683 1,742

Trade payables and other payables 2 8,892

The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions for doubtful debts have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts due from related parties.

(b) Other related party transactions

(i) Jakeman Family Trust

The Group has entered into a contract with the Jakeman Family Trust (JFT) for the provision of services by Dr Miles Jakeman. This agreement provides for:

An entitlement for JFT to receive fixed annual payment of $400,000;

Eligibility to participate in any short-term incentive (STI) plan;

Either party may terminate the agreement by giving six month’s written notice of its intention to do so. Citadel may require JFT not to provide services during the notice period;

Upon any termination of the contract, JFT will be subject to a restraint of trade period of six months. Citadel 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; and

Eligibility to participate in any long-term incentive (LTI) plan.

Payments made under this agreement form part of short-term employee benefits reported in note 32.

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(ii) Citadel Group SaleCo Limited (Citadel SaleCo)

Citadel SaleCo is a special purpose vehicle which was established to enable shareholders existing prior to the IPO to sell a portion of their shares. Some of these shareholders executed a share sale deed in favour of Citadel SaleCo under which these shareholders offered to sell 9.6 million shares to the nominee of Citadel SaleCo free from encumbrances and third party rights, and subject to certain conditions. The shares were subsequently transferred to successful applicants of the IPO.

Citadel SaleCo has no material assets, liabilities or operations other than its interest in the share sale deed described above. The Citadel SaleCo directors are Mark McConnell, Robert (Andrew) Burns and Miles Jakeman. The shareholders of Citadel SaleCo are Mark McConnell and Miles Jakeman.

(iii) Evans and Partners Pty Ltd

Mr H K McCann AM, independent non-executive chairman and director of the Group, is also a director of Evans and Partners Pty Limited and indirectly holds a nominal shareholding in the company. Evans and Partners Pty Ltd acted as the lead manager and underwriter of the IPO. In accordance with the Underwriting Agreement, the Group agreed to pay Evans and Partners Pty Limited an underwriting and management fee of 4% of the IPO proceeds and, in certain circumstances, an incentive fee of up to 0.5% of the IPO proceeds.

For the year ended 30 June 2015, the Group paid Evans and Partners Pty Limited $2.2m (excl. GST) under the Underwriting Agreement detailed above. No other payments have been made to Evans and Partners Pty Limited, and no balance is owed to the company as at 30 June 2015.

NOTE 34 – BUSINESS COMBINATIONS

The following subsidiaries were acquired during 2015 (2014: nil):

Principal activity Date of acquisition

Proportion of shares

acquired

Consideration transferred

% $,000

PJA Solutions Pty Ltd Technology and

managed services 1 June 2015 100% 45,356

45,356

PJA Solutions was acquired so as to continue the expansion of the Group’s technology offerings.

(a) Fair value of consideration transferred

PJAS

$,000

Cash paid 15,000

Issued share rights (a) 487

Employee award liabilities assumed (a) 1,110

Cash payable in tranches (b) 13,930

Issuable shares (c) 4,697

Contingent consideration (d) 10,132

Total 45,356

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(a) In accordance with AASB 2 Share-based payments, the portion of PJA employee award liabilities assumed by the Group that relates to service provided prior to the acquisition date are recognised as part of the consideration. In this acquisition, there is a component of share rights granted in satisfaction of the liability. The Group has recognised the portion of the PJA employee award liabilities assumed of relating to service prior to the acquisition of pre-acquisition liabilities for employee awards.

(b) Under the arrangement, $15 million is payable on finalisation of the 30 June 2016 financial report (but not later than 30 September 2016). These amounts have been recognised as a financial liability. The CGL Board may issue up to $5million of the consideration owing in ordinary shares at market value.

(c) As part of the consideration, CGL issued $5m in ordinary shares at which point, the spot price of the shares was $2.52 per share; these shares are currently held in escrow. Due to the restriction placed on these shares, the fair value is deemed to be lower than the spot price of the shares at the date of acquisition.

(d) The third tranche payment is dependent on the average annual EBITDA (measured between 1 June 2015 and 30 September 2017). The maximum amount payable under this tranche is $25 million. The fair value of this tranche has been determined by taking the weighted average payment expected (weighted by probability) discounted back to its present value.

Acquisition-related costs amounting to $0.4m have been excluded from the consideration transferred and have been recognised as an expense in the profit or loss in the current year, within the ‘other expenses’ line item.

(b) Fair value of assets acquired and liabilities assumed at the date of acquisition

PJAS

$,000

Current assets

Cash and cash equivalents 5,945

Trade and other receivables 768

Other current assets 6

Non-current assets

Property, plant and equipment 381

Intangible assets: software and customer relationships 38,635

Other non-current assets 5

Current liabilities

Trade and other payables 2,184

Provision for employee benefits 217

Income in advance 1,822

Deferred tax liability 3,308

Other accruals -

Non-current liabilities

Provision for employee benefits 42

Net assets acquired 38,167

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The receivables acquired (which principally comprised trade receivables) in these transactions with a fair value of $0.8m had gross contractual amounts of $0.8m. The best estimate at acquisition date of the contractual cash flows not expected to be collected is nil.

(c) Goodwill arising on acquisition

PJAS

$,000

Consideration transferred 45,356

Less: fair value of identifiable net assets acquired (38,167)

Goodwill arising on acquisition 7,189

Goodwill arose in the acquisition of PJAS because the cost of the combination included a control premium. In addition, the consideration paid for the combination effectively included amounts in relation to the benefits of expected synergies, revenue growth, future market development and the assembled workforce of PJAS. These benefits are not recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

None of the goodwill arising on these acquisitions is expected to be deductible for tax purposes.

(d) Net cash outflow on acquisition of subsidiaries

Year ended 30 June 2015

$,000

Consideration paid in cash 15,000

Less: Cash and cash equivalent balances acquired (5,945)

Outflow of cash – investing activities 9,055

(e) Impact of acquisitions on the results of the Group

The acquired business contributed revenues of $1.1m and net profit after tax of $0.5m to the Group for the period from 1 June 2015 to 30 June 2015.

If the acquisition had occurred on 1 July 2014, consolidated revenue and profit after tax for the year ended 30 June 2015 would have been $85.1m and $9.5m respectively. These amounts have been calculated using the subsidiary’s results and adjusting them for:

Differences in the accounting policies between the Group and the subsidiary, and

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.

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NOTE 35 – RECONCILIATION OF THE NET PROFIT AFTER TAX TO THE NET CASH FLOW FROM OPERATIONS

2015 2014

$,000 $,000

Profit for the year 6,525 4,134

Depreciation and amortisation 1,216 863

Unwinding of discount 232 -

Share-based payments 237 -

Loss on write-down of non-current assets 37 -

Transaction costs for issuance of shares expensed in profit and loss, net of tax 1,339 -

Share of net profit of associates accounted for using the equity method (1,759) (1,409)

(Increase) / decrease in trade and other receivables (8,678) 1,392

(Increase) / decrease in inventories (362) (1,105)

(Increase) / decrease in income accruals and other assets (1,445) 23

(Increase) / decrease in prepayments (132) (68)

(Increase) / decrease in deferred tax assets 669 (72)

Increase / (decrease) in trade payables 1,984 574

Increase / (decrease) in tax liabilities (182) 152

Increase/ (decrease) in provisions 424 87

Increase/ (decrease) in other liabilities 6,777 2,045

Net cash inflow used in operating activities 6,882 6,616

NOTE 36 – OPERATING LEASE ARRANGEMENTS

Operating leases relate to leases of land and buildings with lease terms of between 3 and 5 years. The Group does not have an option to purchase the leased land and building at the expiry of the lease periods.

2015 2014

Payments recognised as an expense: $,000 $,000

Minimum lease payments 1,480 1,578

Operating leases:

- Not later than one year 1,261 1,578

- Later than one but not later than five years 3,083 3,472

- Later than five years - 291

Aggregate lease expenditure contracted for at 30 June 4,344 5,341

The Group has entered in to commercial leases for office premises. All leases have an average life of 3 to 5 years.

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NOTE 37 – COMMITMENTS AND CONTINGENCIES

Finance lease liabilities and non-cancellable operating lease commitments are disclosed in notes 21 and 36 to the financial statements.

As at 30 June 2015, the Group has a total of $3.4m in bank guarantees outstanding (2014: $3.3m) relating to office premises and the nRAH project.

There are no other commitments for the Group.

As at 30 June 2015, there were no contingent assets or liabilities (2014: nil).

NOTE 38 – REMUNERATION OF AUDITORS

During the year the following fees were paid or payable for services provided by the auditor of the Group, and its related practices.

2015 2014

$,000 $,000

Remuneration of the external auditors PricewaterhouseCoopers

- Audit and review of financial statements 150 65

- Other assurance services

Investigating accountant’s report on CGL’s prospectus 350 -

Due Diligence report on PJA Solutions Pty Ltd 55 -

Total remuneration for audit and other assurance services 555 65

During the year the following fees were paid or payable for non-audit services by the auditor of the Group.

2015 2014

$,000 $,000

Taxation Services

- Private Rulings - 24

- Taxation Advice 20 -

Total taxation services 20 24

Other services

- Accounting services 9 -

Total other services 9 -

It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the Group are important. These assignments are principally tax advice and due diligence works for merger and acquisition activities.

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NOTE 39 – PARENT ENTITY FINANCIAL INFORMATION

2015 2014

$,000 $,000

Assets

Current assets 9,925 5,207

Total assets 66,782 16,698

Current liabilities 2,241 2,752

Total liabilities 26,737 2,925

Net assets 40,045 13,773

Shareholders’ equity Issued capital 43,660 15,020

Retained earnings (4,265) (1,247)

Reserves - share based payments 650 -

Total equity 40,045 13,773

Profit (loss) for the year of the parent entity 1,094 1,167

Total comprehensive income of the parent entity 1,094 1,167

(a) Guarantees

During the years ended 30 June 2015 and 30 June 2014, Citadel had signed a cross-collateral mortgage debenture with ANZ bank for the outstanding debt of all entities within the Group.

In addition, Citadel has $0.2m ($2014: $0.2m) in bank guarantees outstanding relating to office premises.

(b) Contingent Assets and Liabilities

As at 30 June 2015 there are no contingent assets or liabilities (2014: nil).

(c) Contractual Commitments for the acquisition of property plant and equipment

As at 30 June 2015 there are no contractual commitments for the acquisition of property, plant and equipment (2014: nil).

NOTE 40 – EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

As of the date of signing, no significant event has occurred that would require a change to or disclosure in the annual report.

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Directors’ declaration

In the Directors’ opinion:

a. the financial statements and notes set out on pages 46 to 101 are in accordance with the Corporations Act 2001, including:

i. complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements;

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 financial year ended on that date; and

b. there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.

The Directors have been given the declaration by the Managing Director required by section 295A of the Corporations Act 2001.

This declaration is made in accordance with a resolution of the Directors.

Mr Kevin McCann, AM

Chairman

Canberra

24 August 2015

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Auditor’s report

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Shareholder information

The shareholder information set out below was applicable as at 31 July 2015.

1. SUBSTANTIAL HOLDERS

The name of the twenty largest holders of quoted equity securities are listed below:

ORDINARY SHARES

Shareholder Number Held % of Issued Shares

Substantial holders and greater than 5% holding:

Jakeman Family Trust* 8,309,009 17.81%

McBren Investments* 6,626,306 14.20%

National Nominees Limited*

55,368,703 11.5151%

New Territories Fund Trust

4,289,041 9.19%

PJA Investment A/C 3,000,000 6.43%

Citicorp Nominees Pty Ltd

22,837,604 6.08%

Remaining top twenty holders:

J P Morgan Nominees Australia Pty Ltd

1,856,946 3.98%

HSBC Custody Nominees (Australia) Limited

1,350,729 2.90%

Mirrabrooka Investments Limited

1,028,485 2.20%

UBS Nominees Pty Ltd 1,023,634 2.19%

BNP Paribas Noms Pty Ltd

890890,786 1.91%

AMCIL Limited 836,970 1.79%

Jia Liang 818,616 1.75%

RBC Investor Services Australia Nominees Pty Limited

772,111 1.66%

Brispot Nominees Pty Ltd

661,919 1.42%

Skills4Life Pty Ltd 642,117 1.38%

The Narrawallee Unit Trust

491,578 1.05%

McRoberts Family Investments 01 Pty Ltd

396,065 0.85%

Plant Discretionary Trust

352,401 0.76%

Sert Superannuation Fund

274,236 0.59%

* Considered substantial shareholders

2. VOTING RIGHTS

The voting rights attaching to the shares are: on a show of hands every member present in person or by proxy shall have one vote and upon a poll, are one vote for each share held.

3. DISTRIBUTION OF SHAREHOLDERS

Analysis of numbers of shareholders by size of holding:-

Holding Total No. of Shares Held

No. of Shareholders

1 – 1,000 1,001 – 5,000

5,001 – 10,000 10,001 – 100,000 100,001 and over

43,469 282,839 442,977

3,391,286 42,490,663

91 89 58

116 30

46,651,234 384

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The Citadel Group Limited

ABN: 79 127 151 026

2015

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for personal use only - asx · on 30 september 2015. i note that a special pre-ipo dividend of 8.5...

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